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Latest News [index] Bankrupt Trustee Issues
The Court of Appeal decision in CIR v Duncan [2007] NZCA 235 is a salutary lesson to trustees regarding the management of personal liability for goods and services tax and circumstances where that liability can survive bankruptcy.
Background
CIR v Duncan [2007] NZCA 235 is a case concerning Duncan, the sole trustee of the Duncan Family Trust (the Trust). The Trust acquired land for development in February 1998. Duncan was adjudicated bankrupt in September 1998, but did not resign as trustee of the Trust. Between September 1999 and November 2000, while Duncan was bankrupt, the Trust sold seven units that it had developed on the land. The appropriate GST returns were filed. However, the Trust did not pay the GST owing. Duncan resigned as trustee in June 2001 and was discharged from bankruptcy in September 2001. The Commissioner of Inland Revenue ("the Commissioner") issued proceedings against Duncan in his capacity as trustee to recover the unpaid GST. In terms of of the Goods and Services Tax Act 1985 ,(s 57(3)), as it stood then, Duncan was personally liable for GST payable by the Trust until such time as he notified the Commissioner that he had retired as a trustee.
Duncan denied he was liable for the GST on the basis that that as he had been adjudicated bankrupt, and the Commissioner had failed to prove the GST debt in his bankruptcy. Accordingly, Duncan's view was that he was automatically released from the debt following discharge from bankruptcy.
District Court
The District Court found in favour of Duncan, holding that the GST payable was a contingent liability for the purposes of the Insolvency Act 1967 (s 87(1)). The District Court was of the view that the Trust incurred a contingent liability to pay GST output tax at the time the Trust claimed input tax. This was despite the fact that the liability for output tax did not eventuate until the units were sold, which occurred after Duncan's bankruptcy.
The District Court view being that tax would always have been payable; it was just a matter of when and how much. As the Commissioner had failed to prove the GST liability in Duncan's bankruptcy adjudication, on discharge from bankruptcy, Duncan was released from the liability for GST.
High Court
The High Court upheld the District Court's judgment, albeit on a different basis. After finding that in terms of the GST Act there was no liability, contingent or otherwise, to pay GST output tax until there was a supply of the units; the High Court went on to find that the Trust was committed to the unit sales due to a financing package that was in place and that the Trust would be liable for GST on those sales. Therefore although there was no contingent liability for the purposes of the first limb of s 87(1) of the Insolvency Act, there was an obligation for the purposes of the second limb of s 87(1). That meant the GST liability was incurred by Duncan by reason of obligations in place before his discharge from bankruptcy and so liability was a provable debt in Duncan's bankruptcy. The decsion was appealed by the Commissioner.
Court of Appeal
The Court of Appeal allowed the Commissioner's appeal, holding that for the purposes of s 87(1) of the Insolvency Act, Duncan's liability for GST was not a contingent liability as at the date of his bankruptcy adjudication (Winter v IRC [1961] 3 All ER 855, 858 (HL) cited). At the time of his bankruptcy Duncan was under no commitment to pay the GST, which came to charge later. He did not therefore have a contingent GST liability. It was the Court of Appeal's view that s 87(1) required that the relevant debt or liability be to the party to whom the pre-adjudication obligation was owed. As the GST liability was incurred later it was not provable in Duncan�s bankruptcy. This meant that Duncan remained liable for the subsequent GST liability following his discharge from bankruptcy.