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Brief Counsel

PAYE not held on trust for Inland Revenue – Supreme Court

10 November 2014

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​The Supreme Court, in a judgment released last Friday,1 has overruled the Court of Appeal by deciding that the IRD stands behind liquidators and employees when cash is available in liquidation and PAYE is owed.

This decision, which upholds the payment waterfall in Schedule 7 of the Companies Act, will be welcomed by insolvency practitioners after the Court of Appeal had upset previous industry practice.

Context

The case involved the relationship between section 167 of the Tax Administration Act and Schedule 7 of the Companies Act.  Section 167 creates a trust over PAYE deducted from payments to employees.  For background, see our previous commentary, IRD plays PAYE trump card – and wins.
Prior to the Court of Appeal’s decision, it was generally accepted that, in a liquidation, PAYE should be paid to the Inland Revenue only after insolvency practitioners’ fees and employees’ wages had first been paid under Schedule 7.
The Commissioner of Inland Revenue argued that credit balances in a company’s bank accounts at the time of liquidation were held in trust for the Commissioner and did not form part of a company’s assets available to creditors.

The Supreme Court

The Supreme Court was not prepared to allow unpaid PAYE to sit outside of the Schedule 7 priority regime.  To do so would allow the IRD to effectively “leapfrog” ahead of preferential creditors when in fact the IRD’s claims rank below those creditors.2   The Court ruled that any trust established by the Tax Administration Act is extinguished on the appointment of liquidators.
The Supreme Court’s rejection of the Court of Appeal’s narrow interpretation of the Tax Administration Act is welcome.  The Court has confirmed the application of the settled and well-understood priority scheme for payments in Schedule 7.  Unpaid PAYE will still rank ahead of most debts owed by the employer.  
Our thanks to James McMillan for writing this Brief Counsel.  For further information, please contact the lawyers featured.
Footnotes
2   See [29] of the judgment

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