Issued
2018
Decision
27 Feb 2018
Appeal Status
Not appealed

Order under s 36 of the Insolvency Act 2006 adjudicating Judgment Debtor bankrupt

The High Court held that the grounds for refusal of such an order were not made out and accordingly made an order under s 36 of the Act adjudicating the Judgment Debtor bankrupt.

Case
The Commissioner of Inland Revenue v Wilson [2018] NZHC 236
Legal terms
Bankruptcy notice, adjudication, discretion, refusal to adjudicate

Summary

The Commissioner of Inland Revenue (“the Judgment Creditor”) applied for an order adjudicating Mr Ronald Wilson (“the Judgment Debtor”) bankrupt. The Judgment Debtor opposed the application on the ground that it would be just and equitable for the High Court to exercise its discretion under s 37(c) of the Insolvency Act 2006 (“the Act”) to refuse to adjudicate him bankrupt. The High Court held that the grounds for refusal of such an order were not made out and accordingly made an order under s 36 of the Act adjudicating the Judgment Debtor bankrupt.

Impact

This decision confirms the High Court’s discretion to refuse to adjudicate a debtor bankrupt even where the statutory requirements for adjudication are met; and provides some guidance on the general principles applicable to the exercise of that discretion.

Facts

Mr Wilson was a trustee of the Il Mondo Trust (“the Trust”). In the monthly periods ending 30 November 2001, 31 January 2002, 31 March 2002, 31 May 2002, 31 January 2003, 31 March 2003 and 31 July 2003 the Judgment Creditor assessed the Judgment Debtor with GST owing by the Trust (as trustee, the Judgment Debtor was personally liable for the debt). The total amount of GST assessed was $17,693.65 as at 31 July 2003 and by June 2015 the amount owing had grown to $137,303.10 (“the debt”).

On 17 June 2015, the Judgment Creditor obtained judgment against the Judgment Debtor in the Rotorua District Court for the debt and on 8 October 2015 at the Judgment Creditor’s request, the High Court issued a bankruptcy notice based on the debt. On 5 November 2015, the bankruptcy notice was served on the Judgment Debtor and on 17 November 2015 the Judgment Debtor applied to the High Court for orders setting aside the bankruptcy notice and approving the terms of the payment proposal he had previously offered to the Judgment Creditor. The Judgment Creditor declined the payment proposal on 8 December 2015.

On 22 April 2016, the High Court, invoking its inherent jurisdiction, approved the Judgment Debtor’s payment proposal and held that as such the bankruptcy notice would be deemed to have been complied with. The High Court also held that costs were to lie where they fall (Wilson v Commissioner of Inland Revenue [2016] NZHC 87, (2016) 27 NZTC 22-047 at [64]).

The Judgment Creditor appealed the substantive decision and the Judgment Debtor cross-appealed the costs order. On 31 March 2017, the Court of Appeal issued its judgment finding in favour of the Judgment Creditor and dismissing the cross-appeal (Commissioner of Inland Revenue v Wilson [2017] NZCA 100, (2017) 28 NZTC 23-009 at [45]-[47]). The Court of Appeal determined that on the correct interpretation of s 29(1)(b)(iii) of the Act, the High Court does not have statutory jurisdiction to approve a payment proposal and it does not have an inherent jurisdiction to approve such a proposal either (At [26]-[30] and [38]).

The Judgment Creditor’s application for adjudication was heard by the High Court on 7 December 2017.

Decision

Prejudiced by delay

The High Court found the Judgment Debtor’s debt arose for no other reason than that he failed to pay the Trust’s GST bill promptly. The High Court found there was a strong public interest in making an adjudication order in this case.

The High Court rejected the Judgment Debtor’s evidence that the Judgment Creditor made no attempt to resolve the debt between 2008 and 2014; finding that in fact, during this time the Judgment Creditor had issued 90 statements of account to the Trust notifying it of its debt.

The High Court noted that the Judgment Debtor had no reason not to pay the debt and never made any voluntary payments towards it. The High Court further noted that if the Judgment Debtor seriously contended his preference was to have been adjudicated bankrupt in 2005, one would have expected him to avail himself of his entitlement to voluntary bankruptcy.

Unreasonable rejection of payment proposal

The relevant principle that had to be considered here was what the circumstances in which the debt was incurred were and whether those circumstances suggest the Judgment Creditor was unreasonable in pursuing adjudication. The High Court noted the GST obligation to which the debt attaches relates to an assessment from almost 15 years ago and no voluntary payments towards that amount had been made.

The High Court held the Judgment Creditor was not unreasonable in pursuing adjudication, noting her role in protecting the integrity of the tax system and promoting voluntary compliance and her ability to reject a payment proposal if accepting the proposal may give the impression of an unfair tax system with voluntary compliance being merely optional.

Pointless to adjudicate

The High Court noted the Official Assignee’s powers upon adjudication extend beyond assets owned personally by a debtor. It held evidence regarding a potential income stream into the Judgment Debtor’s bank account (undeclared at the time the payment proposals were made) together with his association to other trusts and a company, provided good justification for making an order for adjudication. The public interest in adjudication further provided strong justification for such an order.

Adjudication is oppressive

The High Court relied on Re Marra, ex parte Commissioner of Inland Revenue (2004) 21 NZTC 18,494 (HC) at [17], in noting the Judgment Creditor has a duty to protect the integrity of the tax system and that it cannot be oppressive conduct to pursue taxpayers who fail or refuse to comply with their legitimately incurred tax liabilities.

Insolvency Act 2006 ss 13, 17, 36 and 37; High Court Rules r 24.10