This article looks at Stiassny v CIR [2012] NZCA 93. The case was a win for the Commissioner in that he got to retain $127 million in GST in circumstances where but for the operation of s 95 of the Personal Property Securities Act 1999 (PPSA) the Commissioner should have stood in line behind the secured creditors in relation to the payment of the GST on the transaction. As it has turned out there was no need for the payment to be made to the Commissioner and the $127 million could have been paid to the secured creditors.
Two companies owned forestry blocks in partnership: Forestry Corporation of New Zealand Ltd (in receivership) ("FCNZ") and Citic New Zealand Ltd (BVI) (in receivership) ("CITIC"). The name of their partnership was the Central North Island Forest Partnership ("CNIFP").
Banks that were owed significant sums by the partnership appointed receivers with respect to the two companies. The partnership then sold the forestry assets for US$ 621 million plus GST of NZ$127 million. The $127 million was paid into a New Zealand bank account.
The receivers of the two companies were worried that they would be personally liable for the GST on the sale of the forests. In order to mitigate their personal risk, they obtained the agreement of the secured creditors that they file a GST return for the partnership and to pay the $127 million to Inland Revenue. They then filed a Notice of Proposed Adjustment (NOPA) seeking to have the $127 million back on the basis that it was paid over by mistake. While it was effectively held that there was no need to have paid the Commissioner, and hence that the payment was by mistake, the effect of s 95 of the PPSA meant that any hope of return of the $127 million was lost. In dollar terms this must rank up there in terms of error.
Had the banks as creditors exercised a power of sale with respect to the secured forests then ss 5(2) and 17 would have had the effect that the banks would have been liable for the payment of GST on the sale to the Commissioner. It is presumably for this reason that it was decided that the partnership would sell the forests.
A partnership is treated as a separate legal entity under s 57 of the Goods and Services Tax Act 1985. It is the partnership that is registered and not the individual partners. It is the partnership that has the GST liability but the partners are jointly and severally liable to satisfy it.
Where a receiver or a liquidator is appointed in respect of a registered person that person is treated as an incapacitated person. An agency period commences and during this period the specified agent, say the receiver, is personally liable for GST on transactions that take place during the agency period.
Because receivers had been appointed in respect of each of the companies which formed the partnership, the receivers were concerned that unless the $127 million of GST collected was paid to Inland Revenue they would be personally liable for it. Understandably that was a worrying prospect. Clearly the banks were worried too as one option would have been for the banks to provide a warranty to the receivers but that does not seem to have happened.
Instead, it was resolved by the receivers and the bankers that:
Firstly, it would be the partnership that would affect the sale not either of the two partners;
Secondly, the $127 million in GST would be paid to IRD by the receivers along with an accompanying GST return;
Thirdly, a NOPA would be filed by the partnership objecting to the correctness of these actions and asking for the money back.
The receivers and banks filed proceedings seeking to recover from the Commissioner the $127 million. The Commissioner filed an application to strike out the statement of claim on the grounds that it disclosed no tenable cause of action. He was unsuccessful in the High Court because the Court found that it was legally possible in principle for the receiver and the banks to bring an action against the Commissioner in personam where the money had been paid by mistake. The Commissioner appealed to the Court of Appeal.
There were three issues, the first one of which went the receiver's way. The latter two went the Commissioner's way. It is clear that had the receivers and the banks acted differently they would have lawfully retained the $127 million.
It was agreed that if the partnership had been placed in receivership the sale would have been during the specified agency period and the receivers would have been liable for the GST output tax. The partnership itself was not placed in receivership and the Commissioner at no point argued that where the two members of the partnership are placed in receivership the partnership itself is insolvent (see [20]).
The first of the three issues was whether the receivers were in fact liable to pay the GST. The conclusion of the Court of Appeal, like that of the High Court was that they were not so liable. The Court had to deal with some inventive arguments on this issue from the Commissioner all designed to make the receivers personally liable under s 58. It is interesting that these arguments were all legal in nature involving some rather strained statutory interpretation. The Court of Appeal obviously considered that there was a potentially shorter route to the commissioner's desired destination, namely for the commissioner to argue that the partnership was insolvent by virtue of the insolvency of the partners (at [20]). However, by virtue of counsel's concessions on that point the argument advanced on the assumption that the partnership was not in receivership.
Each of the various statutory construction arguments advanced by the Commissioner was rejected. The first was that the receiver was by virtue of s 58(1A) of the GST Act treated as a partner of the partnership and therefore carrying on the taxable activities of the partnership despite the fact that the Act explicitly says that the partners themselves are not carrying on the taxable activity. The argument was rejected because:
Firstly, it would require the insertion of words into s 58 that are not there;
Secondly, it would directly contradict explicit wording to the contrary in s 57(2)(a) of the GST Act; and
Thirdly, it is not required as the Commissioner has a right of recovery against the partners in s 57(3) and (5) of the GST Act (at [24]).
The Commissioner's second argument was that the receivers should be treated as members of the partnership on the grounds that they participated in the activities of the partnership. Therefore, it was said, the receivers were personally liable. This argument was based on the premise that it was odd that if they were appointed as receivers of the partnership they would have been personally liable but they would not be personally liable if they were appointed as receivers of the individual partners.
This argument was also rejected. The reasons for its rejection were:
Firstly, the GST Act contemplates that primary liability will rest on the registered person (here the partnership) and only the secondary liability on the partners;
Secondly, the primary liabilities falls only on the members of the body. It does not fall, for example, on the directors of a member of the partnership, who might have "participated" in the activities of the partnership (at [26]).
Thirdly, the receivers are not carrying on the taxable activities of the partnership merely because they control the partner companies: (at [27]).
Fourthly, there is no legislative "gap" to fill because the members of the partnership are personally liable. If the partnership is insolvent then the Commissioner faces the same consequences as any other creditor (at [28]).
The Court of Appeal concluded that under s 57 of the GST Act the receivers were not personally liable. The individual partner companies were personally liable but not the receivers in their personal capacity.
The handling of the risk as to whether the court would agree with that interpretation is where the error was made. The receivers had two options. One was to do what they did, which was to pay the money to IRD. The other option was to commence an interpleader cause of action. That is a cause of action where a person in the receiver's position goes to court saying that they hold the funds but don't know who to pay - the Commissioner or the secured creditor.
Had this approach been adopted then, critically, s 95 of the PPSA would not have engaged to protect the payment, which had erroneously been made to Inland Revenue. Section 95 protects a "debtor-initiated payment". A debtor-initiated payment is one made by the debtor through the use of: a negotiable instrument, or an electronic funds transfer, or a debt transfer order. Payments made under s 95 of the PPSA "have priority over a security interest". Had s 95 been avoided, the ordinary priority would have seen the secured creditors paid first.
Because the payment fell within the terms of s 95 of the PPSA it had priority over the banks security interests and hence the IRD was lawfully able to retain the $127 million. Obviously had no such payment been made to Inland Revenue then the priority fortuitously afforded Inland Revenue by s 95 would not have existed.
It was the wording of s 95 that also sunk the receivers' third argument. This argument, which had been successful in the High Court, was that the receivers had the right to sue Inland Revenue in equity for the return of money paid by mistake. The problem with this argument was that the only mistake was that the receivers got the priority wrong. The Court of Appeal accepted the argument that s 95 of the PPSA cannot be defeated in its effect by arguments that the debtor payer was wrong as to the order of priority. Such a proposition would emasculate of the provision.
The Court of Appeal did not rule out all forms of actions in personam as being ineffective against s 95 of the PPSA. For example, if a payment was made under duress or a mistake of fact as to the person to whom the payment had been made there is still the possibility of bringing an action for money had and received.
The reason that the Commissioner effectively won the appeal was because that third cause of action, and hence the receivers' proceedings, was held to be untenable.
The reason that this case can be seen as a $127 million error is that if no such payment had been made the receiver would have been found not to be personally liable. There would have been no duty on the directors of the partner companies as they were no longer in control by virtue of the receivers taking over. The $127 would have been payable to the secured creditors ahead of the Commissioner.
With the wisdom of hindsight one wonders why the interpleader approach was not adopted. One wonders why the banks did not provide the receivers' warranties and why they agreed to the payment to IRD. After all, possession is 9/10ths of the law and here retaining possession of the cash would have effectively won the battle. No doubt leave will be sought for an appeal. That may yet provide a face saving way out.