Parallel Proceedings Unlikely to Stay Bankruptcy

CIR v Musuku (2016) 27 NZTC 22,078

The High Court has refused to dismiss or stay bankruptcy proceedings commenced by the Commissioner where further litigation involving the taxpayer was pending in the Taxation Review Authority (“TRA”) and Court of Appeal. The Court considered that even if the taxpayer was successful in the TRA and Court of Appeal, his financial position would not improve. It said that there was no advantage to the Commissioner in staying her hand to enable the taxpayer to bring the proceedings to completion. Similarly, there was no justification for the Court dismissing the current proceedings or staying them for the litigation to reach its conclusion.


Mr Musuku (“the taxpayer”) carried on business as a pharmacist. However, he encountered difficulties in relation to his tax returns. This led to a lengthy series of cases concerning his taxation liabilities going back as far as 2001. The tax disputes are continuing and had now reached appellate level.

Apart from the taxation questions that were yet to be determined, the taxpayer owed a debt to the Commissioner. The taxpayer had committed an act of bankruptcy in that he had not responded to the bankruptcy notice which had been served on him. There was no evidence before the High Court which would suggest that he was in a position to pay the debt.

The taxpayer argued that the Court should dismiss the application for adjudication of bankruptcy or defer further consideration of the matter pending the outcome of the further cases involving the parties. It was also argued that a bankruptcy would compromise the taxpayer’s right to a lawyer under the New Zealand Bill of Rights Act 1990. In addition to litigation involving taxation assessments, he was also facing 76 charges brought under the Crimes Act 1961 in relation to his tax returns. It was contended that if he was bankrupted, he would not be able to afford appropriately competent counsel to assist him. It was also contended that bankruptcy would not be conducive to providing him with a fresh start. In addition, it would not result in a pool of assets for distribution amongst creditors being recovered by the Official Assignee and it was not necessary for the purposes of ensuring commercial morality in New Zealand. It was also noted that the Commissioner was the only creditor pressing for bankruptcy, that the taxpayer had no assets and that it was relevant that he had attempted to settle his liabilities with the Commissioner but his offer had been rejected.


In making an order adjudicating the taxpayer bankrupt, Judge Doogue noted:

  • If the taxpayer was adjudicated bankrupt there must be a reasonable prospect that he should be able to obtain legal aid so that he would have counsel at his trial.
  • There was no evidence that the taxpayer would not be able to work as a pharmacist if he were adjudicated bankrupt. He would be under a disability of taking part in the management of a business but that was not the same thing as being left in a position where he could not earn his living.
  • It could not be ruled out that in this case there was some merit in a potential investigation of matters by the Official Assignee such as the disposal of property. This was not a case where the taxpayer’s affairs appeared to be simple and transparent.
  • Making a person such as the taxpayer accountable for failure to pay the tax which was the subject of the debt would be enhanced, not defeated, by making an order for adjudication.
  • Often where persons become insolvent, the only party who was interested in proceeding was the Commissioner. It was also the concern of the Commissioner to uphold the integrity of the tax system and so her interest in pursuing an adjudication on bankruptcy may go beyond simple debt collecting aspects. There was no rational reason to conclude that because the Commissioner was the sole creditor pursuing the matter the Court ought not to order an adjudication.
  • Investigating the position regarding assets would be more easily and desirably carried out in the context of a bankruptcy. If a decision was made to take enforcement action, the Official Assignee had an array of powers which could be usefully deployed to recover property for the benefit of creditors.
  • Even if there was no asset immediately in the control of the taxpayer, there may be good reasons for a bankruptcy to be imposed in order to permit an investigation of the situation and a recovery of any assets illicitly transferred away by the taxpayer.
  • Even if the taxpayer was successful in the litigation before the TRA and the Court of Appeal, he would only be limiting the extent of any additional debt. That debt was likely to go unpaid because of his impecunious position.
  • Having regard to the size of the potential debt, the taxpayer offer to make a payment of $65,000 on the basis that would be an end to all litigation between the parties did not seem to be a large one. That may be the reason why the Commissioner decided that the preferred course would be to explore other means of recovery which could result in a larger recovery being achieved than would have been available under the proposed settlement.


It is apparent from this decision that even if there are parallel tax dispute proceedings against the Commissioner, if such proceedings are unlikely to reduce the debt already owing, bankruptcy will not be stayed. It is not clear, however, whether in the contrary position, where tax dispute proceedings might unlock a refund or otherwise improve the taxpayer’s financial position, a stay would be granted. One would hope that in such a situation the Commissioner would not pursue adjudication, given that set-off may be available to her if the taxpayer were successful in their dispute.

One also can’t help thinking that the taxpayer’s position in this case was compromised by the fact that his affairs were not “simple and transparent”. The impetus to have the Official Assignee to investigate the matter may well have been greater in this case than others.

A final point to note, here the Judge was satisfied that adjudication would not hinder the taxpayer’s ability to continue with his tax dispute proceedings. This is important, for the Commissioner could be considered to be abusing her power and/or carrying out an abuse of process if she was aware that as a consequence of adjudication a taxpayer could not continue with their challenge.

© G D Clews, 2017


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