In November 2012 the Supreme Court issued its decision in Staissny et al v CIR [2012] NZSC 106. The litigation relates to the failed Central North Island Forest Partnership (CNIFP). Two of the partnership partners went into receivership in 2001 and Mr Staissny was appointed as receiver by a bank, which held security over all the assets of the partnership.
An important feature of the case is that there was no receivership of the CNIFP itself. Rather the receivers were installed as the board of CNIFP. From their position, as constituting the board of the partnership, the receivers caused CNIFP to sell all of its forestry assets to a Cayman Island’s partnershipfor USD$621 million plus GST of NZD$127 million.
The issue of priority then arose. The bank considered that its security gave it priority over the amount earmarked for GST ahead of the Commissioner.
Under the GST Act receivers are deemed to be carrying on a taxable activity from the date of their appointment: s 58 of the GST Act. That provision also makes the receivers personally liable for the GST due on supplies that they make during the period of their specified agency. The specified agency is a technical term meaning the period commenced when their receivership commenced as defined in s 58 of the GST Act.
The spectre of personal liability for such a large sum of GST and interest and penalties should the GST not be paid on time, meant that the receivers were nervous. It was decided that the safe way forward was to pay the GST money to Inland Revenue and to then establish that they were not liable to pay those sums and hence obtain them back from Inland Revenue.
The Commissioner had not demanded payment and nor were there any discussions with Inland Revenue before the money was paid over. Having paid the money over, the disputes process was initiated in order to establish that the receivers had no liability to pay the GST over and hence seeking a refund of the NZD$127 million. The disputes procedure was followed and proceedings commenced. The statement of claim was brought under the Tax Administration Act (via the receivers) and was brought as a claim in restitution for money paid under a mistake or compulsion.
The Commissioner moved to strike out the statement of claim. The Commissioner’s arguments were:
- That the receivers were indeed personally liable for the payment of the NZD$127 of GST either under s 57 or s 58 of the Act.
- Alternatively, if the there was no such liability and the receivers were mistaken in paying the GST over, the Commissioner did not have to refund the money because it was received as a debtor-initiated payment for which the Crown has priority under s 95 of the PPSA. This is because, so it is said, the money was received in good faith and the Commissioner acted in accordance with reasonable standards of commercial practice in terms of s 25 of the PPSA.
Before the High Court the Commissioner’s strike out application was not successful. He failed in his argument that the receivers personally owed the money and Allan J considered that it was arguable the money was not received by the Commissioner in good faith. Therefore the matter should proceed to trial.
The Commissioner appealed. He was again unsuccessful with his technical argument that the receivers were personally liable but persuaded the Court of Appeal that she did have priority under s 95 of the PPSA. The Court was persuaded that the Commissioner had acted in good faith.
The receivers then obtained leave to appeal to the Supreme Court. The matter was heard on 27 and 28 September 2012 and a judgment promptly delivered on 28 November 2012.
The Commissioner persisted in her argument that the receivers were personally liable for the GST. She again failed. The key reason for the failure was that the partnership was not in receivership but for the two partners of CNIFP.
While CNIFP was unquestionably carrying on a taxable activity, GST is an ordinary unsecured liability, which only has priority to the extent that the Act gives it priority. Priority is given to the GST of an unincorporated body on unpaid GST at the commencement of an insolvency: s 42 of the GST Act. But of course that is of no assistance to the Commissioner where the unincorporated body, in this case the partnership, is not in receivership.
Section 57 of the GST Act has a special set of rules for an unincorporated body and requires registration in its own name rather than in the name of its members. A series of deeming provisions deems the supplies made and received to be made and received by the unincorporated body rather than by the members of the body. The members are, nonetheless, jointly and severally liable to discharge the GST liabilities of the unincorporated body.
The other relevant section is s 58 of the GST Act. That section is concerned with the incapacity of registered persons. One example of incapacity of a registered person is where a registered person is placed in receivership. The appointing of the receiver begins what is called the specified agency period. During that period the specified agent – in this case the receiver is the person deemed to carry on the taxable activity and the incapacitated person is deemed not to.
When the specified agent makes supplies transactions GST component is afforded a lien, which ranks ahead of the claims of secured creditors in respect of the fund created by the particular taxable supply. Thus the Supreme Court noted that this creates an effective priority for the GST during the incapacity or person of specified agency.
The Commissioner explicitly said that she was not suggesting by way of argument that the appointment of the receivers created an incapacitated person situation in relation to the partnership. Despite that the Commissioner argued that the policy of s 58 was precisely to the effect that where there is a sale under the control of a receiver the priority was intended to be as set out in s 58. In this regard the argument was not what tax lawyers would categorise as a black letter technical argument but rather it was an argument of the more spacious policy style one finds in the context of tax avoidance litigation.
This rather novel interpretative argument was dispatched by the Court, which returned to first principles in the interpretation of tax statues. They looked at the words of the section in light of their intended application. By resort to the traditional approach the Court felt unable to read the words “registered person” as if it meant “incapacitated person” which was what the Commissioner was effectively urging on the Court.
The alternative constructional argument advanced by the Commissioner in support of the argument that s 58 and s 57 of the GST act rendered the receivers personally liable for the GST on this transaction was that a receiver is a member of an unincorporated body in terms of s 57(3) of the GST Act. The Court declined the invitation to depart from the normal cannons of statutory construction and interpret members in a way which was contrary to the wording of the definition. With respect to this second argument the Court considered that if adopted it could create significant unfairness because it would mean that people were liable in situations over which they had no control.
The Court went on to consider whether the GST was recoverable from any of the appellants. In this regard the appellants’ argument was that the GST on the purchase price was paid to the receivers not to the partnership. The reason that this argument was advanced was that if the GST monies were paid to the receivers rather than the partnership then it followed that the payment of the GST to the Commissioner was by the receivers not the partnership or on its behalf.
At this point the Court looked at the documentation and concluded that the tax invoice was issued in the name of the partnership only and, even more significantly, that the nominated bank account the purchasers were to pay the GST into was the partnership’s nominated bank account. The GST which was paid to the Inland Revenue thus came from the partnership’s bank account and related to funds to which it had title. The relevant GST return was filed by the partnership too, not the receivers. That GST return, by virtue of the self-assessment regime, was an assessment and crystallised the debt from the partnership to the Commissioner.
For this reason the receivers NOPA, which challenged the assessment purportedly made against the receivers was found to be ineffective(? Not too sure what this sentence means). With that the tax based arguments of the receivers failed and the Court proceeded to consider the equity based arguments for the return of the $127 million. In this regard the argument was that the payment was made by mistake and in circumstances where the receivers felt compelled to make it.
The problem for the receivers with this argument was the obviously overlooked effect of s 95 of the PPSA. That section provides that a creditor (here IRD) who receives payment of a debt owing by the debtor through a debtor-initiated payment, has priority over a security interest in the funds paid, the intangible instrument that was the source of the payment, and a negotiable instrument used to effect the payment.
The phrase debtor-initiated payment means a payment through the use of a negotiable instrument or electronic funds transfer.
There was no argument that the Commissioner was a creditor and that the return filed had created a debtor creditor relationship. There was no dispute that the payment was through a negotiable instrument. The argument was that the payment was not truly debtor-initiated. The problem with the argument is the explicit wording of s 95. It explicitly gives priority to the recipient over the secured creditor, such that the equitable arguments that the secured creditor had the beneficial interest in the funds which were held merely on bare trust, no longer holds water.
In this regard the decision of the Supreme Court of Canada in Bank of Montreal v Innovation Credit Union [2010] 3 SSC 3 was referred to with approval. The policy of the PPSA was to do away with the older concepts of title and equitable interests.
The next argument for the appellants was that the Commissioner could not retain the money under s 95 because he or she had knowledge of the competing claims by the secured creditors over the money. This argument relied on s 95(2) of the PPSA, which dis-applies s 95 where the creditors haveknowledge of the security interest. The appellants point to letters sent to the Commissioner prior to the payment being made, that protest the existence of the security and the alleged compulsion to make the payment. Because of this knowledge the payment was not received in good faith and the money should be returned.
On this point the Court found that a creditor’s knowledge of the existence of the security does not invalidate the s 95(1) priority but the creditor’s actual knowledge that the payment would be in breach of the security interest would invalidate the s 95(1) priority.
On the facts it was held that all the Commissioner knew was the existence of the security not that payment to him was in breach of it. Thus a fine distinction is drawn to the effect that the Commissioner was aware of the security interest and that the holders of that interest considered that they were entitled to payment in priority to the Commissioner. What the Court would not do is infer that the Commissioner knew that payment would be in breach of that security documentation. That distinction might be seen as a tough call given that it implies that the position could have been salvaged by a more aggressive approach being adopted with the Commissioner. It suggests that the correspondence to him should have more forcefully articulated an asserted breach of the security documentation and should have provided the documentation to the Commissioner but not the cash. For want of more aggression and less cooperation with the Department it seems that $127million has been lost to the Commissioner.