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Accident Compensation Cases

Commissioner of Inland Revenue v Suspended Ceilings (Wellington) Ltd (HC, 05/03/96)

Judgment Text

MASTER THOMSON:
In this case the Commissioner of Inland Revenue applied to the High Court on 28 October 1994 for an order that the defendant company be put into liquidation. On 24 November 1994 the company was re-registered pursuant to the Companies Registration Act 1993. It thereby became a company governed by the provisions of the Companies Act 1993. On the following day it made an interlocutory application under s 236 of the Companies Act 1993 for an order that a compromise between the parties be binding on the company and on such persons or classes of persons as the Court might specify on such terms and conditions as the Court thought fit. That application was opposed by the commissioner. 
On 22 March 1995 I rejected the application on a jurisdictional point and did not consider the merits. I held that before the section could come into play there must first be an arrangement, amalgamation or compromise and as that had not occurred s 236 could not be relied on because that section did not confer power on the Court to impose a compromise on the parties. The issue was seen by me to be whether or not the word “compromise” had its common meaning of an agreement involving concessions on one side or the other, or both, or whether it had a wider meaning enabling the Court to restructure a company's debts and impose an arrangement on the creditors. The commissioner contended for the first of those meanings and that was upheld by me. The company argued for the wider meaning and that was upheld by the Court of Appeal in a judgment delivered on 31 August 1995. 
At pp 7, 8 of the judgment given by McKay J he said: 
“In our view the context supports a wider meaning of compromise, as embracing some adjustment of rights proposed by one party and made binding by the Court whether or not other parties have agreed to it. If this were not the meaning intended, it would be sufficient in the present case for the company to obtain the agreement of one or two creditors to whom it owed debts of $10. Counsel accepted that this would be sufficient to confer jurisdiction. If that is so, then one cannot see what purpose would be served by placing such a limited restriction on the Court's jurisdiction. We prefer the wider meaning, which would make such prior agreement unnecessary. ”
At p 8 he held: 
“Counsel did not address the question whether the proposal would in any event fall within the word ‘arrangement’ which also appears in section 236. That word has been described in Re International Harvester Co of Australia Pty Ltd [1953] VLR 669Has Cases Citing which are not known to be negative[Green]  per Lowe ACJ as a word ‘of very wide import’ and one not restricted in its meaning by its association with ‘compromise’. It was given a wider meaning than ‘compromise’ in In re Guardian Assurance Company [1917] 1 Ch 431 (CA)Has Cases Citing which are not known to be negative[Green] . As A T Lawrence J said at 450, there is no ground for limiting the meaning in a section empowering the Court to approve an arrangement, and any risk is sufficiently guarded against by the fact that the sanction of the Court must be obtained. ”
At p 9 the Court said: 
“It follows that the Master was, with respect, in error in holding that he had no jurisdiction. We allow the appeal. The matter must, if the company is so advised, go back to the High Court for consideration on the merits. The company's proposal apparently involves the Commissioner, as a preferred creditor for over $1 million, which is some five times the company's net worth, accepting a reduction of his debt to some $400,000. It proposes that he should forgo further interest or penalties, but receive payments of $7,500 per month in respect of capital. There may be substance in Mr Cunningham's comment that the Commissioner is being asked to provide the capital to fund the company's operations. However, these questions are not before us and must be resolved, if necessary, in the High Court. ”
In the result the matter came back for hearing before me on 11 October 1995 to determine the application for compromise on its merits. Basically the proposed compromise is as set out in the Court of Appeal judgment. Affidavits have been filed by Mr Jones, the Managing Director, the last of them updating the company's current trading position. I set out the contents of para 3 of that affidavit. 
“CURRENTLY the company has major contracts under way of: 
(i)
Museum of New Zealand - $557,982.80 
(ii)
Seismic upgrade and refurbishment 70 The Terrace, including subdivision costs, work proceeding as floors let - $175,000 approximately 
(iii)
Standards House, Wellington, seismic upgrade and refurbishment of three remaining floors, to commence early 1996 - $90,000 
(iv)
Ceiling alteration at Westpac 140 Lambton Quay - $11,000 
(v)
Ceiling work at Bank of New Zealand Head Office - $19,684 
(vi)
In addition we work closely with a company that has secured the following contracts on a supply only basis: 
(a)
Elam School of Fine Arts, Auckland - $44,000 (installed) and 
(b)
Auckland International Airport - $297,000 (supply only) 
The company started installing Elam on 30 September 1995 and is hoping to secure the Auckland Airport installation starting November 1995. ”
Given that the Court of Appeal has held that the agreement of both parties is not necessary in order for the Court to approve a compromise under s 236, the question now is, - what is the test to be applied when considering the merits of the proposed compromise? This appears to be the first application to be considered by the Court under the section. To decide what test should be used I think some help can be obtained by reference to s 205 of the 1955 Act, although the definition of compromise there was narrower. The test laid down for a s 205 application was formulated in Re C M Banks Ltd [1944] NZLR 248Has Cases Citing which are not known to be negative[Green]  and affirmed by the Court of Appeal in Re Milne and Choyce Ltd [1953] NZLR 724Has Cases Citing which are not known to be negative[Green] . That test was: 
“(1) that there has been compliance with the statutory provisions as to meetings, resolutions, the application to the Court, and the like; 
(2) that the scheme has been fairly put before the class or classes concerned; and that if a circular or circulars have been sent out, as is usual, whether before or after the making of the application to the Court, they give all the information reasonably necessary to enable the recipients to judge and voted upon the proposals; 
(3) that the class was fairly represented by those who attended the meeting and that the statutory majority are acting bona fide and are not coercing the minority in order to promote interests adverse to those of the class whom they purport to represent; and 
(4) that the scheme is such that an intelligent and honest man of business, a member of the class concerned and acting in respect of his interest, might reasonably approve. ”
A similar test is applied in Australia, Canada and the UK where the narrower definition of compromise also operates. See for instance Re Alabama, New Orleans, Texas and Pacific Junction Rly Co [1891] 1 Ch 213, 238-239 (CA)Has Cases Citing which are not known to be negative[Green] , where Lyndley LJI said: 
“and what the Court has to do is to see, first of all, that the provisions of that statute have been complied with; and, secondly that the majority has been acting bona fide. The Court also has to see that the minority is not being over-ridden by a majority having interests of its own clashing with those of the minority whom they seek to coerce. Further than that, the Court has to look at the scheme and see whether it is one as to which persons acting honestly, and viewing the scheme laid before them in the interests of those whom they represent, take a view which can reasonably be taken by business men. The Court must look at the scheme, and see whether the Act has been complied with whether the majority are acting bona fide and whether they are coercing the minority in order to promote interests adverse to those of the class whom they purport to represent; and then see whether the scheme is a reasonable one or whether there is any reasonable objection to it or such an objection to it as that any reasonable man might say that he could not approve of it. ”
I consider then the test to be applied to a s 236 application also to be whether an intelligent and honest man of business could approve of it. I think the Court must also take into account questions of public policy and commercial morality. In that regard I refer to Re Buildmat (Australia) Ltd (1983) 7 ACLR 944Has Litigation History which is not known to be negative[Blue] . In that case the company was insolvent and the Court said at p 947 that if it were to approve the proposed scheme “it would be lending its support to the sending into the market place to trade a company which was hopelessly insolvent and thus a danger to the business community”. The Court in Re Buildmat affirmed the statement by Fry LJ in Re Hester (1889) 22 QBD 632, 641 that
“The court has far larger and more important duties to perform than merely to consider whether the creditors have consented to the rescinding of the order. We are bound in the exercise of our discretions in such a matter, and I think I might almost say in all matters under this Act, to take a wide view. We are not only bound to regard the interest, of the creditors themselves, who are sometimes careless of their best interests, but we have a duty with regard to the commercial morality of the country. ”
I think I should also take note of what was said in Re Tillers Pty Ltd & Companies Act 1961 [1970] 3 NSWLR 202 where it was held that a scheme could not properly be brought forward as an alternative to the winding up of an insolvent company. 
I must also bear in mind that the Commissioner is a preferred creditor, the significance of which was considered in Re V & M Diagnostic Services Pty Ltd (1985) 3 ACLC 306; 9 ACLR 663Has partially negative history or cases citing, but has not been reversed or overruled[Yellow] . Cohen J said at p 309; p 666: 
“In the case of a preferential creditor where winding up is an alternative it was held as far back as 1879 that the Court should not sanction and arrangement if it would prejudice a creditor whose rights would have been preferential if a petition to wind up had proceeded: [Re Richards & Co (1879) 11 Ch D 676]. It was observed in Pennington's Company Law 3rd ed at p 453 that the Court has never laid this down as a binding rule. Nevertheless it would seem to be a significant matter in the exercise of the Court's discretion. ”
For the company, Mr Davie says here that for the purpose of the test the intelligent and honest business person, who might reasonably approve the compromise his client puts before the Court is the ordinary taxpayer. He says this compromise is one which an ordinary taxpayer would approve. Further given the company's present sound financial trading situation it would not make commercial sense to liquidate the company now with such a large sum outstanding to the plaintiff. The compromise he says will result in the plaintiff being better off in the long run because he will receive more money through it than if the company was liquidated. As part of the compromise a debenture over the company's assets is offered. Such a debenture is available because Mr and Mrs Jones (shareholders of the company), at an earlier stage, determined to mortgage private assets, namely their home, in order to inject funds into the company to pay off a Bank of New Zealand debenture. In that regard it is submitted, on behalf of the company, that such repayment clearly triggered the commissioner's application to wind up because as a preferential creditor it then had a claim on all the then unencumbered assets of the company. Mr Davie says that from the point of view of the ordinary taxpayer the compromise offered is a fair one and is in accordance with the aim of the new company legislation which is to provide a means to preserve a viable commercial enterprise capable of making a useful contribution to the economic life of the country. Critical then to Mr Davie's submission, is the acceptance of his proposition that for the purposes of the test here “the intelligent and honest man of business” referred to in C M Banks Ltd equates “the ordinary taxpayer”. However that submission appears to overlook the following words used there, namely “a member of the class concerned and acting in respect of his interest might reasonably approve”. Those words clearly I think here encompass the commissioner plaintiff and in his position as commissioner he is not to be considered solely, as representing the collective interests of the ordinary taxpayer. His obligations are wider than that. He has to consider the interests of the community as a whole, taxpayer, or no, and in particular, the interests of the commercial community. 
There can be no question of course that under the New Zealand income tax legislation a primary responsibility of the commissioner is to collect tax, and a taxpayer's right to challenge the exercise of any discretion exercised by the commissioner in carrying out that duty is quite limited. See Miller v CIR (1995) 17 NZTC 12,341Has Litigation History which is not known to be negative[Blue] , 12,344 where Richardson J giving the judgment of the Court said: 
“Judicial review is available where a decision making authority exceeds its powers and commits and error of law, commits a breach of natural justice, breaches a decision which no reasonable tribunal could have reached or abuses its powers (R v Inland Revenue Commission's ex parte Preston [1983] AC 835 per Lord Templeman at page 862). This is subject to the obvious qualification that the legislation under which the authority is acting may itself limit the nature and scope of any review. ”
On behalf of the commissioner Mr Cunningham submitted that one must keep in mind in weighing up whether or not to grant a compromise that a major principle underlying the making of a winding up order is that a creditor is entitled ex debito justitiae to an order. Re Thames Freightlines Ltd (in rec) (1983) 1 NZCLC 95-012 per Greig J is relied on. 
Mr Cunningham says that the plaintiff's attempts to obtain payment from the defendant company have proved fruitless. The debt is increasing and the defendant company remains in business. He submits the plaintiff should be entitled in those circumstances to have the defendant company put into liquidation. 
Further he asks the Court to take into account in determining whether to grant the application the following submissions: 
“1 THE Plaintiff submits that where, as in this case, the debt arises from a statutory obligation, the Court should have regard to the intention of the legislation. In the present case the debt has arisen from assessments made by the Commissioner under the Goods and Services Tax Act 1985, the Income Tax Act 1976, the Accident Compensation Act 1982 and the Accident Rehabilitation and Compensation Insurance Act 1992. These Acts require that Returns be filed and assessments paid by the due dates set out in the legislation and that failure to do so will result in penalties being imposed. The penalties for late or non payment are quite high particularly in the case of GST and PAYE and are set specifically to discourage late payment or non payment which, in the Defendant Company's case, has been continuing for some years. The intention of the legislation is that Tax must be paid on time and failure to do so will result in additional penalties being imposed. The Commissioner is, of course, most concerned that such revenue which he has a statutory duty to collect is not prejudiced by the operation of s 236. 
2 IT is the Plaintiff's submission that to cancel part of the debt which consists of penalties would be seen by the Commissioner and to Taxpayers as a whole as a disincentive to those who pay their Tax by due date and an incentive for those who owe considerable amount of Tax including penalties to come running to the Court asking for part of that debt to be cancelled and this clearly is repugnant to the intention of the legislation and is an impediment to the Commissioner's statutory duty to collect Tax. There may be circumstances where a compromise could be imposed under s 236 on the Commissioner which would not unduly affect his position particularly where a significant body of creditors favoured a compromise but lacked the necessary majority to obtain a compromise under Part XIV but that is not the case here; there are no opposing creditors and the Commissioner is being asked to forego some $500,000.00 worth of debt. 
3 THE Commissioner has the power to make arrangements with Taxpayers and as part of that arrangement to exercise his discretion to remit penalties although where remission of more than $5,000.00 is involved, the approval of the Minister must be obtained. An arrangement of that type was approved on two earlier occasions with the Defendant Company but not on this occasion. Plus the plaintiff submits that the Court in considering whether to exercise its powers under s 236 and impose a compromise should not readily override the discretion which the Commissioner has exercised in this case not to remit penalties or agree to any compromise particularly where the exercise of that discretion has not been challenged by Judicial Review. 
4 PART of the Defendant Company's proposal is that it give a First Debenture over the security of its assets in favour of the Commissioner. The plaintiff submits that there is no power given to the Commissioner to take security for the debt in the form of a debenture. The Commissioner is a corporation sole and as such only has the powers which are given to him by statute. These do not include the power to hold debentures or mortgages. The Registrar-General of Land has declined to register mortgages given to secure repayment of a debt and it is likely that the Registrar of Companies would take a similar view if a debenture were presented to him for registration. This anomaly has been accepted by both the Commissioner and the Crown Law Office and is being rectified by legislation. Legislation has not yet been passed. 
5 THE plaintiff submits that the Court should take into consideration the Tax compliance record of the Defendant Company. This is set out in the Affidavit dated 28 November 1994 of Kathryn Rawlins. She states that these proceedings are the third since 1991. On the previous two occasions the Department agreed to compromises but on each occasion the Defendant Company defaulted on the arrangement. The defaults are to the detriment to the Department as the debt has grown from some $636,000.00 in November 1991 top just over $1,000,000.00 in 1994 and in the meantime the Defendant Company has continued to trade. Effectively by not paying its Tax the Defendant Company is being funded by the Plaintiff. 
6 ONE further important point needs to be noted. During the four years ended 31 March 1991 to 31 March 1994 inclusive a salary totalling for those years $420,160.00 has been paid by the Defendant Company to its principal shareholder Mr Lloyd McPherson Jones. A smaller salary has been paid to Mrs Jones. Moreover in 1993 another of Mr Jones' companies, Acoustical Material Supplies Limited, was registered as a loss attributing qualifying company which means that the losses attributed to that company could be off-set against Mr Jones' personal Tax liability so in effect the losses would either cancel or reduce the PAYE Tax for those years. 
7 NO-ONE would expect Mr Jones to work for no reward but it is the plaintiff's submission that the level of salary paid to him by the Defendant Company was excessive having regard to the liabilities of the Defendant Company and has been paid at the expense of the plaintiff. 
8 THE Plaintiff submits that throughout the period 1990 to 1995 the Defendant Company has preferred other creditors and its own officers to the detriment to the revenue. All its trade creditors are paid. The Bank was paid but not the Commissioner and yet some of the Commissioner's debt was preferential. ”
In carrying out the necessary balancing exercise I conclude in the end that the application is really an attempt to ask the Court to override the commissioner's discretion, remit a substantial amount of tax and allow the outstanding debt to be paid off over a period of time. Even if the compromise is, as Mr Davie submits, to be tested by considering whether it would be approved by an ordinary taxpayer, or whether it is to be tested from the point of view of a reasonable commissioner for the reasons put forward by the commissioner, I find that it would not be approved by an intelligent and honest man of business. 
In refusing the application I do not overlook the fact that the company's initial problems may not have been completely of its own making but I also take into account the fact that previous arrangements put forward by the company have not been honoured. 
Mr Davie on behalf of the company, in response to the Master's query that if this application was granted it would open the floodgates to similar applications all over the country, argued that the circumstances of his client's case can properly be regarded as unique. I cannot accept that submission. I am sure that if this application were granted then it would indeed open the way for companies to ask the Court to interfere with the exercise of the commissioner's discretion and cancel or reduce debt and direct that outstanding tax be paid by instalments. Given that nine months last year, 130 applications were filed in this Court by the Commissioner to liquidate companies because they had not met their tax obligations, I think there is a real danger that granting this application would inevitably open the flood gates to similar applications by other companies in jeopardy of being wound-up because of failure to pay their tax. 
Lastly I should say that I can accept there may be cases where the commissioner is a creditor that a compromise might be ordered under the section, particularly where interests of other creditors, as well as those of the company and the commissioner require to be considered, but that is not this case. In rejecting the application I remind myself that the onus is on the applicant to satisfy the Court that an order should be made. It has not in my view discharged that onus. 
I refuse the application for compromise. 
The winding-up application is placed on the list for hearing on the fourth day of March 1996. Costs reserved. 

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