A recent judgment in the Wellington High Court makes receivers, liquidators – and, potentially, the directors of companies in receivership and liquidation – personally liable for GST on the sale of mortgaged properties even where the mortgagee is not GST registered.1
The decision is being appealed and may be overturned as – in our view – it rests upon an unusual interpretation of the law.
If it survives the appeal, receivers in similar situations should pay GST to the IRD before they account for the sales proceeds to their appointor.
The facts of the case in brief
Fortress Credit Corporation appointed receivers to Capital + Merchant Investments Ltd (CMI).
CMI was the lender on various mortgages, some of which were in default. CMI, as mortgagee, sold the properties. As the mortgagors were GST-registered, the sales were subject to GST.
The receivers sought direction from the Court as to whether they were personally liable for the GST. If they were, the GST would have to be paid to the IRD in priority to other claims. If they were not, Fortress would be paid first and IRD would be left as an unsecured creditor of CMI.
The Court directed the receivers personally to pay the GST.
The Court reached that decision by relying on section 58 of the GST Act 1985. That section applies to, among other things, liquidations and receiverships.
Section 58 makes a receiver or other agent of an “incapacitated person” personally liable to pay the GST incurred while the person is “incapacitated”. The concept of “incapacitated” includes being in receivership and liquidation.
The difficulty is that an “incapacitated person” is defined to be a person registered for GST. So, we would have thought that the section would only apply if CMI was in fact registered for GST. As a supplier of financial services, CMI was not a registered person.
Accordingly, a prerequisite of section 58 was not met so the section should not have applied. The effect of the judgment is to read the words:
“a registered person who dies, or goes into liquidation or receivership …”
as if they said:
“a registered or unregistered person who dies, or goes into liquidation or receivership …”
The Court took a purposive approach to interpretation, as has been recently applied in certain tax avoidance cases.2 But a purposive approach is used to interpret ambiguous legislation, not to attribute a strained meaning to a statutory provision which the provision cannot properly bear.
The Court also indicated it would have been prepared to invoke section 185 of the Property Law Act 2007, again – in our view – incorrectly. Section 185 simply sets out the liabilities of the mortgagee (CMI) when accounting for the proceeds of a sale. It does not create a personal liability of the receivers, who are merely agents of the mortgagee.
This brings us to our third point – if receivers are personally liable for GST in the manner described by the Court, then directors are equally liable. Both are acting in their capacity as agent of a company.
It appears that in coming to its conclusions, the Court was heavily influenced by policy considerations. The Judge stated:
“I accept that, in public policy terms, it is undesirable to permit receivers to charge 12.5 per cent (now 15 per cent) more than the mortgagor could have retained for sale of its own property, thereafter leaving the Commissioner out of pocket by that same amount by virtue of having to permit the purchaser an input tax credit for paying that amount”.
But the Privy Council, confronted with a similar dilemma in another high profile case about GST in insolvency proceedings, was emphatic that the strict interpretation of the law must prevail, even where it seems at odds with the probable policy intention of the law-makers:
“If the mortgagor had sold the property, both Belman and Edgewater would have been entitled to insist on payment in full before releasing their security. The Crown would have enjoyed no preference against either of them. Why should the position be different because the sale was by the mortgagee rather than the mortgagor?
Their Lordships consider that the answer to this rhetorical question is: because that is what s 17 says”.3 [emphasis added]
For the reasons outlined above, we look forward to the appeal judgment. In the interim, receivers should assume that they will be liable for the GST, regardless of whether the company in receivership is GST registered, and pay that money to the IRD before passing the sales proceeds to their appointor.
Unfortunately, the recently enacted compulsory zero-rating provisions for certain land transactions would not necessarily have avoided the dispute in this case as the application of these provisions depends on a number of variables including the registration status of the vendor and purchaser, as well as the intended use of the land.