Damien Grant: IRD must keep right to wind up sick firms

Opinion

The ease of incorporating a new company in New Zealand is what allows some directors to leave a trail of unpaid tax and burned creditors in their wake.

At present, if a company goes into liquidation the liquidator must pay creditors in the following order:

* Secured creditors (where debt is secured by a specific asset).
* Liquidators' fees.
* Staff, up to $18,700 per staff member.
* The IRD for unpaid GST and PAYE.
* All other unsecured creditors.

The IRD gets its money before other creditors. This is not the case across the Tasman, and there has been a trend in OECD nations away from what is termed the IRD preference.

Minister of Commerce Simon Power is being lobbied to remove the IRD preference. He should resist the siren call, for three reasons.

Firstly, government goods and services are not, as John Key reminded us in July, paid for by pixies at the bottom of the garden printing money. You may not like what the Government is doing with the money it collects, and you can express your views every three years, but if taxes are not collected from Peter they will be collected from Paul. The IRD must get paid.

Second - most firms who give credit take a commercial decision about doing so. They consider the creditworthiness of their customer and weigh up the risk of non-payment against the profit to be made. The IRD does not have this choice. It is an involuntary creditor. Given this obligation, it is reasonable that it receive the benefit of recovered funds before those who made a (bad) commercial decision to advance credit to an insolvent company.

Thirdly, the IRD is at the forefront of liquidations in New Zealand. It is responsible for over half of the court-appointed liquidations. It takes a public policy approach to removing companies who cannot pay their taxes. And it should. Companies who continue to trade while not paying their taxes have an unfair economic advantage over honest firms. The IRD preference leaves in place an important incentive for the IRD to continue to vigorously pursue recalcitrant companies.

Indeed, there is a strong case to be made that the IRD should be more rigorous in pursuing tax debtors regardless of the economic times in which we currently trade.

If the Commissioner of Inland Revenue allows tax defaulters to continue to trade it creates pressure for other firms to do the same, just to compete. Very soon you have a rapid erosion of the tax base.

Worse, the IRD is often too slow in closing down companies not paying their tax. These companies continue to trade, first unable to pay their tax but soon unable to pay other bills as well, finally failing in a heap of debt.

But because it is so easy to register a new company in New Zealand it is simple for ethically challenged directors to create a new firm, switch the assets across and continue to trade.

What is needed is a policy that can:

a) bring insolvent companies to a stop earlier in their life cycle, and
b) knock out directors who continually offend.

The consequences of failing to pay your taxes should be dramatic, immediate and effective, and ideally it should hit at the director himself if he does not address the issue. The Australians have just such a regime.

The Australian Tax Office has the option to issue a 14-day notice to firms with tax arrears. That notice gives the company directors three options:

* Pay the tax arrears.
* Enter voluntary administration.
* The directors become personally liable for the company's tax arrears.

Most companies fold before the 14 days are up, causing the bleeding to stop. For those company directors who flout the notice the Australian Tax Office can, and does, bankrupt them, thus keeping the commercial community safe from that director for at least the duration of his bankruptcy.

Failing to pay GST and PAYE is the equivalent of a dead canary in a coal mine. Adopting the Australian regime will enable the IRD to deal with insolvent firms quickly and effectively, and without recourse to a lengthy court process leading to liquidation. It also has the enormous benefit of getting insolvency practitioners into the company while there is something that can be salvaged.

No favours are being done by prolonging the suffering of the commercially terminal.



* Damien Grant is a liquidator with Waterstone Insolvency