Insolvency Service has to bear the cost of a potential $2.41 million GST lability arising from its $18.5 million settlement with auditors of failed finance company Capital + Merchant. Insolvency Service cannot dip into funds otherwise payable to investors, the High Court ruled.
Finance company Capital + Merchant went into liquidation a decade ago. As liquidator, Insolvency Service negotiated an out-of-court settlement with auditors BDO Spicers for alleged negligence. Much of this money went to Capital + Merchant’s secured creditors. Sitting on the sideline was insolvency specialist Korda Mentha acting on behalf of some 7500 retail investors demanding repayment. To speed up payment to investors, Korda Mentha cut a deal with Insolvency Service in 2015; $2.34 million could be retained by Insolvency Service for payment of costs and expenses with the balance handed over to Korda Mentha. The High Court was told anticipated payments to secured creditors proved to be less than expected, leaving Insolvency Service holding an unexpected pot of some two million dollars. Learning that Inland Revenue is demanding $2.41 million for GST on the out-of-court settlement, Insolvency Service refused to hand over the surplus.
Justice Jagose ruled Korda Mentha is entitled to the money. The two had agreed how much Insolvency Service could retain. It was not entitled to a ‘second bite at the cherry’ holding money back to cover its own negligence. The High Court was told Insolvency Service could not claim it made a mistake when negotiating the 2015 agreement with Korda Mentha. It had assumed Capital + Merchant was not GST registered since it was providing financial services. In fact it was GST registered; a reflection of its mix of business activities. The out-of-court settlement with auditors described the agreed payment as ‘inclusive of GST, if any’. This should have alerted Insolvency Service of potential GST liability.
Insolvency Service is currently disputing with Inland Revenue whether at law GST is payable on the settlement with Capital + Merchant auditors.
Gibson v. Officlal Assignee - High Court (21.03.19)
19.061