Unsuccessful application to set aside statutory demand after taxpayer's breach of binding agreement with the Commissioner regarding tax debt
2017 case note - unsuccessful application to set aside statutory demand for unpaid taxes - binding agreements, contractual remedies, estoppel, delegated authority.
Elementary Solutions Ltd (“the applicant”) was unsuccessful in its application to set aside the Commissioner of Inland Revenue’s (“the Commissioner”) statutory demand for unpaid taxes. The Court held that the parties had reached a binding agreement, where the Commissioner would not pursue the debt pending the outcome of a separate defamation proceeding. The Court held that an essential term of the agreement was that for the next 12 months the applicant and its director meet their ongoing tax obligations. When they failed to do so, the Court held that the Commissioner was entitled to cancel the agreement and pursue recovery of the applicant’s tax debt.
This judgment makes it clear that the Commissioner can enter a binding agreement under which she may accept payment of less than the full amount of tax that she considers is lawfully due (and assessed).
It is not clear whether, for such a binding agreement, consideration is required and the rule in Foakes v Beer (1884) App Cas 605 that a promise to pay part of a debt is not consideration for forgiveness of the balance applies.
The Commissioner may be estopped from serving a statutory demand where an estoppel defence is made out: an expectation is created through the actions or representation of the Commissioner, the expectation is relied on, detriment will be suffered if the expectation is departed from and it would be unconscionable for the Commissioner to depart from the expectation.
Inland Revenue staff can bind the Commissioner only if they have delegated authority. Here the High Court considered that there is nothing to suggest that an acting manager does not have the same authority and powers as an ordinary manager.
The applicant brought proceedings to set aside a statutory demand dated 18 February 2016 issued by the Commissioner for unpaid taxes.
The applicant did not dispute its liability for any of the taxes, but said that the demand should be set aside under s 290(4)(a) of the Companies Act 1993 (“the Act”). The applicant contended that it made an arrangement with the Commissioner in May 2013 for enforcement of its tax debt to be stayed pending the outcome of a separate defamation proceeding, for which the gross proceeds would be paid to the Commissioner. The applicant said the statutory demand was in breach of contract and that the Commissioner was estopped from claiming payment. The applicant also ran arguments as to counterclaim under s 290(4)(b) and other grounds under s 290(4)(c).
The Commissioner denied making any binding arrangements with the applicant in May 2013 but stated that she entered into an agreement with the applicant and its director, Daniel Ayers, in September 2013 to stay enforcement against them in return for receiving the proceeds of the defamation case. The Commissioner said that it was a term of the agreement that they would meet their ongoing tax obligations and as they breached these conditions, she was entitled to cancel the agreement.
Setting aside under s 290
His Honour noted that the general purpose of s 290 is to allow statutory demands to be set aside. On application under s 290(4)(a) the onus is on the applicant to show a substantial dispute, and that there is a fairly arguable basis for it to succeed. He noted that the Court does not resolve disputed questions of fact on affidavits and if there is a genuine dispute it should be more properly decided in other proceedings.
The Commissioner’s ability to enter into agreements for the collection of taxes
The applicant’s grounds for the dispute were based on the argument that it had entered into a binding contact with the Commissioner for the payment of its tax arrears, and that the Commissioner was estopped from issuing the demand because of representations by her officers.
Associate Judge Bell stated that that there was no dispute that the Commissioner was able to enter into binding agreements under which she may accept payment of less than the full amount of tax due, and that this was consistent with ss 6(1) and 6A(2) and (3) of the Tax Administration Act 1994 (“TAA”). The Judge also noted that under s 7 of the TAA the Commissioner may delegate her powers, and that officers can bind the Commissioner only if they have the delegated authority to do so. His Honour said that ordinary principles of contract law, agency law and the law as to equitable estoppel apply.
The meeting of 8 May 2013 and following events
Since 2009 the applicant had been a non-compliant taxpayer. Towards the end of 2012 the Commissioner advised that a statutory demand would be served, which occurred on 15 April 2013.
On 8 May 2013, a meeting took place between two collections officers on behalf of the Commissioner and the applicant’s director, Mr Ayers, and his tax agent. The parties disagreed as to whether a binding agreement had been reached at that meeting, with the applicant asserting that the Commissioner had agreed to cease enforcement action in return for receiving the proceeds of the defamation action. The collections officers referred to the need to obtain an appropriate undertaking from the applicant’s solicitor, which was not forthcoming.
The Judge noted that neither collections officer had the delegated authority to bind the Commissioner as the arrangement exceeded their level of financial delegation. A further meeting was held on 27 May 2013, where it was discussed that recovery options would need to be discussed with the Area Manager. Mr Ayers was also asked to supply further information, including a report from a health professional.
His Honour noted that the Commissioner’s evidence appeared more persuasive, but added that there were obstacles to the applicant’s claim that there was a binding agreement concluded on 8 May 2013. First, even Mr Ayers accepted the Commissioner’s requirements for his defamation lawyer to give an undertaking so as to assure payment of the litigation proceeds. Second, the collections officers did not have the authority to enter into an agreement binding the Commissioner given the level of unpaid taxes.
The Court held that equitable estoppel was not available as on the facts of the case there is nothing in the evidence to suggest the collections officers were clothed with any ostensible authority to bind the Commissioner, and the arrangements were always subject to obtaining the solicitor’s undertaking.
The meeting of 17 September 2013
A further meeting took place on 17 September 2013 between Mr Ayers and the Group Manager Collections and Collections Principal Advisor. Mr Ayers contended that he had never conceded that the proposed arrangement from the previous meeting had ended. Mr Ayers did not accept that he entered into a new agreement on 17 September.
The Group Manager acknowledged that Mr Ayers may have left the 8 May meeting under the impression an agreement had been reached, even though Inland Revenue’s position was that none had.
Various email correspondence was exchanged between Mr Ayers and the Group Manager and, even if there was uncertainty as to what was discussed on 17 September, that was cleared up by the emails. The email exchange shows that Mr Ayers, the applicant and the Inland Revenue entered into a binding agreement. The Judge considered that there was no difficulty with questions of consideration as the agreement resolved a dispute – whether an agreement was made on 8 May 2013. Whatever prior discussions that had taken place had been replaced by a new agreement, with both Mr Ayers and the applicant being parties to the agreement giving cross-undertakings as to each other’s tax obligations.
The agreement required the following from the applicant and Mr Ayers:
- Ongoing compliance with tax obligations for the next 12 months;
- Continuing with the defamation case, which arose implicitly from the promise to pay from the litigation proceeds; and
- Voluntary payments as and when able.
The Court did not accept Mr Ayers’ claim that the first term was subject to a condition that his compliance was not to be impeded by his health.
Cancellation of the agreement of September 2013
His Honour noted that the only way to cancel the agreement was for a breach under s 7 of the Contractual Remedies Act 1979 (“CRA”).
The Commissioner relied on failures to comply with tax obligations for the following 12 months as the basis for cancelling the contract. The applicant failed to file three GST returns by the due date and Mr Ayers filed his 2013 income tax return late. The Court held that in accordance with s 7(4)(a) of the CRA it was an essential term of the contract that tax obligations must be kept up to date for the next 12 months. Accordingly, it did not matter how minor the breaches were.
On 19 January 2016 the Commissioner advised the applicant that she no longer considered herself bound by the earlier agreements for payment to be deferred. The Court held that notice was appropriately given under s 8 of the CRA. As at 19 January 2016 the taxes owing under the assessments referred to earlier had not been fully paid.
The Court held that the Commissioner had not affirmed the contract in any of its subsequent correspondence.
The Court also noted that unpaid GST that had accrued in the 12 months after 17 September 2013 was not part of the moratorium for the historic debt under agreement, and the Commissioner was entitled to recover it without first cancelling the agreement.
The applicant’s estoppel argument
The applicant argued that the respondent was estopped from serving the statutory demand because of the representations made in the September 2013 meeting, that the applicant had acted to its detriment in continuing with the defamation proceeding and incurred legal costs. The Judge concluded that any estoppel argument would fail in light of the respondent’s entitlement to cancel the contract and no longer be bound by any representations she had made. Further, the meeting also set expectations for the applicant (to meet its ongoing tax obligations for the next 12 months) and when it failed to meet those expectations, in circumstances where the Commissioner was entitled to cancel the agreement, it cannot be unconscionable for the Commissioner to move from the arrangement made.
His Honour concluded he was not persuaded that there was a substantial dispute under s 290(4)(a) of the Act whether the debt is owing or due.
Counterclaim under s 290(4)(b)
The applicant also raised a counterclaim against the Commissioner for lost earnings as a result of the Commissioner’s breach of the alleged May 2013 agreement by filing and serving a liquidation application in June 2013. The Court held that as this was raised for the first time in the applicant’s submissions, the Commissioner would be prejudiced by this issue being raised late. His Honour further noted that the claim was implausible on questions of causation and damage, as the report from the health professional included in Mr Ayers’ affidavit was that Mr Ayers had said that the initial defamation (2-3 years earlier) had had a serious effect on the company and Mr Ayers’ health problems had also affected its business for some time already. His Honour noted that this was against very heavy tax liabilities that were long overdue. The Court considered that any suggestion that the Commissioner caused the downfall of the company by her liquidation application is fanciful.
Other grounds under s 290(4)(c)
The applicant asserted that the statutory demand was an abuse of process.
The Judge noted that the applicant had been in default of its tax obligations since 2009. The Court further noted that any difficulties in funding litigation and taxes were there at the time before the statutory demand in April 2013 and the demand did not cause any difficulties, it merely exposed them. The Court concluded that there were no circumstances that made it unjust for non-compliance with the demand to lead to a presumption of insolvency.
The Court held that:
- The application to set aside the statutory demand was dismissed.
- Under s 291(1)(a) of the Act, the applicant is to pay the Commissioner $343,182.30 by 24 February 2017.
- The time for complying with the statutory demand expires on 24 February 2017.
- The applicant is to pay the costs of the application.
Companies Act 1993 ss 289, 290, 291 Contractual Remedies Act 1979 s 7 Tax Administration Act 1994 ss 6, 6A, 7