Ge Burns and Rd Agnew v The Commissioner of Inland Revenue Hc Ak

• Jurisdiction: New Zealand
• Judge: D.I. Gendall
• Judgment Date: 10 August 2011
• Neutral Citation: [2011] NZHC 1363
• Docket Number: CIV-2010-404-7387
• Court: High Court
• Date: 10 August 2011

[2011] NZHC 1363

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2010-404-7387

BETWEEN

Grant Edward Burns and Richard Dale Agnew

Applicants

and

The Commissioner of Inland Revenue

First Respondent

And

Strategic Finance Limited (In Receivership) and Strategic Nominees Limited (In Receivership)

Second Respondent

Counsel:

C. Murphy - Counsel for Applicants

N.H. Malarao and N.M.H. Whittington - Counsel for First Respondent

N.I. Robinson and B.J. Steed - Counsel for Second Respondents

JUDGMENT OF ASSOCIATE JUDGE D.I. Gendall

Introduction

1 Before me is an application by the applicants as liquidators of Takapuna Procurement Limited (in liquidation) (the company), previously a property development company, for directions under s 284(1)(a) of the Companies Act 1993 as to the proper characterisation of certain funds held by the liquidators on behalf of the company. The proper treatment of those funds will determine how they should be distributed. The funds in question presently held by the liquidators (the collected funds), as I understand the position, total $782,108.18.

2 The collected funds can be categorised as follows:

• (a) Refunds to the company from the North Shore City Council (the Council) of:

  • i. Payments made earlier by the company to the Council for development contributions ($451,176.94);

  • ii. Bonds paid earlier by the company to the Council ($3,000);

• (b) A GST refund of $169,349.86 released by the Commissioner of Inland Revenue to the company in error; and

• (c) Various funds held by the company's solicitors which relate to the earlier property development undertaken ($158,581.38).

3 The second respondents, Strategic Finance Limited (in receivership and in liquidation) and Strategic Nominees Limited (in receivership) (collectively Strategic) are the only remaining secured creditors and the first respondent, the Commissioner of Inland Revenue (the Commissioner), is the only preferential creditor of the company. Both the Commissioner and Strategic seek, after payment of the liquidators' costs, payment of the balance of the collected funds. Whether the funds are paid to the Commissioner or Strategic essentially turns on the meaning of “accounts receivable” in Schedule 7 to the Companies Act 1993, a defined term in the Personal Property Securities Act 1999 (PPSA). The Commissioner and Strategic both contend that Schedule 7 to the Companies Act 1993 accords them priority. If the collected funds are accounts receivable or “proceeds” of accounts receivable (“proceeds” also being a defined term), the Commissioner's claim has priority pursuant to the statutory preference regime encapsulated in s 312 and Schedule 7 to the Companies Act 1993. Otherwise, the rights of Strategic as secured creditors under their General Security Agreement (GSA) will prevail (subject to the position in respect of the GST refund discussed below). The liquidators therefore apply to this Court for directions as they are not certain about the correct application and operation of s 312 and Schedule 7.

Background

4 The company was previously in business as a property developer in the Auckland region. Part of its business involved the development of a property at Anzac Avenue, Takapuna known as “Shoalhaven” (the Shoalhaven Development). The company's directors were Messrs Robert and Kelly McEwan. Both were adjudicated bankrupt as of 26 February 2009 and 20 May 2009 respectively.

5 On 18 July 2008 the Commissioner filed liquidation proceedings against the company and six other of Messrs McEwan's companies. The company was placed into liquidation on 21 November 2008 by order of this Court and the applicants appointed as liquidators.

6 Previously, Strategic had advanced funds to the company for the completion of the Shoalhaven Development. The company granted Strategic a GSA which was registered on the Personal Property Securities Register (registered on 22 May 2003 and re-registered on 4 April 2008) along with a second registered mortgage over the Shoalhaven Development property. Strategic claims that, at the date of liquidation, it was owed in excess of $4,800,000.00 plus accruing interest and costs under these securities. The liquidators say that Strategic have in fact filed a proof of debt claim in the sum of $7,056,000.00.

7 The Commissioner lodged its claim as a preferential creditor which the liquidators have accepted at $3,625,493.51. This relates to GST arrears owing by the company plus interest and penalties.

The Collected Funds

8 The development contributions refund noted at [2](a)(i) above arose out of contributions paid in the past by the company to the Council. Those contributions had been required by the Council from developers on development project approvals, essentially to help fund infrastructure in the region. In Neil Construction Limited v North Shore City Council [2008] NZRMA 275 this Court found that the Council had erred in asserting that the grant of specified resource consents would automatically trigger these development contributions charges. Following that decision, the Council reviewed and amended its development contributions policy. The refunded amounts totalling $451,176.94 were the difference between development contributions that had been paid in the past on various company projects and the Council's later reassessment of the correct level of those contributions.

9 Bonds are a standard requirement for approval of a development project by the Council. Developers such as the company in the present case are required to pay a bond to ensure that work undertaken by it complies with the Council's standards. Bonds are refunded after the Council considers a development is compliant and the

$3,000.00 post-liquidation payment made to the company here was such a bond refund.

10 The GST refund of $169,349.86 noted at [2](b) above was a payment made to the company post-liquidation in error by the Commissioner. More on that is provided at para [15] and following below.

11 The funds noted at [2](c) above held by the company's solicitors, Carter Atmore, relate in part to three separate sale and purchase agreements for units at the Shoalhaven Development. Those sales were to a Mr Ian Newman to Red Sea Properties Limited and to Lateott Limited.

12 Mr Newman, Red Sea Properties and Lateott paid deposits of $40,600.00,

$15,108.75 and $41,200.00 respectively to Carter Atmore pursuant to their individual sale and purchase agreements for Shoalhaven Development units. Carter Atmore continued to hold those funds on trust for the company at the time of liquidation and post-liquidation, they transferred them to the liquidators (plus interest) on request.

13 Carter Atmore also received and held certain other funds. These represented first, a refund of unused Body Corporate levies, secondly, rental payments received from Quinovic Property Management, thirdly, rental of one unit retained by the company at the Shoalhaven Development, fourthly, reimbursement funds from the Investors Forum New Zealand Limited, fifthly, money held subsequent to a settlement between the company and a purchaser over remedial works required for one of the units and lastly, a refund held for overpayment of general rates, water charges and legal fees.

The Issues

14 As I have noted above, the present application for directions by the liquidators seeks guidance from the Court on how to categorise the collected funds on the basis that this will determine their disposition between the competing interests.

15 The first issue concerns the $169,349.86 GST refund provided to the company in error by the Commissioner. Essentially the Commissioner's position is that he has a proper claim to these monies paid by mistake under restitution principles or alternatively the liquidators should be directed to return the funds to the Commissioner under the rule in In re: Condon (1874) 9 Ch App 609(CA).

16 In response, counsel for Strategic contends that the Commissioner has no proprietary interest in the GST refund monies for three reasons:

• (a) There was no relevant mistake;

• (b) Even if there was a mistake, there is no proprietary remedy available; and

• (c) The rule in In re: Condon does not apply here.

17 The liquidators in their present application seek the guidance of the Court regarding the GST refund monies as a separate issue in light of the competing positions taken here by Strategic and the Commissioner.

18 The second issue relates to all the categories of collected funds and raises the question whether the liquidators are required to pay these amounts (or any part of them) to the Commissioner as a preferential claimant under s 312 Companies Act 1993 rather than to Strategic as secured creditors holding a GSA over the company's assets.

19 In this regard s 312 Companies Act 1993 states:

312 Preferential Claims

• (1) The liquidator must pay out of the assets of the company the expenses, fees, and claims set out in Schedule 7 to this Act to the extent and in the order of priority specified in that Schedule and that Schedule applies to the payment of those expenses, fees and claims according to its tenor.

• (2) Without limiting clause 2(1)(b) of Schedule 7 to this Act, the term assets in subsection (1) of this section does not include assets subject to a charge unless the charge is surrendered or taken to be surrendered or redeemed under section 305 of this Act.

20 Schedule 7 makes provision for preferential claims on a company liquidation and provides in clause 1(5) for payment to the Commissioner of GST, PAYE and other stipulated forms of unpaid taxation as a general priority payment.

21 On this, clause (2) of Schedule 7 provides in part (emphasis added):

(2) Conditions to priority of payments to preferential...