Court of Appeal considers Commissioner’s opposition to the restoration of companies to the New Zealand Companies Office register to protect the integrity of the tax system

Summary

This was an appeal of the High Court’s decision restoring five companies to the Companies Register (“the register”) under s 329 of the Companies Act 1993 (“the Act”), Commercial Management Ltd v Commissioner of Inland Revenue [2018] NZHC 2224. The Court of Appeal overturned the High Court’s decision and held that:

1. The applicants’ failed to provide the information that the Court needed in order to give proper consideration to the application.
2. Restoration of the removed companies after such a long period of being deregistered would be either nugatory or contrary to the public interest.

Impact

This decision demonstrates that where it is in the public interest, and to protect the integrity of the tax system, the Commissioner of Inland Revenue (“the Commissioner”) may object to the restoration of companies to the register.

Facts

The applicants sought restoration of five removed companies (“the removed companies”) to the register under s 329(1)(b) of the Act on the grounds that it is just and equitable for them to be restored. They contended that the purpose of restoring the removed companies to the register was to enable them to be parties to any settlement negotiations with the Commissioner in relation to GST, and/or enable them to pursue GST claims against the Commissioner.

The five companies were removed from the register, variously, on 17 February 1998, on 25 September 1996, on 27 June 2000, on 23 April 1998, and on 22 December 2011.

The High Court made orders under s 329 of the Act restoring the removed companies to the register. The Commissioner appealed that decision on the basis that the exercise of discretion by the Associate Judge in the High Court under s 329 was “plainly wrong”.

The Commissioner said that the Associate Judge gave too much weight to the private interests of the applicants, and insufficient weight to the public interest factors that supported refusal of restoration of these companies, having regard to the length of time for which the companies had been removed from the register and the threat to the integrity of the tax system posed by restoration of the companies.

The applicants submitted that the Associate Judge correctly identified and applied the principles relevant to s 329 applications.

Issues

Whether the High Court correctly exercised its discretion in finding it was just or equitable to restore the removed companies.

Decision

Delay

The Court agreed with the Associate Judge that the long delay in making an application to restore these companies to the register is a factor that points against their restoration. They found the respondent did not satisfactorily explain reasons for the delay.

Application for restoration failed to provide necessary information

The Court noted section 329(1A) provides that the Court must have regard to the reasons for the company’s removal and whether those grounds existed at the time of removal or exist at the hearing of the application. It is incumbent on an applicant associated with the removed company (such as a former shareholder or director) to provide the information that the court requires in order to consider this mandatory relevant consideration.

They held that the applicants failed to provide sufficient information, as required by s 329(1A), for the Court to properly determine the application.

Restoration either nugatory or contrary to the public interest

The Court disagreed with the Associate Judge that there is a public interest in the removed companies being permitted to pursue their proposed claims against the Commissioner. Additionally, the Court identified significant hurdles to the GST claims that the removed companies would seek if they were restored to the register in order to pursue their GST claim.

They found that the significant delay in seeking to pursue any claims that the removed companies might have had to GST refunds counted against restoration of the companies. The potential claims by the companies for GST refunds had been spotted by the companies’ tax agent by 1993 at the latest. Some 25 years then passed before any formal steps were taken to assert claims on behalf of the removed companies.

The Court held that it is not just and equitable to restore the removed companies to the register in order to enable them to pursue the claims that the applicants have identified as the sole rationale for their restoration.

They concluded that the purpose of the restoration of the companies to the register was to achieve a partial and asymmetric reversal of the GST consequences of the highly contrived and artificial tax avoidance arrangements previously entered into by these companies. In effect, when the tax avoidance arrangements that the companies had previously been a party to were set up the arrangements were a “closed loop” where the net result for GST purposes was a wash. The applicants sought to restore only one half of that loop and make claims against the Commissioner to secure a tax advantage – refunds of GST output tax paid by the removed companies.