Stiassny and Ors v Commissioner of Inland Revenue

• Jurisdiction: New Zealand
• Judge: Blanchard J
• Judgment Date: 28 November 2012
• Neutral Citation: [2012] NZSC 106
• Docket Number: SC 21/2012
• Court: Supreme Court
• Date: 28 November 2012

BETWEEN

Michael Peter Stiassny and Grant Robert Graham

First Appellants

and

Forestry Corporation of New Zealand Limited (In Receivership) and Citic New Zealand Limited (BVI) (In Receivership)

Second and Third Appellants

and

CNI Forest Nominees Limited

Fourth Appellant

and

Bank of New Zealand

Fifth Appellant

and

Commissioner of Inland Revenue

Respondent

[2012] NZSC 106

Court:

McGrath, William Young, Chambers, Gault and Blanchard JJ

SC 21/2012

IN THE SUPREME COURT OF NEW ZEALAND

Appeal from Court of Appeal decision striking out claims of appellants for recovery from Crown of GST – receivers appointed for two companies that were partners in a partnership that carried on forestry business – receivers caused partnership to sell all its forestry assets – receivers concerned that under s58 Goods and Services Tax Act 1985 (personal representative, liquidator, receiver, etc) they might, as specified agents, be personally liable for GST payable by partnership in respect of its taxable period during which sale was transacted – receivers made decision was safer to pay GST and seek recovery if could establish had no personal liability – appellants sought declaration that receivers not liable to Crown for GST in respect of the sale and that Commissioner of Inland Revenue had to refund GST plus interest in accordance with Tax Administration Act 1994 – also claim for recovery of money paid under mistake or compulsion – whether receivers were personally liable – whether GST was recoverable.

Counsel:

M R Crotty for First, Second and Third Appellants

R G Simpson, D K Simcock, J Q Wilson and P G Watts for Fourth Appellant

J A McKay and B J Burt for Fifth Appellant

D J Goddard QC and H W Ebersohn for Respondent

• A The appeal is dismissed.

• B The appellants are to pay the respondent's costs in this Court in the sum of $40,000 together with reasonable disbursements as fixed by the Registrar.

JUDGMENT OF THE COURT

REASONS

(Given by Blanchard J)

Introduction

1 A partnership known as the Central North Island Forest Partnership (CNIFP) carried on a forestry business on a substantial scale. The business encountered financial difficulties. The two partners were the second and third appellants, Forestry Corporation of New Zealand Limited (FCNZ) and CITIC New Zealand Limited, who in this litigation sue together as a firm.

2 In 2001 Mr Stiassny and Mr Graham, the first appellants, were appointed as receivers of each of FCNZ and CITIC by their first ranking secured creditor, the fifth appellant, Bank of New Zealand. The case has been argued on the basis that BNZ held a security over all the assets of the partnership, as well as over the separate assets of each partner. There may of course be other documentation we have not seen. However, on the documents before the Court at least, it appears that the security was given by the partners individually and not by the partnership, so that what was charged was each partner's interest. 1 This potentially important issue was not argued before us, so we will put it to one side and deal only with the matters advanced by counsel.

3 Central to the dispute to be resolved at this stage of the litigation is the fact that there was no receivership of CNIFP. Instead, the receivers procured appointment of themselves as the board of CNIFP, constituted under the terms of the partnership agreement between FCNZ and CITIC. By that means the receivers then controlled and managed the ongoing business of CNIFP.

4 In 2003, and therefore after the Personal Property Securities Act 1999 (PPSA) came into force on 1 May 2002, thenceforward governing the priority of interests in the forestry assets, 2 the receivers caused CNIFP to sell all of its forestry assets to a partnership of certain Cayman Island companies for a price of USD 621 million plus a further sum expressed as representing GST on that price of approximately NZD 127.5 million.

5 BNZ and the second ranking secured creditor of the partnership, the fourth appellant, CNI Forest Nominees Limited, were of the opinion that their charges over the sale proceeds gave them priority in respect of the sum earmarked for GST and that they were therefore entitled to receive that sum in priority to the Commissioner of Inland Revenue. 3 They so advised the Commissioner. For their part, the receivers were concerned that under s 58 of the Goods and Services Tax Act 1985 they might, as specified agents, be personally liable for the GST payable by CNIFP in respect of its taxable period during which the sale was transacted. A failure to pay it within the time period prescribed by the Act might result in their also becoming liable for penalty tax and interest. The sums involved were very large. They made a decision that it was safer to pay the GST and seek recovery if they could establish that they had no personal liability. The GST was therefore paid by cheque to the Inland Revenue Department. 4 That payment had the effect of discharging the liability of the partnership and the partners for the GST owing to the Crown by CNIFP. No demand for payment had been made by the Commissioner and it seems that there had been no prior discussions with the Department concerning it. Subsequently, the receivers filed a Notice of Proposed Adjustment (NOPA) in their own names contesting their personal liability. The Commissioner rejected that notice.

6 In this proceeding the receivers, CNIFP and the security holders seek a declaration that the receivers are not liable to the Crown for the GST in respect of the sale and also orders that any assessment against them be cancelled and that the Commissioner must refund the GST plus interest in accordance with the Tax Administration Act 1994. The appellants brought their proceeding both under that Act (via the receivers) and as a claim for recovery of money paid under mistake or under compulsion. The Commissioner applied to strike out the proceeding.

7 The Commissioner's position is, first, that the receivers were indeed personally liable for the GST under either s 58 or s 57 of the GST Act. He has been unsuccessful on that ground in both the Courts below. But he says that, even if the receivers were not personally liable and were mistaken in paying or causing the GST to be paid, he does not have to refund it because the payment the Department received was a debtor-initiated payment for which the Crown has priority under s 95 of the PPSA, having received it in good faith and having acted in accordance with reasonable standards of commercial practice in terms of s 25 of that Act. He also denies that the payment is recoverable by way of any restitutionary claim.

8 In the High Court, Allan J concluded that there was a tenable argument that the payment, though made by the partnership and thus “debtor-initiated” in terms of s 95, had been made under a mistake of law by the receivers as to the order of priority of creditors and that, although the Commissioner gave good consideration (the discharge of the debt owing for the GST), the payment was arguably not received in good faith. 5 These questions, the Judge concluded, should be left to be resolved at trial.

9 The Court of Appeal allowed the Commissioner's appeal, 6 holding that s 95 gave the Commissioner priority. It agreed that the payment was debtor-initiated. It also found that the Commissioner had given good consideration. If there were also a requirement of good faith, the Court said, in reasons given by Randerson J, the Commissioner had so acted on the facts as pleaded. Mere notice of the secured

creditors' adverse claim, without more, was not sufficient to show an absence of good faith in the context of the case: 7

Something more such as knowledge of the payer's mistake or knowledge of a lack of entitlement to the money would ordinarily be required. There is no allegation of any other wrongdoing by the Commissioner such as to give rise to an independent ground for relief against him or to be otherwise brought into account in the Court's discretion.

The Court of Appeal struck out the appellants' claim. They appeal to this Court against that striking out. 8

Were the receivers personally liable?

10 The Commissioner gave notice of his intention to support the Court of Appeal's order striking out the appellants' claim on the ground that, contrary to that Court's view, the receivers were personally liable for the tax. Logically, that is the first issue to be addressed since, if the Commissioner is correct, the appeal must fail.

11 It will be recalled that, although the two partners of CNIFP were in receivership at the time of the sale of the forestry assets, CNIFP itself was not. Bearing that in mind, we approach the salient provisions of the GST Act.

(a) The GST Act

12 There is no doubt that CNIFP was carrying on a “taxable activity” as defined in s 6(1)(a), 9 or that, in terms of subs (2) of that section, the sale of its forestry assets came within the definition:

(2) Anything done in connection with the beginning or ending, including a premature ending, of a taxable activity is treated as being carried out in the course or furtherance of the taxable activity.

13 GST payable by any person is recoverable as a debt due to the Crown. 10 The Crown is, however, an ordinary (unsecured) creditor of the taxpayer, save to the extent that particular provisions give it preferential priority for GST. Section 42(2) confers a priority in respect of certain assets for GST unpaid on the commencement of a formal insolvency. It is provided, in particular, in relation to an unincorporated body (defined in s 2 as including a partnership) that on the appointment of a receiver on behalf of any person, the amount of unpaid GST payable by the unincorporated body ranks in priority over the claims of any person under a security interest to the extent that it is over all or any part of the unincorporated body's accounts receivable...