The collapse of Mainzeal Property in 2013 resulted in a shortfall of approximately NZ$110 million being owed to creditors and has led to a long series of litigation and claims, including against its former directors.
The latest chapter in this litigation was decided last week, with two High Court decisions released, with Inland Revenue and QBE Insurance being the respective defendants.
Background on the Mainzeal decision
The background centres on an insurance payment made by QBE Insurance under a D&O insurance policy of around NZ$20 million (partially covering the full liability). This payment was made on account of the former Mainzeal directors’ liability but critically was paid directly to an account nominated by Mainzeal’s liquidators (being a third-part claimant), rather than directly to the directors.
The case highlights the dangers of the GST rules for insurance payments in the context of litigation settlements or Court awards. The issue being that the receipt of an insurance payment can trigger a GST liability in the hands of the payee, even if they are not a party to the insurance contract. At that point that payee would want to have GST added to that payment - but whether that is possible depends on the terms of the relevant insurance policy, settlement agreement or other contractual arrangements.
In this case, the relevant GST clause was included in the QBE insurance policy. However, the narrow wording of that clause put any GST gross up in doubt. Specifically, the GST clause only triggered when "the Insured"1 was liable to pay GST, and in this case the High Court held that the "Insured" was not Mainzeal (receiving the payment), but the former Mainzeal directors involved in the proceeding. This is despite Mainzeal itself being a party to the insurance contract, just not in relation to that particular claim.
Inland Revenue’s position
Separately, in response to Inland Revenue’s position, Mainzeal submitted that the GST insurance rule should only apply if the insurance payment is made to a person that suffered insured loss. In this case, the relevant loss being insured (being the Mainzeal directors and the insured loss being the damages sum). The High Court disagreed, confirming GST applied regardless. The reference to a loss incurred did not require the insurance payment to compensate for that particular loss. The Court’s judgment here was consistent with Inland Revenue’s previously published statements.
The relevant GST provision only applies when an insurance payment is paid to a GST registered person. The judgment also considered but did not need to determine whether the payment could have been paid to the directors to avoid the GST consequence. While no conclusion was reached here, it raises some important points as to how payments might be structured under an insurance payment scenario, and which party has ‘received’ the payment for the purpose of these rules.
These rules are particularly important in the context of any out of court settlement, where GST may not seem relevant at first glance. It is entirely possible that the first sign of an insurer being involved will be the bank receipt details of the payment into a solicitor’s trust account. In this case, it is critical that the settlement agreement has an appropriate GST clause that allows for the payment to be grossed up, or alternatively some form of warranty that an insurer will not make such a payment. Where GST is likely to trigger, the terms of the relevant insurance contract and any GST clauses should also be checked well in advance of a request for a GST gross-up.
Our perspective on the case
This case will be important for any person involved in litigation where there is a potential for an insurer to be involved. It is clear that the presence of an insurer, the contract for insurance and how an insurance payment might be structured will be important and should be considered upfront rather than after that payment has been made.
If you have any questions about this article, please get in touch with the contacts listed or your usual Bell Gully adviser.
1Clause 4.12 of the Directors and Officers Liability and Company Reimbursement Insurance Policy issued by QBE Insurance
Disclaimer: This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.
