Deputy Commissioner of Taxation for the Commonwealth of Australia v Pavlinovich - [2001] WADC 86

JURISDICTION : DISTRICT COURT OF WESTERN AUSTRALIA
IN CHAMBERS

LOCATION: PERTH

CITATION: DEPUTY COMMISSIONER OF TAXATION FOR THE COMMONWEALTH OF AUSTRALIA -v- PAVLINOVICH [2001] WADC 86

CORAM: DEPUTY REGISTRAR HEWITT

HEARD: 22 MARCH 2001

DELIVERED : 5 APRIL 2001

FILE NO/S: CIV 3147 of 2000

BETWEEN: DEPUTY COMMISSIONER OF TAXATION FOR THE COMMONWEALTH OF AUSTRALIA
Plaintiff
AND
JANICE ETHEL PAVLINOVICH
Defendant

Catchwords:

Practice Western Australia - Application to set aside Judgment - Director's Liability under S222AOC of Income Tax Assessment Act 1936 - Defence to action by Deputy Commissioner - Pleading requirements for such an action

Legislation:

Income Tax Assessment Act 1936, s 222AGA, AGB, AHA, AOB, AOC, AOD, AOE, AOH, AOJ, APB, APE

Result:

Application dismissed

Representation:

Counsel:

Plaintiff: Ms J Lord
Defendant: Mr B P Wheatley

Solicitors:

Plaintiff: Australian Government Solicitors
Defendant: Murfett & Co

Case(s) referred to in judgment(s):

Deputy Commissioner of Taxation of the Commonwealth of Australia v Steven Allan Dunn and Others, unreported; County Court Melbourne; April 1997
Re Scobie & Anor; ex parte DFC of T (1995) 95 ATC 4525

Case(s) also cited:

Androvin Pty Ltd v Figliomeni (1994) 14 WAR 11
Blandford v Fox (1945) 45 SR (NSW) 241
Coburn v Colladge [1897] 1 QB 702
Commissioner for Corporate Affairs v Bracht [1989] VR 811
Daniels v Anderson (1995) 16 ACSR 664
Deputy Commissioner of Taxation v Pejkovic [2000] NSWSC 1176
Deputy Commissioner of Taxation v Thai (1993) 26 ATR 108
Fitzgerald v DFC of T (1995) 95 ATC 4,587
Gates v WA & RJ Jacobs Limited [1920] 1 Ch 567
General Motors Acceptance Corporation of Australia v Davis [1971] VR 734
Group Four Industries v Brosnan [1992] 59 SASR 22
Harding v Lithgow Corporations (1937) 57 CLR 186
Hart v Nominal Defendant [1971] 1 NSWLR 147
Insurance Commissioner of State Motor Car Insurance Officer v Moss [1969] VR 650
Miller v DFC of T (1998) 98 ATC 4,059
Parker v Transfield Pty Ltd & Anor [2000] WASCA 382
Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 231
Simpson & Ors v DFC of T (Cth) (1996) 96 ATC 4,651
Strauss v Rothfield [1945] VLR 263
Tourprint International Pty Ltd (in liq) v Bott (1999) 32 ACSR 201
Vines v Djordevitch (1955) 91 CLR 512

DEPUTY REGISTRAR HEWITT: In this matter the plaintiff issued a writ against the defendant on 26 November 2000 seeking to recover monies alleged to be payable by the defendant to the Deputy Commissioner of Taxation pursuant to the provisions of the Income Tax Assessment Act. An affidavit of service on the file indicates that service was achieved on 5 December 2000. An appearance was filed by the defendant on 15 December 2000 and the defendant was therefore required to file a defence to the statement of claim within 14 days. In light of the Christmas vacation that period would have expired at some time in January and certainly prior to 25 January 2001 being the date upon which the plaintiff entered a default judgment.
The defendant has now applied to set aside that judgment and that is the application before me. Upon such an application the defendant is required to give a satisfactory explanation for her failure to comply with the rules and to show a defence on the merits.
On the first of those issues the defendant relies on the fact that she relied upon the assistance of her husband who was not familiar with the requirements of the rules, that her attempts to instruct solicitors on the matter were hampered by the fact that the offices of those solicitors were closed for the Christmas vacation and the fact that after her solicitors became available there was some time necessary to arrange the terms upon which those solicitors would act. The affidavit of Mr DeSilva who works for the solicitors for the defendant indicates that he was not aware that the time for filing a defence had already expired and it would appear that Mr DeSilva who is only an articled clerk was not familiar with the rules of Court and the prospect of a default judgment being entered against the client.
The default judgment had been lodged some time prior to 25 January 2001 and in my view the solicitors for the defendant had very little realistic prospect of obtaining the instructions necessary to draw a defence and file it within the time which was available to them.
The delay has not been great and in my view the explanation for that delay is satisfactory. I therefor turn to consider the merits of the defence which is advanced by the defendant. Before doing so I shall briefly canvas the basis of the plaintiff claim.
The defendant was at material times the director of a company called Sandalwood Corporations Pty Ltd a company which was required to deduct certain monies from wages paid to its employees and remit those moneys to the plaintiff under the provisions of the Income Tax Assessment Act. It is alleged that the company Sandalwood Corporation Pty Ltd made default in the obligations deposed upon it under the Act as a consequence of which by the combination of s 222AOB and s 222AOD the defendant as a director of the company became personally liable to pay a penalty in an amount the equivalent of the unpaid deductions. That portion of the claim amounts to something in the vicinity of $100,000 and a further claim arose in a like manner under the provisions of s 222AGA, s 222AGB, s 222AHA and s 222APB in respect of assessments made by the Commissioner in respect of the company. That claim amounts to $60,000 or thereabouts.
Three potential grounds of defence were argued before me and I will deal with them sequentially.
The first ground is that the judgment is irregular. That ground arises in respect of the claims on the provisions of s 222AOB, s 222AOC, s 222AOD and s 222AOE. In order to understand this analysis I reproduce these sections below.
"Directors to cause company to remit or to go into voluntary administration or liquidation
222AOB.(1) The persons who are directors of the company from time to time on or after the first deduction day must cause the company to do at least one of the following on or before the due date:
(a)comply with Division 2, 3A, 3B or 4, as the case may be, in relation to each deduction:
(i)that the company has made for the purposes of that Division; and
(ii)whose due date is the same as the due date;
(b)make an agreement with the Commissioner under section 222ALA in relation to the company’s liability under a remittance provision in respect of such deductions;
(c)appoint an administrator of the company under section 436A of the Corporations Law;
(d)begin to wound up within the meaning of that Law
(2) this section is complied with when:
(a)the company complies as mentioned in paragraph (1)(a); or
(b)the company makes an agreement as mentioned in paragraph (1)(b); or
(c)an administrator of the company is appointed under section 436A, 436B or 436C or the Corporations Law; or
(d)the company begins to be wound up within the meaning of that Law;
whichever first happens, even if the directors did not cause the event to happen.
(3)If this section is not complied with on or before the due date, the persons who are directors of the company from time to time after the due date continue to be under the obligation imposed by subsection (1) until this section is complied with.
Penalty for directors in office on or before due date
222AOC. If section 222AOB is not complied with on or before the due date, each person who was a director of the company at any time during the period beginning on the first deduction day and ending on the due date is liable to pay the Commissioner, by the way of penalty, an amount equal to the unpaid amount of the company’s liability under a remittance provision in respect of deductions:
(a)that the company has made for the purpose of Division 2, 3A, 3B or 4, as the case may be; and
(b)whose due date is the dame as the due date.
Penalty for new directors
222AOD. If:
(a)after the due date, a person becomes, or again becomes, a director of the company at a time when section 222AOB has not yet been complied with; and
(b)at the end of 14 days after the person becomes a director, that section has still not been complied with;
The person is liable to pay the Commissioner, by way of penalty, an amount equal to the unpaid amount of the liability referred to in section 222AOC.
Commissioner must give 14 days’ notice before recovering penalty
222AOE. The commissioner is not entitled to recover from a person a penalty payable under this Subdivision until the end of 14 days after the Commissioner gives to the person a notice that:
(a)sets out details of the unpaid amount of the liability referred to in section 222AOC; and
(b)states that the person is liable to pay to the Commissioner by way of penalty, an amount equal to that unpaid amount, but that the penalty will be remitted if, at the end of 14 days after the notice is given:
(i)the liability has been discharged; or
(ii)an agreement relating to the liability is in force under section 222ALA; or
(iii)the company is under administration within the meaning of the Corporations Law; or
(iv)the company is being wound up."
The argument revolves around the analysis of s 222AOE specifically the words “the Commissioner is not entitled to recover from a person a penalty payable under this Subdivision until the end of 14 days after the Commissioner gives to the person an notice that;…”. It is argued by the defendant that the giving of the notice is an essential for the plaintiff’s cause of action to arise. There is nothing within the pleading in this action to say that such a notice was given and the defendant therefore argues that the statement of claim does not disclose a proper cause of action as a consequence of which the default judgement obtained is irregular and should be set aside. Authority was quoted to support the proposition that a judgment based on a defective statement of claim is irregular and should be set aside.
I accept that proposition as correct. I now consider whether or not the pleading is defective. The issue to be considered is whether or not the notice is a prerequisite to the defendant being liable, or a procedural step which is required to be taken before the director is required to satisfy the liability. In that regard I refer to the wording of s 222AOC and focus on the words “is liable to pay to the Commissioner by way of penalty…”. The structure of the Act therefore appears to me to be that the liabilities are created by s 222AOC but the Commissioner is required to give a notice to the director before recovering the penalty imposed.
The defendant in making these submissions relied upon the decision of Re Scobie & Anor; ex parte DFC of T (1995) 95 ATC 4525, in particular the passage appearing at p 201 in which his Coper J said:
“The statutory defence provided in s 222AOJ only has any relevant operation when there remains in existence a penalty recoverable as a debt due to the Commonwealth by proceedings instituted in a Court of competent jurisdiction.
For the Commission to be in that position the following circumstances must exist:
(a)a company liable to pay unremitted deductions under the ITAA has defaulted in payment in accordance with the provision of the ITAA;
(b)the directors of the company have not discharged the obligation imposed on them by s 222AOB(1) to cause the company to comply by causing one of the events specified in s 222AOB to occur;
(c)the directors are by virtue of s 222AOC or s 222AOD liable to pay a penalty in the amount of the unremitted and unpaid deductions;
(d)the Commissioner has given noted in accordance with s 222AOE;
(e)the period of fourteen days has expired;
(f)the directors’ obligation under s 222AOB(1) remans to be satisfied by compliance with s 222AOB(2).
If the above circumstances exist, the Commissioner is entitled to recover the penalty as a debt due to the Commonwealth in a Court of competent jurisdiction and upon proof of the above facts is entitled to judgement against the directors for the amount of the penalty.”
In circumstances of that case, as here, a notice had been served on the directors under the provisions of s 222AOE. The proof of that matter in the present case is contained in the affidavit of Michael Colgan sworn on 14 March 2001.
In the Scobie case the Court only needed to consider whether or not the amount claimed by the Deputy Commissioner of Taxation was contingent or not. It was not necessary for the Court to consider the pleading requirements in an action to recover a penalty from a director. Therefore to the extent that his Honour commented on the components of such an action his comments are obiter. More directly to the point is the case of Deputy Commissioner of Taxation of the Commonwealth of Australia v Steven Allan Dunn and Others, unreported; County Court Melbourne; April 1997. In that case there was a challenge to the sufficiency of a statement of claim on the basis that the substance of a notice under s 222AOE was not pleaded. In considering that matter Eckhardt J. stated:
“There is no doubt that the Commissioner was required pursuant to s 222AOE of the Act to take certain action before he could institute these proceedings. That he did or did not do so may be a question of fact which the offending party may raise by way of failure to comply.
The questions are then first, whether this statutory requirement is a condition precedent and, second, whether the pleadings must specifically include the fact of the Commissioner’s actions pursuant to s 222AOE.
The intent of O 13.05, in my view, is to cause a condition precedent to be implied if it is necessary. In the sense that pleadings are a narration arising from, in this case, non-performance it is that non-performance that gives rise to the cause of action and that is where this particular story begins. The cause of action does not arise from the giving of notice pursuant to s 222AOE of the Act but rather from the failure – as alleged- to satisfy the statutory requirements. Or, to put it another way, the moment the statutory obligation arises is the point at which this particular narrative begins. I have read the authorities provided to me and have, on the basis of such, and of an interpretation of O 13.05, decided that the pleadings are not defective and the application by the defendants is, therefore, dismissed.”
Order 13.05 of the relevant rules in Victoria states “an allegation of the performance or occurrence of any condition precedent necessary for the claim or defence of a party shall be implied in his pleading”. Order 20 r 8(4) of our Supreme Court Rules states “a statement that a thing has been done or that an event has occurred, being a thing or an event the doing or occurrence of which, as the case may be, constitutes a condition precedent necessary for the case of a party is to be implied in his pleadings.” In my opinion there is no relevant distinction between the two sets of rules. On the basis of these authorities I conclude that it is not necessary for the Commissioner to plead the giving of a notice under s 222AOE that notice being a condition precedent to the bringing of the action to be implied into the pleadings.
It is to be noted in the proposed defence which is exhibited to the affidavit of the defendant pleads in par 5.1 “no notice under s 222AOE or any other section of the Income Tax Assessment Act 1936 was served on the defendant.” The affidavit of Michael Colgan to which I have earlier referred indicates that is not correct. Appropriate notices were served on the defendant at her proper address for service.
I therefore conclude that in so far as the plaintiff claims the sum of $100,000 or thereabouts there is no defect in the pleading.
In regard to the second portion of the plaintiff’s claim a similar pleading point is made revolving around the provisions of s 222APE.
I see no useful point in canvassing the argument on those provisions since they are essentially the same as the matters with which I have dealt earlier. My conclusion is therefore that there is no defect in the plaintiffs pleading which would entitle the defendant to characterise the judgement as irregular.
The next matter raised concerns the defence provided by s 222AOJ of the Act which is in the following terms:
"222AOJ. (1) This section has effect for the purposes of:
(a)proceedings to recover from a person a penalty payable under this Subdivision; or
(b)proceedings under section 222AOI against a person of the kind referred to in paragraph 222AOI (d).
(2)It is a defence if it is proved that, because of illness or for some other good reason, the person did not take part in the management of the company at any time when:
(a)the person was a director; and
(b)the directors were under the obligation to comply with sub-section 222AOB (1).
(3)It is also a defence if it is proved that:
(a)the person took all reasonable steps to ensure that the directors complied with subsection 222AOB (1); or
(b)there were no such steps that the person could have taken."
In order to examine whether or not this aspect of the defence is made out I refer to the defendant’s affidavit sworn 15 February 2001. The relevant materials are contained in par 5 of that affidavit in which the defendant states that her appointment was on her husband’s assurance that her appointment would:
“5.1Only be for the term of his Part X administration, during which time I understand that he was incapable of acting as Sandalwood’s director under certain provisions of the Corporation’s Law;
5.2Not result in me incurring any liability in my own name; and
5.3Sandalwood, although in financial difficulties, would not incur any liabilities during my directorship that would be unpaid or for which I would become personally liable.”
In summary the applicant says that she undertook the office of a director of Sandalwood Corporation Pty Ltd at the request and insistence of her husband and on his assurance that her appointment would only be for the term of his Part X administration and that she would not thereby incur personal liability. Additional relevant material is contained in par 8.2 of the affidavit in which the deponent states:
“My appointment as a director
(a)was at my husband’s instance and under protest from me; and
(b)was based on my husband’s assurance that:
(i)I would not incur any personal liability during the period of my directorship.
(ii)Sandalwood’s employees would continue to manage Sandalwood’s business and affairs and that I would not be required to take any part in its management or business whatsoever.”
To distil the propositions contained within these paragraph I firstly note that it appears to me to be irrelevant under the provisions of s 222AOJ why precisely a person may have chosen to become a director of a company. What is required is to demonstrate that because of illness or some other good reason the person did not take part in the management of the company. In the present instance the reason advanced by this defendant that she did not take part in the management of the company was her husbands assurance that she would not incur personal liability by accepting the post of a director and she would not be required to take any part in the management of business whatsoever. When one bears in mind that this was a single director company I would have thought that such an explanation is incapable of satisfying the requirements of s 222AOJ(2) of a “good reason” that the applicant did not take part in the management of the company. In effect she took on the task without the slightest intention of making any effort to discharge any responsibilities whatever on the basis that she would not thereby be liable. As I have indicated I do not consider that to be a good reason for failing to part in the management of the company.

The next point raised by the defendant is that the relevant company has executed a deed of company arrangement. It is argued that the effect of that deed is to discharge the company’s liability and thereby the director’s liability. Section 222AOH is relevant to this issue and it provides:
"Effect of director paying penalty or company discharging underlying liability
222AOH.(1) in one or more persons are liable to a penalty under the Subdivisions, the following are parallel liabilities:
(a)the liability of that person, or of each of those persons, to the penalty;
(b)the liability referred to in section 222AOC;
(c)liability under a judgment, so far as it is based on a liability referred to in par (a) or (b).
2This means that if, at a particular time:
(a)an amount is paid or applied towards discharging one or the parallel liabilities; or
(b)because of sections 222AHA, one of the parallel liabilities is discharged to the extent of a particular amount;
each of the others that is in existence at that time is discharged to the extent of the same amount. However, this subsection does not discharge a liability to a greater extent than the amount of the liability.”
Section 222AOH only has any application if a sum of money is paid which discharges or partly discharges liability of some other person. Reference is made within the section to s 222AHA. That section also indicates that a payment is required to effect a discharge.
The only way that the placing of a company under administration could be effective to discharge a director from an obligation to pay a penalty would be if the company was placed under administration within the time provided by the notice required to be given under s 222AOE.
There is no suggestion within the supporting affidavit that any monies have been paid by the company to the plaintiff by the administrator and as a consequence it appears to me that the appointment of an administrator at a late stage is not effective to discharge a director from liability for a penalty imposed virtue of s 222AOD.
Furthermore the terms of the deed of arrangement are not before me and I have not had the opportunity to examine its terms. An affidavit was tendered by the plaintiff from the administrator appointed pursuant to that deed of company arrangement but the applicant objected to the admission of that affidavit on the basis of late service. The applicant has not chosen to place the deed before me herself and by objecting to me admitting the affidavit to which I have referred has therefor deprived herself of the opportunity to refer to the terms of the deed of arrangement in order to establish that it does in truth operate to effect an immediate discharge of the company’s liability. In my opinion however the terms of the deed of arrangement are probably irrelevant to the issues with which I am confronted because the issue is not whether such a deed was made, nor if it was, whether its terms effectively discharged the company from liability but whether or not penalties imposed by sub-div b of Div 9 of the Income Tax Assessment Act have been discharged.
Whatever it terms may be the deed of company arrangement is not to my mind capable of discharging the liability imposed upon a director under the provisions of the subdivision.