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Inland Revenue's approach to Insolvency - The Two Way Street
17 October 2007

Address by Graham Tubb - Group Tax Counsel Assurance, Legal & Technical Services at Rydges Hotel in Auckland

IR's options for dealing with debt

• IR involuntary creditor in most or all NZ businesses
• We have no ability to withhold credit like a trade creditor
  • Future compliance key consideration for IR
• IR has other options for dealing with non-compliance
  • Offence for failing to pay tax deductions on time
    • Of particular concern when companies go into liquidation with unpaid tax deductions
• Deduction Notices - s 157 TAA
• Statutory Charges - s 169 PAYE
• Power to obtain information
• Section HK 11

IR's Preference

• Government decided to retain preference for certain taxes as part of Insolvency Law Review
• Preferential taxes are trust monies collected on behalf of other taxpayers
• Important fiduciary relationship
• Important to preserve status of that relationship
• Meeting fiduciary obligations key to good corporate governance

IR's expectations of Insolvency Practitioners

• Insolvency Practitioners are fiduciaries
• Law very clear on what is expected of Insolvency Practitioners - Minimum requirements
  • Insolvency Act 1967/Insolvency Act 2006
  • Companies Act 1993
  • Receiverships Act 1993
• Expect practitioners to operate at more than just the bare minimum
• SES 1
  • General expectation of how all practitioners will carry on business

IR's expectations

• Expect practitioners to consider not just recovery, but also what offences have been committed and refer those to NEU in every case
• Expect practitioners to consider wider options rather than just dealing with physical assets
  • Can often get better recovery from non-tangible assets

IR's Response

• Practitioners whose failure to meet standards is to detriment of IR can expect IR to take steps to preserve its position
  • Includes legal action and removing practitioners
• IR will support practitioners who take action to protect IR's position
  • Doesn't mean direct involvement in all insolvency proceedings
  • Behaviour of customer will determine extent to which IR wishes to be involved e g  phoenixing, asset stripping, misusing the corporate structure and failing to correctly return tax

IR's alternatives to liquidation

• Legal action is only ever a last resort for IR
• IR prefers to resolve debt issues directly with the customer
• Legal action is taken in cases where no resolution can be reached
• Often legal action will be due to continued non-compliance of customer
• Expectation that continued non-compliance will cease
• Expectation that these customer's affairs will be fully investigated by liquidator/OA

Other actions

• IR reserves right to bring other legal proceedings
• HK11 Income Tax 2004
  • Personal liability for directors/shareholders where arrangement leaves company unable to meet its tax obligations
• S135 Companies Act 1993
  • Reckless Trading
  • Proceedings have been brought by IR
  • Further cases are being considered

Voluntary Administration

• IR supports regime
• Will allow viable businesses to be rehabilitated thereby continuing to trade and generating future income
• Maximise long term recovery to Inland Revenue
• IR's preference can be included where agreed by creditors
  • Preference will not be the only ground on which IR decides whether to support a proposed Deed of Company Arrangement
• All cases will be decided on their own facts

Voluntary Administration

• All cases will be considered on their own facts
• Will update Standard Practice Statements in due course
• Will seek to work with the profession constructively as to best practices
• Consider new Regulations, but IR is likely to develop own approach over time
• Any discrimination against IR in the proposal

IR's key considerations

• Company's compliance history
  • Expect proposals to outline how past compliance defaults will be remedied
  • Expect proposals to out line how future compliance will be ensured
• Business must be truly viable
  • Non-viable businesses will not be able to successfully rehabilitate
  • Appointment of administrator for any other purpose than rehabilitation unlikely to receive support
• Expect more than mere creditors' pool
  • Opportunity to save businesses
  • Expect practitioners to consider more than just how to divided up the money

Other Considerations

• Adequacy of corporate information, reports etc provided by Administrator
• Company law compliance - voidable transactions etc - including associates
• Whether the company is part of an ongoing tax investigation
• Prospects of future income eg ceased trading
• Likelihood that DOCA proposals can be achieved

How will IR manage VA cases?

• Centralising work
  • Key staff in major sites responsible for dealing with all VA cases in their geographical region
    • Takapuna, Manukau, Hamilton, Wellington, Christchurch, Dunedin,
• Notification through ordinary channels
• Subsequent correspondence sent direct to key staff
• Technical support in place throughout process

IR will never support Deeds where....

• Inland Revenue is required to receive payment in any form other than money
  • Eg. Shares or physical assets
• The company has shortfall penalties imposed for evasion or abusive tax position and the offer of payment is not sufficient to clear those periods in full
• The Deed attempts to prevent Inland Revenue from extinguishing losses or imputation credits on the write-off of the uncollectible debt.

Funding

• IR will fund but only appropriate cases
• Appropriate cases include
  • Where concerning behaviours are the cause of loss to IR
  • Where insolvency practitioners have taken all steps required of them
  • Where insolvency practitioners have exhausted all other avenues of recovery
  • Case will directly benefit IR
  • Case is novel or of high risk
  • Favourable precedent will work in IR's favour for future cases
• IR requires clear understanding of case and analysis of risks vs benefits before funding can be considered

Insolvency Law Reform Changes

• s245A - Courts power to disregard related party votes
  • IR expects pragmatic approach from insolvency practitioners where related party voting determines outcome of vote
  • If such an approach is not taken IR will apply to Court to set aside those votes if they prejudice IR
• ss386A to 386F - Phoenix Companies
  • IR expects practitioners to identify companies to which these sections apply and take action or refer to MED's NEU
• s241AA - 10 day window
  • If practitioners accept appointment for companies for which IR has filed proceedings more than 10 working days prior, IR will consider whether to have their appointment invalidated

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• Corporate Insolvency - Taxation Risk Management
• Strategic Human Resource Management for the Public Service
• Managing IT in the Public Sector
• Inland Revenue = more than just tax
• Inland Revenue = more than just tax

Corporate Communications
Inland Revenue

For all media enquiries phone: 04 890 1698

For general communications enquiries
Phone: (04) 890 1936
Email: corpcomm@ird.govt.nz
Fax: (04) 498 5809

P O Box 2198
12-22 Hawkestone Street
Wellington
New Zealand

Date published: 17 Oct 2007

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