Supreme Court reverses "super priority" for Inland Revenue on insolvency

Monday 10 November 2014

Authors: Murray Tingey and James Gibson

​​​A company runs into financial difficulty, and a liquidator is appointed. On the date of appointment, the company has $14,000 in its bank account. Which creditor has first claim to the funds?

The normal answer is that certain secured creditors, some liquidators’ fees and expenses, and employees all rank ahead of the Commissioner of Inland Revenue. However, in CIR v Jennings Roadfreight Ltd (in liq), the Court of Appeal turned this understanding upside down, ruling that the Commissioner has the benefit of a trust over all money in the company’s bank account on the date of liquidation, and that it jumps the queue ahead of secured and preferential creditors.1

On 7 November 2014, the Supreme Court unanimously overruled the Court of Appeal – restoring some certainty for  insolvency practitioners, but also leaving some unanswered questions.2

The Tax Administration Act

The case concerned section 167 of the Tax Administration Act. Subsection 1 provides that PAYE withheld by an employer “shall be held in trust for the Crown” and form no part of the assets in liquidation. Subsection 2, by contrast, provides that if an employer has not dealt with the PAYE as required by subsection 1 or in accordance with the PAYE rules, the amount of tax owing ranks in the ordinary way in accordance with the Seventh Schedule of the Companies Act.

The Commissioner cannot jump the queue

The Supreme Court ruled that subsection 2 takes precedence over subsection 1, because it is more specific. In addition, the Court agreed with our earlier client update that any other interpretation would “cut right across” the priorities in the Seventh Schedule and “allow the Commissioner effectively to ‘leapfrog’ ahead of other preferential creditors when in fact his or her claims rank below”.

Open questions and issues to watch out for

However, there remain some fishhooks for insolvency practitioners. First, the Court said that an employer does not have an obligation to hold PAYE deductions in a separate fund – but if the employer in fact does hold the money separately, subsection 1 may take precedence over subsection 2 and the Commissioner may have a trust that allows it to jump the queue. The Supreme Court said that it was unnecessary for it to decide the point in this case.

Second, the Supreme Court said that a trust arises under subsection 1 until the date of liquidation. It said that this was not a “true trust”, but a “notional statutory trust”. The Court did not explain the concept of a notional trust, except to say that it is not similar to a floating charge. The Supreme Court also went further than the Court of Appeal, saying that the notional trust applies not only to the employer’s bank account but to “the employer’s assets generally”.

Third, the concept of a notional statutory trust is likely to lead to considerable uncertainty. To what extent can an employer use or pay away any of its assets if they are the subject of a trust? And can a third party such as a bank become liable for knowing receipt or dishonest assistance in breach of the notional trust?

Fourth, subsection 2 only applies to PAYE that falls due for payment before liquidation. If PAYE falls due after liquidation, subsection 1 applies and the Commissioner can jump the queue in relation to this amount.

Finally, the Supreme Court suggested that the existence of a notional trust would protect from clawback amounts actually paid (whether late or not) to the Commissioner before liquidation. However, it said that it did not want to be definitive on this point, as the precise issue was not before it.


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.

For more information
  • James Gibson

    Partner Auckland
Related areas of expertise
  • Restructuring and insolvency