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
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
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
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.
The Insolvency and Bankruptcy Code, 2016 (the Code) has consolidated the insolvency, bankruptcy and liquidation laws for companies, partnerships firms, limited liabilities partnerships and individuals in India, which came into effect on 28 May 2016.
Under the New Zealand PPSA, GE's interest would not have been entirely lost but its priority could have been affected.
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