IRD’s queue jump thwarted

The Supreme Court thrown out the Inland Revenue's "super priority" claim on insolvency won in the High Court.

If a Company runs into financial difficulty, and a Liquidator is appointed; and on the date of appointment the Company has money in its Bank account; which creditor has first claim to the funds?

The usual answer is that certain secured creditors, the liquidator's fees and expenses, and the Company's employees, all rank ahead of the Inland Revenue Department.

However, in the case of Jennings Road Freight Limited (Jennings) who were placed into Liquidation on 24 March 2011, the Commissioner of Inland Revenue (The Commissioner) sought to grab a super priority.

Jennings owed approximately $50,000 in PAYE for the month ended 28 February 2011. The Commissioner of the Inland Revenue issued a notice pursuant to Section 157 of the Tax Administration Act 1994 (TAA), requiring the BNZ to deduct funds from Jennings Road Freight Limited's Bank account.

The Tax Administration Act (TAA) section 167 subsection 1 provides that the PAYE withheld by the employer "shall be held in trust for the Crown" and form no part of the assets in liquidation. Subsection 2 however states that if an employer has not dealt with the PAYE as required by subsection 1 or in accordance with the PAYE rules, the amount of tax owing ranks in accordance with Schedule 7 of the Companies Act 1993.

The Higher Court had found for the Commissioner, that the monies were held on trust, and therefore they could have first claim. This sent ripples through the insolvency world, as that effectively enabled the IRD to queue jump, ahead of what have been generally accepted rules, as set out in the long and involved Schedule 7 of the Companies Act 1993.

The case was appealed to the Supreme Court, which was a costly exercise, but necessary, as this ruling turned the acceptable insolvency rules on its head. The Supreme Court has now reversed the decision, meaning that normal rules apply once more.

Schedule 7 of the Companies Act 1993 details the priority. Case law has been determined, based upon the interpretation of Schedule 7, and there are well established precedents. The legislation and case law as a whole need to be considered, not one subsection of an Act in isolation.

The IRD 'queue jumping' in this matter, has quite rightly been quashed.

~ Brent & Hamish


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