Bankruptcy proceedings delayed, 29 August 2014

The High Court has granted Mr Russell’s application for an interim order to prevent the Commissioner from taking steps to have him adjudicated bankrupt pending further order of the Court. The Court ruled that the interim order was to last only until the Commissioner’s application to strike out Mr Russell’s judicial review proceeding was determined.

The facts

In January 2003, pursuant to s 99 of the Income Tax Act 1976 and ss BG 1 and GB 1(1) of the Income Tax Act 1994, the Commissioner assessed Mr Russell for taxation in the years 1985 to 2000, having determined that he was a party to, and affected by, arrangements said to constitute tax avoidance. The Commissioner assessed Mr  Russell for income tax and penalties, including abusive tax shortfall penalties pursuant to s 141D of the Tax Administration Act 1994 which, together with interest, amounted to $75,298,475.54 (the assessments).

Mr Russell’s challenge to the assessments in the Taxation Review Authority failed and the assessments were confirmed in a decision reported as Case Z19 (2009) 24 NZTC 14,217.

Mr Russell appealed to the High Court where his appeal was dismissed in a decision reported as Russell v C of IR (No 2) (2010) 24 NZTC 24,463 (HC). The High Court noted that as at 28 April 2010, the amount claimed by the Commissioner, including penalties and interest was $138,796,819.38.

Mr Russell appealed to the Court of Appeal which dismissed his appeal (Russell v C of IR (2012) 25 NZTC 20,120 (CA)). Mr Russell’s application for leave to appeal to the Supreme Court was dismissed by that Court (Russell v C of IR (2012) 25 NZTC 20,140 (SC)).

At that stage, Mr Russell had exhausted all avenues of challenge to the assessments. The Commissioner then began enforcement action against him. On 10 June 2014, the High Court gave summary judgment against Mr Russell in favour of the Commissioner for unpaid tax, interest, and penalties totalling $367,204,207.41 (being the balance owing at that time) (C of IR v Russell (2014) 26 NZTC 21,074).

On 23 May 2014, Mr Russell filed proceedings seeking judicial review (the application for judicial review). The application related to the Commissioner’s refusal to accept Mr Russell’s offers to settle his tax liability by instalment payments (the instalment payment proposals). In his statement of claim for judicial review, Mr Russell alleged that the Commissioner’s decisions to reject his instalment payment proposals were not made fairly, reasonably, or in accordance with the relevant provisions of the Tax Administration Act.

Mr Russell also applied for interim relief under s8 of the Judicature Amendment Act 1972 by way of an order prohibiting the commencement of and staying the continuation of any application for summary judgment proceedings, any bankruptcy proceedings or any other enforcement proceedings by the Commissioner relating to the assessments pending the outcome of the application for judicial review. Interim relief was sought on the grounds that the order was necessary to preserve Mr Russell’s position and was in the interests of justice. The application for interim relief was opposed by the Commissioner.

The Commissioner has applied to strike out the judicial review proceeding and Mr Russell has filed a notice of opposition to that application.

The High Court’s decision

The High Court held that an interim order should be made prohibiting the Commissioner from commencing bankruptcy proceedings against Mr Russell but that the order should last only until the Commissioner’s application to strike out
the judicial review proceeding was determined. The Court found as follows:

1. The interim order was necessary to preserve Mr Russell’s position as without that order he would be bankrupted.

• (i) The position that Mr Russell sought to preserve was the legal status of not be bankrupt. The status of not being bankrupt incorporated more than the ability to pursue legal proceedings. Bankruptcy adjudication effected a significant change in a person’s status. While its effect may not be second only
  to being sentenced to imprisonment, it was nonetheless a significant change incorporating restrictions on the bankrupt’s ability to manage his own affairs.
• (ii) An interim order was reasonably necessary to preserve Mr Russell’s position of not being bankrupt. The Commissioner had a judgment against Mr Russell and, in the absence of an interim order preventing the Commissioner from doing so, she could and would pursue bankruptcy proceedings.

2. As the Commissioner has applied to strike out the judicial review application, which had not yet been heard, it was not appropriate to comment in any detail on the strength or weakness of Mr Russell’s case. However, it could not be concluded that his case was so hopeless that his application for an interim order should be
dismissed before the application to strike out was heard.

3. There was no evidence that the Official Assignee would pursue the judicial review proceeding if Mr Russell were bankrupted. The nature of the judicial review proceeding was such that the Official Assignee would be unlikely to see any benefit in pursuing it. The interest in pursuing it lies with Mr Russell, not the administrator
of his estate.

4. Although “delay” could not be determinative to conclude that a stay should not be granted, it was accepted that the extremely long time it had already taken to determine tax issues between the Commissioner and Mr Russell was prejudicial to the public interest in maintaining the integrity of the tax system, and to the Commissioner carrying out her duties to administer the tax laws. Accordingly, a further delay as a result of a stay of the bankruptcy proceedings should be for as short a time as possible.

Russell v C of IR HC Auckland, [2014] NZHC 2034. CIV-2014-404-001281, 26 August 2014.