The Fishman’s non-payment of tax was not dishonest

The Fish Man Ltd was in liquidation. Its director, Mr Hadfield, raised and sold ornamental fish from 14 fish tanks at his home. But one day he cut his finger and, for a time, could not work. Sadly, this ultimately led to the Fish Man not being able to meet its PAYE and GST liabilities, and going into liquidation, in 2010, and Mr Hadfield into bankruptcy, on 6 June 2013, from which he has since been discharged.


One issue was whether a claim by the Fish Man against Mr Hadfield was a claim in fraud as that term is used under s 304 of the NZ Insolvency Act. It provides that a bankrupt is released from all debts provable in the bankruptcy except ones including any debt or liability incurred by fraud or fraudulent breach of trust to which the bankrupt was a party: s 304(2)(a). A similar exclusion applies under the Australian Bankruptcy Act: s 153.

The question was whether or not the breach of fiduciary obligation of Mr Hadfield, as a director of his company, to pay the PAYE and GST, was “fraud or fraudulent breach of trust”.

The Court considered that this question had to be answered against a consideration of the purpose of the policy of the Insolvency Act to discharge bankrupts from all debts.

The term “fraud” includes equitable fraud, or “dishonest assistance”. But the Court said that mere non-payment of tax debts was not dishonest.

” … it is a common case of a director of a company continuing to spend on the necessary inputs, such as food for the fish and retaining the employees, ahead of the tax debts. He did not do this with an intention to defeat the Inland Revenue in the long run, but rather to save the business. …. It is a common place event for companies under financial stress to fall behind in tax and for tax arrears to accrue”.

The Court said that this is not normally regarded as fraud or fraudulent breach of trust and it found that s 304(2)(a) did not apply to the decision of Mr Hadfield as director to give priority to his business’ current expenses ahead of the tax liabilities. He was therefore discharged from that liability.

That is correct.  Non payment of a debt is not necessarily dishonest per se. And this is the case even if it is a tax debt.

The Fish Man Limited (under water) v Hadfield [2016] NZHC 1750.

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  1. Many people regard money deducted from wages on account of tax as being held on trust by the employer and never the money of the employer once the employees wages entitlement has been paid. If that is the case misuse of that deducted tax could be argued to be a “breach of trust”. The question then needs to be answered as to whether or not that is a “provable claim” s 82 Bankruptcy Act. You then have to have regard to director “penalties” under our revenue laws again in the sense of “provable claim”.

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