Effect of Self-Employment and Community Involvement on Decision to Bankrupt under s 37 of Insolvency Act 2006
The Judgment Debtor, Tainui Stephens (“Mr Stephens”), opposed the Commissioner of Inland Revenue’s (“CIR”) application for an order adjudicating him bankrupt.
The Judgment Debtor, Tainui Stephens (“Mr Stephens”), opposed the Commissioner of Inland Revenue’s (“CIR”) application for an order adjudicating him bankrupt. Mr Stephens relied on s 37 of the Insolvency Act 2006 (“the Act”), which provides a broad discretion for the High Court to decline to grant an order where it is just and equitable that the Court does not make an order, or where for any other reason an order should not be made. The Court held that the impact of an order of Mr Stephens’ career as a self-employed film producer and writer was not sufficient to trigger the exercise of its discretion under s 37.
This case reaffirms the large body of case law which provides a high threshold for the exercise of the s 37 discretion, especially in tax arrears cases where there is a significant public interest factor in granting an order.
Mr Stephens is a self-employed contract worker in the Maori film industry. He had failed to pay income tax for the years 2007 to 2017. He also had some GST debt. The CIR’s application for an order adjudicating Mr Stephens bankrupt was based on a judgment for $551,027.63 of tax arrears. At the date of hearing, Mr Stephens was still not keeping current with his tax affairs. Mr Stephens was also the sole director of a company, Pito One Productions Limited, which was put into liquidation by the CIR in February 2017 with tax debts of $232,793.47.
The Court agreed with the CIR that the three particular elements of the case relevant to s 37 were:
- the interests of Mr Stephens himself – in particular, his ability to support himself, his age, the impact of the stigma of bankruptcy on his work and community activities;
- the possible presence of assets, and the potential for matters requiring the investigation of the Official Assignee; and
- the public interest.
Mr Stephens argued that the High Court should exercise its general discretion under s 37 of the Act to decline the CIR’s application for an order. Mr Stephens’ main submission was that his work in the film industry and as a board member and trustee of various industry and community organisations would be impeded by an order. He stated that his work was of considerable public interest and that there were few who would be able to fill his place as a contributor to the Maori screen industry.
The CIR submitted that Mr Stephens would be able to apply to the Official Assignee or the Court for leave to continue work in a self-employed capacity, and also that his ceasing to be self-employed would not justify the exercise of discretion under s 37. The CIR further submitted that Mr Stephens had disregarded taxation for a long time and therefore there was a considerable public interest in granting an order. It was also argued that the long history of non-compliance also displaced considerations regarding the effect of bankruptcy on Mr Stephen’s community participation.
The CIR also showed that there was evidence of properties owned by Mr Stephens and his wife, which were matters that should be investigated by the Official Assignee. The CIR further relied on the public interest in collecting revenue and the Commissioner’s statutory duty to maximise recovery and protect the integrity of the tax system under ss 6A(3), 6 and 176(1) of the Tax Administration Act.
The Court acknowledged that Mr Stephens’ contributions to film production and community involvement were likely to be reduced if an order were made. The Court stated that the question was whether the public interest in maintaining the integrity of the tax system outweighed those considerations. The Court decided that it did. The Court stated that Mr Stephens would be able to work with the Official Assignee and his supporters in the film industry to use his talents notwithstanding his bankruptcy. The Court further held that Mr Stephens had shown disregard or disrespect for tax obligations and considerations of public morality also weighed in favour of an order.
Insolvency Act 2006 s 37; Tax Administration Act ss 6, 6A(3) and 176(1)