Case: The Commissioner of Inland Revenue v Tower City Holdings
Limited [2020] NZHC 2239
Decision date: 31 August 2020
CSUM 20/10
Legislative References: Companies Act 1993, ss 241(2), 241(4), 194, 131, 135, 137, 246
Tax Administration Act 1994, parts 4A and 8A
High Court Rules 2014, r 5.61
Legal terms: liquidation, winding-up, interim liquidation, GST, income tax
Summary
The Commissioner applied for an order under s 241(4) of the Companies Act (“CA1993”) placing the defendant company (“Tower”) into liquidation on a number of grounds, including the company’s inability to pay its debts, its failure to keep proper accounting records and breaches of various directors’ duties. The defendant company unsuccessfully argued that the order should not be made.
Impact
The result indicates that the Court will at least sometimes be willing to grant a liquidation order where some of the debt is subject to dispute, so long as the Commissioner can establish she has standing as a creditor and can make out one or more of the grounds for liquidation in s 241(4) of the CA 1993. What is still unclear is whether the Commissioner would have been (or will be in future cases) successful in establishing standing to bring the claim when all of the debt in question is the subject of dispute.
Decision
Did the Commissioner have standing to claim as a “creditor” of Tower?
The Court held that the Commissioner was a creditor of Tower, based on Tower’s two self-assessed returns showing an indebtedness of $333,216.27, and did not require leave (as a prospective or contingent creditor would have done) to bring the claim.
Was the liquidation proceeding vexatious, and/or an abuse of process?
This became an issue because counsel for Tower submitted that the claim had been brought for vexatious or ulterior motives, namely:
so that the Commissioner could avoid determining Tower’s GST returns and/or making refunds to Tower;
to obtain information about third parties,
to deny Tower its rights to dispute and/or challenge the Commissioner’s application under the TAA.
The Court found that there was no basis for any of the allegations of abuse of process.
Had the Commissioner shown that Tower had persistently or seriously failed to comply with s 194 of the CA 1993?
The Court found that there was “no doubt” that the Commissioner had shown that Tower had seriously and persistently failed to comply with its obligations under s 194 of the CA 1993 (being the obligation to keep proper accounting records).
The Court concluded that satisfying this ground was sufficient for the Commissioner to be entitled to a liquidation order, and that there was no sound basis on which it should exercise its discretion against making an order. The liquidation order was therefore made on the basis of this ground having been established.
Had the Commissioner shown that Tower was unable to pay its debts?
Having determined that a liquidation order would be granted on the previous issue, the Court considered that there was strictly no need to address this issue, but recorded that, if necessary, it would have found for the Commissioner on this issue.
Did Tower have a genuine and substantial argument that there were GST set-offs which did or may exceed any amount owing to the Commissioner?
Again, an answer was not strictly required, but had an answer been necessary, the Court’s answer would have been “no”. It was not disputed that Tower owed the self-assessed amounts of tax, and r 5.61 of the High Court Rules 2016 precludes any set-off against that debt.
Had the Commissioner shown that Tower’s directors had, in a persistent and/or serious way, failed to comply with duties relating to Tower under ss 131, 135, and/or 137 of the CA 1993?
Again, no answer was required, and with respect to this issue the Court considered it “neither necessary nor appropriate to embark on an analysis of the performance of the directors, in a number of complex transactions, in order to make findings on whether they discharged their respective duties under ss 131, 135, and 137 of the Act (and to the extent that they did not, whether their defaults can be characterised as “persistent” or “serious”, so as to justify the making of a liquidation order).”
Had the Commissioner shown that it would be just and equitable to put Tower into liquidation?
Again, the Court considered there was no need to address this issue, as the need for a liquidation was clear on the issue of serious and persistent breach of s 194 of the Act, and “nothing useful would be added by making findings on the question of whether the circumstances are also caught by the broad “just and equitable” jurisdiction in s 241(4)(d) of the Act.”
Source: IRD
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