In Commissioner of Inland Revenue v Stiassny  NZCA 93 the NZ Court of Appeal allowed the appeal by the Commissioner and found that the claim for a refund of GST by the receivers appointed to the partners in a GST-registered partnership should be struck out. The decision of the High Court appealed from can be found here – Stiassney v Commissioner of Inland Revenue  NZHC 1935
The case is interesting as it considers the question of whether the receivers of the partners (who were not appointed as receiver to the partnership) were personally liable to pay GST on the sale of partnership property. A similar question may arise under s 58 of the GST Act. Secondly, the case discusses the scope for a claim based on restitution.
- The respondents traded in a forestry partnership. Funding for the partnership was provided by a syndicate of banks for which security was held over the assets of the partnership and the individual assets of the partners.
- Receivers were appointed in respect of the assets secured and while the partners were each placed in receivership, the partnership was not. However, the partners appointed the receivers to the management board of the partnership and the receivers effectively controlled the management of the partnership
- The partnership entered into an agreement where it agreed to sell its assets for USD$621m plus GST of NZ$127.5m. The partners, in their capacity as partners of the partnership, were names as vendors in the agreement. As happens in a number of these types of cases, the proceeds of the sale were insufficient to pay in full the secured amounts and the GST payable to the Commissioner on the sale.
- The partners and the lenders entered into a deed whereby funds sufficient pay the GST debt would be placed into the partnership’s bank account
- The sale was completed and the GST was paid because the receivers were of the view that they were personally liable to pay the GST
- The receivers brought proceedings in the High Court, in which it was asserted that, contrary to their earlier view, they were not personally liable to pay the GST and that the GST was paid under a mistake of law.
- The Commissioner sought to strike out the proceedings
- In dismissing the strike out application, the High Court found that the receivers were not personally liable to pay the GST and that the issue of mistaken payment should go to trial (also at issue were various “priority” issues with regards to the respective claims of the Commissioner and the creditors-that discussion is beyond the scope of this post).
Were the receivers personally liable for the GST
It was clear that the sale of assets was a taxable supply. The issue of whether the receivers were liable depended upon consideration of the NZ provisions dealing with the registration of entities such as partnerships and also the “incapacitated entity” provisions (ironically found in Section 58, which is the same number as the equivalent provisions in our GST Act). The Court of Appeal agreed with the High Court that the receivers were not personally liable for the GST. When regard is had to the provisions of Division 58 in the GST Act, it would appear likely that the same result would apply here.
With respect to partnerships, like the Australian provisions, it is the partnership that is carrying on the enterprise and is to be registered for GST. The members of the partnership may not be registered for GST. However, the statutory provisions ensure that partners effectively have a secondary liability for the obligations of the partnership – this reflects the common law position.
The issue was whether the receivers were personally liable in circumstances where the partnership was not placed into receivership, as the partnership was not an “incapacitated person” within the meaning of s 58. The Commissioner unsuccessfully sought to run a number of arguments which appear similar to those unsuccessfully run by our Commissioner in Deputy Commissioner of Taxation v PM Developments Pty Ltd  FCA 1886 where Logan J found that Division 147 of the GST Act simply did not work. The reasons of the Court of Appeal in rejecting these arguments also shows that the concept of “purposive construction” of statutes such as the GST Act can only go so far. The arguments were:
- the combined relevant purposes of the provisions were to achieve administrative efficiency and to ensure that a receiver pays the registered person’s GST liability during a receivership, and the finding of the High Court was inconsistent with that purpose. The Court rejected this argument on the basis that it would require the notional insertion of words into the legislation which are not there. Also, the approach would directly conflict with the provision which provided that partners shall not be registered persons – the Commissioner’s approach would be to effectively make partners registered persons if they went into receivership
- the receivers should be treated as “members” of the partnership on the basis that they participated in the taxable activities of the partnership. It was submitted that it would be anomalous if the receivers would become personally liable if they had been appointed in respect of the assets of the partnership but were not liable, where they were appointed only in respect of the assets of the partners
Can the receivers, the secured creditors or the partnership recover under a mistake of law
The Court of Appeal found that the secured creditors and the receivers had not right to seek recovery of the GST. The claim by the secured creditors was denied because the Commissioner received the GST payment in priority to their claims. The claim by the receivers was denied because they could have no greater right to recovery than the secured creditors
The claim by the partnership involved the question of whether a claim based on mistake of law could be maintained in circumstances where the payment discharged a debt due to the commissioner. This can be compared to a case where the payment was never due, but was paid by mistake – for example, see the recent decision of the UK Court of Chancery in Investment Trust Companies v HM Revenue and Customs  EWHC 458 where the Court found that rights in restitution may arise. For my post on that decision, see here.
The Commissioner submitted that the payment discharged the partners liability (albeit a secondary liability to that of the partnership). The receivers contended that the Commissioner had been unjustly enriched because, but for the mistake made by the receivers, the GST would not have been paid and the funds would have been available to the secured creditors. In finding for the Commissioner, the Court of Appeal based its decision on the simple footing that “if the defendant is entitled to the money, then it cannot be said to be unjust, or against conscience, to require payment”. The Court acknowledged that an exception to this rule could be where it is shown that the recipient of the funds was not acting in good faith. However, this was not alleged in this case.