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Accident Compensation Cases

Wilder Transport Ltd v Commissioner of Inland Revenue (HC, 16/02/99)

Judgment Text

Reserved judgment of Master Venning 
Master Venning
The applicant Wilder Transport Ltd (“Wilder”) seeks an order setting aside a statutory demand issued by the respondent Commissioner of Inland Revenue (“CIR”). In 1998 the creditors of Wilder approved a compromise under Part XIV of the Companies Act 1993. The CIR voted against the compromise. The CIR takes the view it is not bound by the compromise and has pursued the issue of the statutory demand against Wilder. Wilder's position is that the CIR is bound by the compromise and is out of time to apply for an order pursuant to s 232(3) that it not be bound. 
The debt pursued by the CIR is $377,703.53 as at 24 July 1998. It relates to accident compensation employer premiums, penalties and interest due under the Accident Rehabilitation and Compensation Insurance Act 1992. 
Background 
Counsel for Wilder, Mr Kellar, advised the Court that Wilder is a substantial transport company. It formerly had 300 employees and even now still employs approximately 200 people. It has a multi million dollar turnover. In 1998 its directors recognised that it was seriously indebted and could not continue operations at the then level of indebtedness. Approximately $6 m was owed to secured creditors and just under that sum was owed to unsecured creditors. Wilder was an operational company trading as a trucking and freight forwarding business. A related company, Wilder Management Ltd had a management role. It did not trade. 
In July 1998 a notice of intention to hold a meeting of creditors, statement of proposed compromise and voting paper were all sent by post to creditors of both companies. The voting papers were to be returned by 5.00 pm on Tuesday, 14 July and counted on 17 July. The proposal was that the companies would pay the sum of 55 cents in the dollar in respect of monies due to unsecured creditors at 30 June 1998, but that the balance debt would be cancelled. As noted, the proposal was in respect of both Wilder and Wilder Management Ltd. Apart from holiday pay due, the only creditor of Wilder Management Ltd was the CIR in respect of accident compensation payments, GST and PAYE. 
The CIR voted against the proposed compromise. As the CIR was effectively the only creditor of Wilder Management Ltd the compromise in respect of that company failed. The compromise proposed in respect of Wilder was passed by the requisite majority of creditors. The first payment of 15 cents in the dollar has been made pursuant to that compromise. The balance payments are due March 1999 and December 1999. 
It is the CIR's submission that the compromise was irregular and that the CIR is not bound by the terms of the compromise in any event. 
The compromise 
Two preliminary issues arise. First, whether notice of a proposed compromise may be given in respect of two companies. The second is whether the CIR was given proper notice of the result of the compromise as required by the Act. 
The provisions relating to a compromise are found in Part XIV of the Companies Act 1993. "Compromise" is defined as "... means a compromise between a company and its creditors ...". 
In the present case the proposal put to creditors was put on behalf of both Wilder Management Ltd and Wilder. The terms of the proposed compromise were identical for both companies. 
The proponent of a compromise must compile, in relation to each class of creditors of the company, a list of creditors setting out the amount owing or estimated to be owing by each of them, and the number of votes each of them is entitled to cast. The proponent must also give to each known creditor notice in accordance with the Fifth Schedule of the intention to hold a meeting of creditors and a statement complying with the provisions of s 229(2)(b) together with a copy of the lists of creditors. 
On my reading of the documents before the Court those requirements were satisfied in the present case. The lists compiled were lists of creditors of both Wilder Management Ltd and also of Wilder. However, where the creditors were of Wilder Management Ltd that fact was clearly identified in the list, and as is apparent from the lists the only creditors of Wilder Management Ltd were the CIR and those parties entitled to holiday pay. 
It was always open for creditors to vote in respect of the compromise in relation to either Wilder or Wilder Management Ltd depending on what company they were creditors of. The evidence is clear enough from the voting results that the proposal insofar as it related to Wilder Management Ltd was defeated but that in relation to Wilder it was accepted. 
In my view Wilder has, in substance, complied with the requirements of s 229 and the Fifth Schedule of the Companies Act. The fact the companies chose to combine information in their notices of the proposed compromise to be put to creditors, rather than send out two separate notices of proposed compromises, is not fatal to the procedure. Whilst the compromise ultimately made must be between a company and its creditors, the notices containing the information required for the compromise proposal can, in appropriate cases, be combined, where the creditors are not misled and the information required by the Act is provided. The notices sent out in this case contained the required information. To the extent that there may have been a procedural breach by combining the information in one notice, the Court could give directions approving the procedure adopted under s 232(1)(a) in any event. In my view nothing turns on that aspect of the matter. 
Notice 
In its opposition the CIR has also taken issue with the notice of the result of the voting. Section 230(4) requires the proponent to give written notice of the result of the voting to each known creditor, the company, any receiver or liquidator and the Registrar. In the present case notice was given of the result of the voting to the CIR. Ms Kennedy, an officer employed in the Department of Inland Revenue by the CIR, accepts that on 24 July 1998 she received a copy of the voting results through the Department's internal mail system. She also accepts that the voting results had earlier been delivered to the Southern Processing Centre at Christchurch on or about 22 July 1998. The notice was of the result of the voting by creditors on the compromise. It did not expressly differentiate between the outcome of the voting for Wilder and Wilder Management Ltd, although it recorded that the resolutions had been adopted by a majority. That can only have been in respect of Wilder as the CIR would have been well aware that in relation to Wilder Management Ltd he was effectively the only creditor, and having voted against it that proposal had been declined. Again, in my view the defect, such as it was, is the type of defect which in the circumstances of this case the Court would be prepared to waive under s 232(1). 
Mr Shamy made the rather bold submission that the notice to the CIR was not effective as the notice should have been directed to the case officer rather than just being sent generally to the Department. With respect, that submission cannot be correct. There is no dispute the notice was received by the Department. The Department must put systems in place to deal with receipt of these types of notices. 
Mr Shamy also submitted that the notice was defective in that it did not inform the creditor, the CIR, of his rights pursuant to s 232 of the Act, and particularly the time limits involved for bringing objection to the process. Ms Kennedy deposed that she was unaware of the time limits. Again, with respect to that submission, in my view it cannot be sustained. Section 230(4) simply requires written notice of the result of the voting. There is no particular prescribed form in the schedule to the Act. 
I therefore find that the notice given was adequate notice of the result of the voting as required by s 230(4). 
Special position of the CIR 
The effect of that finding is that the CIR is unable to pursue an application that he is not bound by the proposal on the grounds set out in s 232(3). He is out of time to bring an application under that section. 
However, the main thrust of the CIR's case is that the CIR is in a special position and is not bound by the compromise in any event. In other words, the CIR's position is that he is not in the position of a creditor voting against the compromise who needs to bring an application pursuant to s 232(3) for an order that he not be bound by the compromise. It is the CIR's submission that as a matter of law he is not bound by the compromise, and thus is not required to make application under s 232(3). 
That submission is based on the general submission that the CIR has a special legal status and is in a unique position as a creditor. It was submitted by Mr Shamy that it was wrong for Wilder to include the CIR's claim in respect of accident compensation earner premiums, penalty and interest with unsecured creditors. He submitted that the CIR should have been included as a separate class of creditor. 
Mr Kellar, on the other hand, submitted that whilst he accepted in respect of PAYE and GST the CIR was a preferential creditor, insofar as the debt in the present case related to accident compensation earner premiums which the CIR collected as agent, the CIR was only an unsecured creditor and as such had no special status. 
The special position of the CIR as a creditor generally has been referred to in a number of cases. In Cates v CIR (1982) 5 NZTC 61,237; 5 TRNZ 603Has Litigation History which is not known to be negative[Blue]  decision of the Court of Appeal, Somers J stated: 
“The Commissioner, who is head of a Department of State, assesses the tax and collects it on behalf of the Crown. He is for those purposes the statutory agent of the Crown. ”
In Suspended Ceilings (Wellington) Ltd v CIR (1997) 8 NZCLC 261Has partially negative history or cases citing, but has not been reversed or overruled[Yellow] , 318 the Court of Appeal referred to s 6A(3) of the Tax Administration Act 1994 which provides: 
“In collecting the taxes committed to the Commissioner's charge, and notwithstanding anything in the Inland Revenue Acts, it is the duty of the Commissioner to collect over time the highest net revenue that is practicable within the law having regard to— 
(a)
The resources available to the Commissioner; and 
(b)
The importance of promoting compliance, especially voluntary compliance, by all taxpayers with the Inland Revenue Acts; and 
(c)
The compliance costs incurred by taxpayers. ”
The Court noted that "the importance of those statutory provisions must not be overlooked". 
Whilst accepting that the CIR is generally in a special position, the issue is whether in terms of the statutory provisions relating to compromises with creditors the CIR should be in a separate class of his own, regardless of whether or not the debt would otherwise have priority in a liquidation. Mr Shamy submitted that the CIR should be so recognised. The effect of his submission would be that in any compromise the CIR should be in a separate class of his own. 
It is accepted that the Courts give a liberal meaning to the word "class" in the context of proposals or compromises with creditors: Re Stewart & Sullivan Farms Ltd [1981] 1 NZLR 712Has partially negative history or cases citing, but has not been reversed or overruled[Yellow] ; Re The National Dairy Assoc of NZ Ltd (1988) 4 NZCLC 64,198, 64,207-64,209; [1987] 2 NZLR 607Has Cases Citing which are not known to be negative[Green] , 619-621; The NZ Municipalities Cooperative Insurance Ltd v Dunedin City Council (1989) 4 NZCLC 65,044Has Cases Citing which are not known to be negative[Green] , 65,052. 
In the NZ Municipalities, case McGechan J cited with approval the statement of Bowen LJ in Sovereign Life Assurance Co v Dodd [1892] 2 QB 573Has Cases Citing which are not known to be negative[Green] 
“It seems plain that we must give such a meaning to the term 'class' as will prevent the section being so worked as to result in confiscation and injustice, and that it must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest. ”
Mr Shamy submitted that in CIR v Kane Builders Ltd [1992] 3 NZLR 341; (1992) 14 NZTC 9,085; (1992) 16 TRNZ 825Has Cases Citing which are not known to be negative[Green]  and CIR v Roadmark Systems Ltd (1997) 18 NZTC 13,331; [1997] 3 NZLR 744Has Litigation History which is not known to be negative[Blue]  the Court accepted the special position of the CIR and proceeded on the basis he constituted a separate class of creditor for the purpose of compromises. 
Before considering those cases it is important to recognise that the Seventh Schedule of the Act provides that the CIR is a preferential creditor in relation to: 
(a)
Tax payable by the company in the manner required by Part III of the Goods and Services Tax Act 1985; 
(b)
Tax deductions made by the company under the PAYE rules of the Income Tax Act 1994; 
(c)
Non-resident withholding tax deducted by a company under the RWT rules of the Income Tax Act 1994; 
(d)
Every resident withholding tax deduction made by a company under the RWT rules of the Income Tax Act 1994; 
(e)
Duty payable within the meaning of s 2(1) of the Customs and Excise Act 996. 
Clearly, in relation to such classes of debt the CIR is a preferential creditor and is in a different class to unsecured creditors 
In the Kane Builders case the claim by the CIR related to unpaid GST, income tax and accident compensation levies. The CIR is a preferential creditor in relation to GST. Whilst the Court accepted that the CIR's claim for unpaid tax placed him in a different category of creditors from that of the ordinary unsecured creditors, no distinction was made between the unpaid GST and income tax as opposed to the accident compensation levies. Further, the focus of Master Towle's reasoning was directed towards whether the CIR could be bound by a scheme of arrangement under the Companies Act 1955. 
In the Roadmark Systems Ltd case Master Kennedy-Grant stated: 
“... I have no doubt that the Commissioner, to the extent that he is a preferred creditor, constitutes a separate class of creditors and therefore cannot be bound by a decision which was not entered into by creditors of the same class as himself. In my view, the compromise as entered into fails to treat the Commissioner as constituting a separate class of creditor in respect of his preferred claim, although it does provide for his preferred claim to be met in advance of his claim as an unsecured creditor and the claims of other unsecured creditors. ”
(Emphasis added.)
With respect, I agree. To the extent that the CIR is a preferred creditor then his rights are dissimilar to the rights of other unsecured creditors. 
This was recognised in CIR v Suspended Ceilings (Wellington) Ltd (1996) 7 NZCLC 261, 100. The Court accepted the CIR was a preferred creditor, referring to the case of Re V & M Diagnostic Services Pty Ltd: Re Northern Newcastle Constructions Pty Ltd (1985) 9 ACLR 663Has partially negative history or cases citing, but has not been reversed or overruled[Yellow]  in which case Cohen J stated (at pp 666-667): 
“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 an arrangement if it would prejudice a creditor whose rights would have been preferential if a petition to wind up had proceeded: Re Richards (1879) 11 ChD 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 to consider in the exercise of the court's discretion. ”
Mr Shamy referred to the following passage at p 667 of the V & M Diagnostic Services decision: 
“In effect, where all creditors cannot be paid, those whose livelihood depended on the company, and the Crown, representing the general community, to whom money was due because of the nature or result of the company's activities, have been regarded as having a right to be paid ahead of those who, for the most part, took the usual commercial risk inherent in granting or allowing credit. ”
Mr Shamy cited that in support of the submission that the CIR in the present case was in a different position to other unsecured creditors, even if not a preferential creditor. 
However, I accept Mr Kellar's submission that the passage following in the judgment (at p 668) puts that statement in context, namely: 
“The principle which has been established by statute, has been intended for situations where, in simple terms, there is not enough to go around for everyone who is entitled. Some are to be preferred to others ... 
In the cases before me there is no apparent reason for removing the priority of the Commissioner. All other preferential creditors retain their statutory benefit. ”
Clearly in that case the CIR was a recognised, preferential creditor. 
Mr Shamy also referred to two decisions of this Court in support: CIR v Carlyle Properties Ltd 2/4/98, Master Venning, HC Christchurch M816/97 and CIR v Rathmore Ltd 2/2/98, Master Venning, HC Christchurch M818/97. In the Carlyle decision the CIR was recovering unpaid GST. The CIR was preferred creditor, as in CIR v Roadmark (supra). In the Rathmore Ltd case the CIR was seeking an order to place the company in liquidation in relation to unpaid accident compensation premiums Mr Shamy relied upon the clearly obiter comment in that decision that: 
“It may be the Commissioner should be regarded as a separate class of creditor for the purposes of the voting on the proposal. In those circumstances it is at least arguable, although it is unnecessary for me to decide the point, that the Commissioner as a separate class is not bound by the proposal. ”
With respect, that comment cannot be elevated to the extent that he would like, particularly when the matter was not directly in issue as it is in the present case. The statement referred to was no more than recognition there was an argument for another day. This appears to be that day. 
Finally on this issue of the test to apply when considering whether a creditor should be in a separate class, I note the comments of Street J in Re Jax Marine Pty Ltd [1967] 1 NSWR 145Has partially negative history or cases citing, but has not been reversed or overruled[Yellow] , at p 148: 
“The test is rather one of whether or not the persons who, prima facie, appear to constitute the class of unsecured creditors should be dissected into separate classes by reason of some particular matter so affecting the rights of some as to render it impossible for them to pursue their own interests concurrently with their participating in the pursuit of the interests of the class of which they appear to be members. ”
I accept Mr Kellar's submission that the rights the Court must consider in this context are the rights of a creditor against the company in respect of the debts in question. The rights of the CIR attaching to the accident compensation employee premium debt are not so dissimilar from the rights of other unsecured creditors as to make it impossible for the CIR to consult with other unsecured creditors with a view to their common interest. The ClR is not a preferred creditor in relation to that debt. 
The prime debt owing to the CIR in this case is accident compensation employer premiums. That is the premium payable under s 101 of the Accident Rehabilitation and Compensation Insurance Act 1992. Section 77(6) of that Act provides: 
“... the amount unpaid and any penalty imposed under this Act in respect of that amount shall constitute a debt due to the Corporation and may be recovered by way of proceedings by the Corporation ... ”
The Corporation is authorised to write off any amount otherwise recoverable under the Act: s 77(9). 
Section 117(1) of the Act provides that employer premiums: 
“shall be payable to the Commissioner ... as agent for the Corporation. ”
The provisions of the Tax Administration Act 1994 apply so far as they are applicable as if the Accident Rehabilitation Compensation Insurance Act were one of the Inland Revenue Acts and the premium were a tax or duty under one of the Inland Revenue Acts: s 117(3). 
Notwithstanding that, the Corporation retains discretion to remit late payment penalties. The CIR may remit interest and penalties imposed by the Tax Administration Act on the unpaid employer premiums. 
In summary, whilst pursuant to the Tax Administration Act the CIR has a duty to collect over time the highest net revenue that is practicable within the law, the fact that the CIR in this case would receive little, if any, of the premium employer debt, penalty and interests in a liquidation (given that the debt is unsecured), and given the compromise may well preserve the future tax take are relevant considerations in the exercise of the discretion. 
The CIR has the power to write off core debt interest and penalties, the debt is not preferential in a liquidation, and accordingly the CIR is, at least in relation to the debt in this case, in much the same position as other unsecured creditors who have to determine whether the compromise proposed is the most practical outcome for them given their position as unsecured creditors. 
Unless the debt owing to the CIR is a preferential debt then in my view the CIR can be included with unsecured creditors, and there is no requirement for the CIR to be included in a separate category or class for the purposes of voting on the compromise proposal. 
Section 9 of the Companies Act 1993 binds the Crown. Part XIV makes no special provision for the position of the CIR as a creditor. Save for recognising that in respect of some debt the CIR is a preferred creditor, nor do the schedules to the Act. 
It follows that in this case the CIR is bound by the compromise under Part XIV of the Act. If the CIR did not wish to be bound by the proposal then an application could have been made by him for relief under s 232. 
However for the reasons given above that option is no longer open in the present case. 
The application to set aside the statutory demand must succeed, the debt demanded is not presently due and owing. Order in terms of the application. The applicant is entitled to costs. Costs of $2,000 plus disbursements as fixed by the Registrar. 
The application for liquidation is adjourned for call on 1 March 1999. 

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