The Court of Appeal has upheld the principle that receivers must account to IRD for the GST on a mortgagee sale, even where the mortgagee was not GST registered.
But it has overturned an interpretation from the High Court that receivers are personally liable for GST in such circumstances.
Chapman Tripp questioned the High Court’s application of the law, and considers that elements of the Court of Appeal’s judgment are also surprising.
The Court of Appeal overturned the High Court’s decision for a number of reasons, but fundamentally on the ground that section 58(1A) of the GST Act 1985 deems a receiver to be personally liable for GST incurred during the receivership of a registered person carrying on the taxable activity. It does not apply where the company in receivership is not registered for GST. The Court of Appeal held that the High Court erred in interpreting section 58(1A) as applying to both a registered person and, taking a purposive interpretation, an “unregistered person”.
The judgment is significant as it establishes a proprietary interest in the proceeds of a mortgagee sale for expenses occasioned by sale, even where the mortgagee is in receivership. Previously, the general view was there was no such proprietary interest.
We consider that some aspects of the judgment are somewhat surprising and expect that there may be an appeal to the Supreme Court.
In the meantime, receivers should treat all costs of effecting a mortgagee sale (e.g. GST, real estate fees, marketing expenses etc), where the mortgagee is in receivership, as payable ahead of the mortgagee’s secured creditors.
The case involved the sale of mortgaged properties by mortgagee, Capital + Merchant Investments Limited (CMI). At the time of the mortgagee sales, CMI was itself in receivership, having defaulted on a loan from Fortress Credit Corporation. The receivers asked the Court for directions as to the application of the proceeds of sale with respect to GST.
They accepted that CMI was liable to account for GST to the IRD but argued that, because it was in receivership and unable to meet its debts, the IRD was simply an unsecured creditor. As they had no personal liability for the GST, the receivers believed they must account to the secured creditor for all proceeds of sale (including the amounts received as GST).
The Court of Appeal held that, notwithstanding that the receivers were not personally liable, they must still pay the GST to the IRD on the basis that:
The effect of s 185 of the Property Law Act is that the GST never enters the general funds of the company available for secured creditors. As an expense of sale it is to be paid to the Commissioner before secured creditors are paid. As receivers, Messrs Simpson and Downes are not entitled to frustrate the fulfilment of the company‘s obligation.
Court of Appeal’s application of CIR v Edgewater
Although the Court of Appeal stated that it was applying the Privy Council’s decision in CIR v Edgewater Motel Ltd (2004) 21 NZTC 18,644, its ruling seems to be contrary to the Privy Council’s statement in Edgewater that:
There is no conflict between s 17 and s 104 of the 1952 Act [s 185 of the Property Law Act 2007] because s 17 does not purport to interfere with the order of priorities laid down by s 104. It does not say that the mortgagee must pay the GST out of the proceeds of sale or out of any particular fund. It simply says that he must pay the GST. As s 17(2) says, it creates a debt. The Crown has no concern with how the payment of this debt affects the distribution of the proceeds of sale. In claiming payment of the GST, the Crown is not seeking to assert a priority in the distribution of the assets of the mortgagor, any more than an estate agent instructed by the mortgagee and claiming commission on the sale. The claim lies directly against the mortgagee. [emphasis added]
In addition, the relevant excerpts from section 185 of the Property Law Act 2007 state:
The proceeds arising from the sale by a mortgagee of mortgaged property must be applied first, to the payment of all amounts (if any) referred to in subsection (2)… [including]… amounts reasonably paid or advanced at any time by the mortgagee…with a view to the realisation of the security. [emphasis added]
While this section confirms that the mortgagee is entitled to reimbursement out of the proceeds of sale for GST paid or advanced to the IRD, it seems to us to fall short of making the receiver liable to pay GST where the mortgagee is insolvent and has not paid or advanced GST to the IRD at any time.
Agreement with the IRD
Prior to the litigation, the receivers entered into an agreement with IRD whereby they would pay the disputed GST on the basis that:
If it is determined in relation to the mortgagee sales that the receivers do not have personal liability for any GST payable by CMI, then the GST and the interest already paid will be refunded within seven days of the final decision of the relevant Court.
However, while the Court of Appeal held that the receivers did not have “personal liability”, it did not require the IRD to refund the payment in accordance with the agreement. Instead, it told the receivers that they could apply for further directions from the High Court on that issue if necessary, as questions about the enforceability of the agreement were not part of the arguments run in the Court of Appeal.
In doing so, the Court noted that the Commissioner had at all times reserved his rights against CMI (the mortgagee). That appears to suggest that the agreement may not require the IRD to refund the GST to the receivers. It seems that the Court, in making its substantive finding, saw itself as dealing with CMI’s liability, not that of the receivers.
But that just highlights our main difficulty with the case. If it is CMI’s liability that matters here, ought not usual insolvency principles apply, with the result that CMI’s secured creditor (Fortress) is paid before its unsecured creditor (IRD)?
If the answer to this question is no, and IRD is to be paid first, it can only be because s185 creates a proprietary interest on the part of IRD, as a creditor of the mortgagee. To our knowledge, this is the first decision to advance such an idea.