With the largest restructuring and insolvency law practice in New Zealand and strong relationships with major New Zealand banks and financial institutions, MinterEllisonRuddWatts has been at the forefront of a significant number of high profile and complex insolvencies.
GST is an important factor in any transaction, but it can be particularly troublesome where it crosses into the area of insolvency. Common issues include Inland Revenue’s status as a preferred creditor, the GST treatment of mortgagee sales, and personal liability issues for those affected by insolvent companies.
In this alert we summarise insights regarding GST that have been gleaned from our work in restructurings and insolvencies.
It’s all about priority
Several of the most contentious GST issues arise in respect of an insolvency. This is not surprising because Inland Revenue is a preferential creditor for GST and vigorously pursues GST debts. The same preferred status applies to PAYE but, given criminal penalties for non-payment of PAYE, that is usually paid.
Preferential right to accounts receivable
Secured creditors should be aware that, as a preferential creditor, Inland Revenue’s priority over a debtor company’s “accounts receivable” extends to almost any monetary obligation in the period leading up to receivership. This priority is not limited to the book debts of the company. For example, the sale by a distressed debtor of a secured asset such as a vehicle or machinery prior to the appointment of a receiver will have the effect of taking the asset outside the scope of the General Security Agreement and replacing it with an account receivable that will accrue to the benefit of the preferred creditors such as Inland Revenue.
Sale in satisfaction of debt / mortgagee sales
One of the clearest examples of Inland Revenue’s priority for GST is when a creditor exercises their right to sell property in satisfaction of a debt (e.g. a mortgagee sale). In that situation the creditor is required to treat the sale of the property as being subject to GST and must file a special GST return and account for GST (if any) on the sale, unless the debtor would not have been required to pay GST if it had sold the property itself. For secured creditors there is a fine line between encouraging debtors to voluntarily sell their assets and being too involved in seeking a voluntary sale, which may attract scrutiny by Inland Revenue as the preferential creditor.
Beware of personal liability
Trustees
Individuals acting as trustees of GST-registered trusts should be aware that the GST Act imposes liability directly onto the trustees. This can prove disastrous in an insolvency situation where property is disposed of, often at a loss, and the trustees can be left with a GST liability and a worthless indemnity out of the assets of the trust.
Receivers and liquidators (and voluntary administrators)
For GST purposes receivers and liquidators are treated as carrying on the business of the company in receivership and are personally liable for any resulting GST liability.
That said, receivers and liquidators are not personally liability for GST on supplies made before their appointment, as for that period the GST liabilities stay with the company and Inland Revenue remains a preferential creditor.
Given their personal liability for GST, past financial crises have seen receivers and liquidators seek clarification from the courts regarding GST, which in some cases have taken several years to resolve. One of these was in the context of the sale of a forest by a partnership, where the risk of personal liability saw the receivers for the partners make a voluntary payment to Inland Revenue of GST owing by the partnership ahead of payment to the secured lenders. The Supreme Court ultimately held that the receivers were not personally liable to pay the GST, as it was owing by the partnership (which was not in receivership), but the receivers were unable to recover the GST even though it was mistakenly paid. Meanwhile, the secured creditors were barred from recovering the GST pursuant to section 95 of the Personal Property Securities Act 1999, which gives a creditor who receives payment of a debt through a debtor-initiated payment priority over a security interest in the funds paid.
Given the apparent inequity of cases like that, if there is any doubt about personal liability an escrow or tax pooling arrangement may protect the creditor against the imposition of penalties and punitive interest while the matter is being sorted out.
It is still to be determined whether a voluntary administrator is personally liable for GST in the same way as receivers and liquidators under current legislation.
Directors and shareholders
Directors and shareholders can be personally liable for GST where a company has entered into an arrangement with the purpose of stripping assets out of company to avoid paying a GST liability.
If you require any more detail about any of the points raised above, we encourage you to call one of our tax or insolvency experts.
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