Simpson and Downes as Receivers of Capital + Merchant Investments Ltd ((in Receivership)) v Commissioner of Inland Revenue

• Jurisdiction: New Zealand
• Judge: White J
• Judgment Date: 30 March 2012
• Neutral Citation: [2012] NZCA 126
• Docket Number: CA361/2011
• Court: Court of Appeal
• Date: 30 March 2012

Between

Richard Grant Simpson and Timothy Wilson Downes as Receivers of Capital + Merchant Investments Limited (In Receivership)

Appellants

and

Commissioner of Inland Revenue

Respondent

[2012] NZCA 126

Court:

Arnold, Ellen France and White JJ

CA361/2011

IN THE COURT OF APPEAL OF NEW ZEALAND

Appeal from a High Court decision directing that the appellants were personally liable as receivers for GST on sale proceeds of mortgagee sales — application under s34 Receiverships Act 1993 for directions on disposition of GST — whether receivers should be treated as “the second person” under s5(2) Goods and Services Tax Act 1985 — whether receivership meant mortgagee was entitled to GST — whether “wrong question” had been asked in appeal and Court had power under s34 to answer correct issue.

Counsel:

G J Toebes for Appellants

H W Ebersohn and P W O'Regan for Respondent

A The appeal is allowed.

B The direction given by the High Court is set aside.

C Messrs Simpson and Downes are directed that they are obliged as receivers of CMI to pay the GST received on the five mortgagee sales to the Commissioner.

D There is no order for costs.

JUDGMENT OF THE COURT

REASONS

(Given by White J)

Table of Contents

	Para No
Introduction	[1]
Factual background	[4]
Agreed issue	[15]
Agreed disposition	[17]
Relevant legislation	[19]
High Court judgment	[20]
Submissions for parties	[27]
Does CMI's receivership mean Fortress is entitled to the GST?	[31]
The “personal liability” of the receivers	[57]
The answer to the agreed issue	[64]
Result	[70]
Schedule of relevant legislation

Introduction

1 Richard Simpson and Timothy Downes, the receivers of Capital + Merchant Investments Ltd (in receivership) (CMI), appeal against the High Court judgment of Dobson J giving a direction that the receivers were “personally liable” to the Commissioner of Inland Revenue (the Commissioner) for the payment of GST totalling $1,215,201.39 on five mortgagee sales by CMI. 1

2 The receivers accept that CMI itself is liable for the payment of the GST, but argue that, because CMI is in receivership and unable to meet its debts, the Commissioner is an unsecured creditor and, as receivers, there is in the circumstances of this case no basis for “personal liability” on their part under the relevant provisions of the Goods and Services Tax Act 1985 (the GST Act). On this basis the receivers contend that they must account to the secured creditor for the amounts received as GST.

3 The receivers' case has reached the Courts by way of an originating application under s 34 of the Receiverships Act 1993 for directions, a statement of agreed facts, an agreed issue and, depending on the answer to the agreed issue, an agreed arrangement for the disposition of the GST, which in the meantime has been paid by the receivers to the Commissioner to hold pending the outcome of the case.

Factual background

4 CMI was a finance company which was not registered for GST because it provided GST exempt supplies as a provider of financial services.

5 In order to finance the acquisition of another company, CMI borrowed funds from Fortress Credit Corporation (Australia) II Pty Ltd (Fortress). The borrowings were secured by a General Security Agreement (GSA) dated 18 December 2006 over all the assets of CMI, which included loans to five other companies secured by mortgages over their properties. Fortress also registered caveats against the interests of CMI as mortgagee under each of the mortgages.

6 Clause 12.1 of the GSA provided under the heading “Application of Proceeds”:

Order: Subject to the repayment of any claims having priority to any claim of the Secured Party in respect of any Security Interest created by this Agreement and to any statute that overrides this clause 12.1, the net profits (if any) of carrying on the business of the Debtor and the net proceeds of any sale or realisation of the Secured Property on enforcement received by any Receiver or the Secured Party will be paid or applied:

First in satisfaction of all costs and expenses of whatever nature of and incidental to the exercise of all or any of the Secured Party's rights under this Agreement (including the exercise of any such rights of any Receiver and the remuneration of the Receiver);

Secondly in payment of any preferential claims that are by law given priority to any Security Interest created by this agreement …

7 The receivers, both of whom are chartered accountants and partners in the well-known professional services firm, Grant Thornton New Zealand Ltd (Grant Thornton), were appointed on 23 November 2007 after CMI defaulted on its obligations to Fortress.

8 The five companies with mortgages over their properties to CMI then defaulted under their mortgages. This led to the service of Property Law Act notices on the mortgagors by the receivers for CMI as mortgagee and, when the defaults were not remedied, mortgagee sales of the properties owned by the five companies.

9 GST was incurred in respect of each mortgagee sale. Each agreement for sale and purchase required the purchaser to pay “any GST” and each settlement statement for each sale issued by Buddle Findlay, the solicitors for CMI, showed GST as a separate item in the calculation of the balance required for the purchaser of the properties to settle the transactions. In accordance with the settlement statements, the purchasers paid the balance required to settle, including the GST, to Buddle Findlay who accounted to Grant Thornton which held the funds in its CMI trust account.

10 CMI filed GST returns with the Commissioner in respect of each of the mortgagee sales, but no GST was paid with the returns.

11 CMI's indebtedness to Fortress exceeded the value of the gross proceeds of realisation of CMI's assets, including the proceeds from the mortgagee sales.

12 Fortress, as CMI's secured creditor, required payment to it of all moneys available from the mortgagee sales, including the amounts paid by the purchasers as GST, before it would withdraw its caveats. The Commissioner, however, claimed he was entitled to the GST.

13 Pending the Court's determination of the agreed issue, the GST on the five mortgagee sales was paid by the receivers from the Grant Thornton CMI trust account to the Commissioner.

14 To enable the caveats to be withdrawn and the transfer of the properties sold by mortgagee sale to be registered, it was agreed that the GST and interest, less costs, would be paid to Fortress in the event that the Court determined the agreed issue in favour of the receivers.

Agreed issue

15 The issue agreed between the parties raised in the originating application for directions brought by the receivers under s 34 of the Receiverships Act is:

Do Messrs Simpson and Downes as receivers of Capital + Merchant Investments Ltd (In Receivership) (“CMI”) have personal liability for payment to the Commissioner of Inland Revenue (“The Commissioner”) of the Goods and Services Tax (“GST”) payable by CMI, but not paid, in relation to five specified mortgagee sales undertaken by CMI?

16 The parties and the High Court have proceeded on the basis that the reference in the issue to the “personal liability” of the receivers is to be distinguished from their obligation, if any, in their capacity as receivers of CMI to pay the GST to the Commissioner. This approach to the issue led the Commissioner to submit to us that the “wrong question” had been asked. The receivers maintained that the Court was required to answer the issue in the form agreed by the parties. We shall return to the question of the interpretation of the agreed issue and the power of the Court when considering the direction to be given under s 34 of the Receiverships Act.

Agreed disposition

17 The parties also reached agreement that, following the Court's determination of the agreed issue, the case would be disposed of on the following basis:

• (a) If it is determined in relation to the mortgagee sales that the receivers do not have personal liability for any GST payable by CMI, then the GST and the interest already paid will be refunded within seven days of the final decision of the relevant Court;

• (b) If in relation to the mortgagee sales it is found that the receivers do have personal liability then the GST and interest already paid to the Commissioner will be retained absolutely by the Commissioner;

• (c) In each case the refund or retaining of the payment, in accordance with the final determination of the Court, shall be in full satisfaction of the obligations of the receivers to the Commissioner or by the Commissioner to the receivers whether for GST, interest, use of money interest, shortfall penalties or otherwise payable in respect of the mortgagee sales;

• (d) In relation to these proceedings it is agreed that each party is to bear its own costs and not seek costs against the other; and

• (e) The Commissioner reserves all its rights in relation to the liability of CMI in relation to the GST for the mortgagee sales.

18 For reasons which will emerge later in this judgment, it is significant that, notwithstanding the agreement recorded in subparas (a)–(c), the Commissioner has reserved his rights in relation to the liability of CMI.

Relevant legislation

19 The relevant provisions of the GST Act, the Property Law Act 2007 and the Receiverships Act are set out in the schedule to this judgment.

High Court judgment

20 Dobson J found that the receivers were “personally liable” to pay the GST to the Commissioner. He upheld the Commissioner's case on a number of grounds. The principal ground was that the receivers should be treated as “specified agents” under s 58 of the GST Act and that their status as specified agents meant they were personally liable for GST incurred by CMI on the mortgagee sale.

21...