Deputy Commissioner of Taxation v Cahill
[2003] VSC 58
•12 March 2003
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. 4616 of 2001
| DEPUTY COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA | Plaintiff |
| V | |
| STEPHEN JOHN CAHILL | Defendant |
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JUDGE: | Balmford J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 18 February 2003 | |
DATE OF JUDGMENT: | 12 March 2003 | |
CASE MAY BE CITED AS: | Deputy Commissioner of Taxation v Cahill | |
MEDIUM NEUTRAL CITATION: | [2003] VSC 58 | |
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TAXATION - Agreement under section 222ALA of the Income Tax Assessment Act 1936 – whether correspondence operated to vary or terminate original agreement – whether breach of original agreement – statutory obligation to pay.
Taxation Administration Act 1953 – ss.255-45 and 255-5
Income Tax Assessment Act 1936 – ss.222ALA and 222AQA
Masters v Cameron (1954) 91 CLR 353
Federal Commissioner of Taxation v Wade (1951) 84 CLR 105
O’Reilly v State Bank of Victoria Commissioners (1983) 153 CLR 1
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr M Bearman | ATO Legal Practice |
| For the Defendant | Mr M P Pirrie | T J Mulvany & Co |
HER HONOUR:
This proceeding was commenced by writ issued on 26 February 2001. The plaintiff sues on the basis of a certificate under section 255-45 of Schedule 1 of the Taxation Administration Act 1953 (“the Administration Act”) certifying that the sum of $757,093.65 was, as at 18 February 2003, a debt due and payable by the defendant to the Commonwealth of Australia. That certificate is challenged only on the issue appearing below, and it is not necessary to set out in detail all of the facts and statutory provisions which are said to give rise to that debt. It is sufficient to state, in broad and general terms, that the defendant was at all relevant times a director of Cahill Mechanical Installations (Aust) Pty Ltd (“CMIA Pty Ltd”) which, having withheld from payments to employees deductions in respect of income tax payable by those employees, did not remit those deductions to the Commissioner of Taxation (“the Commissioner”) as required by the Income Tax Assessment Act 1936 (“the Tax Act”). On 19 March 1997, CMIA Pty Ltd entered into an agreement with the plaintiff under section 222ALA(1) of the Tax Act (“the original agreement”) for payment of specified amounts on specified days, being one day in each month between 15 April 1997 and 15 May 1998, in order to discharge the liabilities of CMIA Pty Ltd under relevant provisions of the Tax Act. The distinction between the plaintiff and the Commissioner is not significant for present purposes.
The submission of the plaintiff is that, as CMIA Pty Ltd did not make payment of those specified amounts on or before the specified days, it has contravened the original agreement; that the balance unpaid under the original agreement then becomes due and owing by virtue of section 222ALA(5) of the Tax Act; that section 222AQA of that Act then has the effect that the defendant, as a director of CMIA Pty Ltd, becomes personally liable to pay that balance to the Commonwealth, by way of penalty; and that that penalty becomes a debt due to the Commonwealth and payable to the Commissioner by virtue of section 255-5 of Schedule 1 of the Administration Act.
The submission of the defendant is that an agreement was entered into by an exchange of correspondence between the solicitors for the parties, which constituted an agreement under section 222ALA(7) of the Tax Act to vary or terminate the original agreement. The dispute between the parties is as to the effect of that correspondence. In the submission of the defendant, the agreement between the parties is constituted by the original agreement as varied by the correspondence. The plaintiff responds that that correspondence does not have the effect for which the defendant contends, that the original agreement is still in force without variation, and that the defendant is accordingly still personally liable to the Commonwealth for the amount in issue on the basis set out in [2] above.
Section 222ALA of the Tax Act, which appears in Division 8 Subdivision G of that Act, reads as follows, so far as relevant:
222ALA.Commissioner may make agreement
(1)The Commissioner may make with a person a written agreement under which the person is to pay specified amounts, on specified days, for the purpose of discharging one or more specified liabilities of the person, each of which is:
(a)a liability under a remittance provision; or
(b)a liability to pay an estimate.
(2)An agreement may contain other provisions.
(3)An agreement may also provide that, if the person contravenes specified provisions of it, so much of the total of the specified amounts as remains unpaid becomes due and payable on the day of the contravention. If an agreement so provides, the specified provisions are called special conditions.
(4)The amounts specified in an agreement are due and payable on the specified days.
(5)However, if:
(a)a specified amount is not paid on or before the specified day; or
(b)the person contravenes a special condition;
so much of the total of the specified amounts as remains unpaid:
(c)becomes due and payable on that day, or on the day of the contravention, as the case may be; and
(d)is called the balance payable under the agreement.
(6). . .
(7)The Commissioner may make with a person a written agreement varying or terminating an agreement with the person that is in force under this section.
(8). . .
The correspondence which the defendant claims had the effect of varying the original agreement consists of a letter of 25 November 1997 from the solicitor for the defendant, Mr Tiernan of Messrs T J Mulvany & Co, to the solicitor for the plaintiff, Mr Linden of the Australian Government Solicitor’s office, and Mr Linden’s reply of 3 December 1997. By way of background it should be said that three other companies of which the defendant was a director had also been indebted to the Commonwealth in respect of unremitted deductions, namely Geelong Personnel Coordinators Pty Ltd, CMI Contract Labour Pty Ltd and National Labour Placements Pty Ltd. The four companies are together referred to as “the CMI group”. Proceedings had been initiated by the plaintiff to wind up all four companies. Those proceedings had been adjourned several times by Senior Master Mahony in order to give the companies the opportunity to raise equity funding to pay out their liabilities. The hearings were listed to resume on 26 November 1997.
From a letter of 13 June 1997 from the defendant to the office of the plaintiff it seems that it was proposed that weekly payments of a minimum of $10,000 would be made to the plaintiff, presumably by the CMI group, although this is not clear. It does not appear to be suggested that that letter formed part of any agreement to vary the original agreement. However, payments of $10,000 were apparently made by the CMI group to the plaintiff more or less weekly from 20 June 1997. Those payments were applied to the debts which were oldest in time. By 21 November 1997 this process had resulted in Geelong Personnel Coordinators Pty Ltd and National Labour Placements Pty Ltd having paid their debts to the Commissioner in full, leaving CMI Contract Labour Pty Ltd and CMIA Pty Ltd still indebted. By the time of commencement of this proceeding, an amount of only $21,383 deriving from those payments was able to be attributed to the total debt of CMIA Pty Ltd under the original agreement.
Mr Tiernan, in his letter of 25 November 1997, written the day before the winding up proceedings were to resume, proposed that a named individual be appointed to oversee a scheme of arrangement. He said that “our client” (presumably the CMI group) undertook to pay out the debt due by CMI Contract Labour Pty Ltd by 31 March 1998. Their client would continue “to make weekly payments of $10,000 in accordance with existing payment arrangements”.
Mr Linden in his reply of 3 December 1997, on the letterhead of the Australian Government Solicitor, said “my client is willing to agree to a scheme of arrangement on the 5 terms outlined in your letter subject to the following further terms:” The further terms included the following:
5.All current liabilities shall be paid by their due date.
6.The terms of the scheme of arrangement shall be embodied in a Deed to be executed by the parties within 21 days of this day, failing execution the Deputy Commissioner of Taxation shall be at liberty to take such legal action as it considers appropriate.
7.[CMIA Pty Ltd] and CMI Contract Labour Pty Ltd shall pay the Deputy Commissioner’s costs of the applications to wind-up in the total sum of $7,500.
8.Within 21 days of this day the companies shall enter a payment agreement under section 222ALA of [the Tax Act] in relation to the outstanding group tax liabilities (apart from those liabilities which are the subject [of] proceeding number 5632 of 1997 in the Supreme Court of Victoria). The Deputy Commissioner’s right to prosecute that proceeding shall not be affected by the scheme of arrangement.
The letter concluded:
Upon agreement by your clients to the above terms my client will seek leave to discontinue the wind-up applications this day.
Yours faithfully
Stephen Linden
Solicitor
Insolvency Team
The plaintiff discontinued the winding up proceedings on 3 April 1998. Its costs of $7,500 were paid by the CMI group on 23 December 1997. The weekly payments of $10,000 were continued apparently until 20 November 1998. The debt of CMI Contract Labour Pty Ltd was discharged before 2 April 1998.
On 23 December 1997 Mr Tiernan sent to Mr Linden a deed prepared in accordance with clause 6 of Mr Linden’s letter of 3 December and executed by his clients. That crossed in the mail a similar deed prepared by Mr Linden. The two deeds are not identical in their terms, which would indicate different understandings between the two solicitors as to what was intended by the letters relied on by the defendant as constituting an agreement. Indeed, in the event, the parties were unable to agree on the form of the deed. On 27 April 1998 Mr Linden wrote to Mr Tiernan in the following terms (omitting formal parts):
It is clear that our clients cannot agree on the effect of the agreement in December 1997 or on terms of a deed of arrangement. My client does not wish to discuss the matter nor engage in any further correspondence.
My client will be pursuing its rights to recover the outstanding debt.
The leading case on this issue is Masters v Cameron[1] where the High Court (Dixon CJ, McTiernan and Kitto JJ) said:
Where parties who have been in negotiation reach agreement upon terms of a contractual nature and also agree that the matter of their negotiation shall be dealt with by a formal contract, the case may belong to any of three classes. It may be one in which the parties have reached finality in arranging all the terms of their bargain and intend to be immediately bound to the performance of those terms, but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect. Or, secondly, it may be a case in which the parties have completely agreed upon all the terms of their bargain and intend no departure from or addition to that which their agreed terms express or imply, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document. Or, thirdly, the case may be one in which the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract.
In each of the first two cases there is a binding contract: in the first case a contract binding the parties at once to perform the agreed terms whether the contemplated formal document comes into existence or not, and to join (if they have so agreed) in settling and executing the formal document; and in the second case a contract binding the parties to join in bringing the formal contract into existence and then to carry it into execution. Of these two cases the first is the more common. Throughout the decisions on this branch of the law the proposition is insisted upon which Lord Blackburn expressed in Rossiter v. Miller (1878) 3 App. Cas. 1124 when he said that the mere fact that the parties have expressly stipulated that there shall afterwards be a formal agreement prepared, embodying the terms, which shall be signed by the parties does not, by itself, show that they continue merely in negotiation. His Lordship proceeded: " ... as soon as the fact is established of the final mutual assent of the parties so that those who draw up the formal agreement have not the power to vary the terms already settled, I think the contract is completed". (1878) 3 App. Cas., at p. 1151: see also Sinclair, Scott & Co. Ltd. v. Naughton (1929) 43 C.L.R. 310, at p. 317.
. . .
Cases of the third class are fundamentally different. They are cases in which the terms of agreement are not intended to have, and therefore do not have, any binding effect of their own: Governor &c. of the Poor of Kingston-upon-Hull v. Petch (1854) 10 Exch. 610 [156 E.R. 583]. The parties may have so provided either because they have dealt only with major matters and contemplate that others will or may be regulated by provisions to be introduced into the formal document, as in Summer-greene v. Parker (1950) 80 C.L.R. 304 or simply because they wish to reserve to themselves a right to withdraw at any time until the formal document is signed. These possibilities were both referred to in Rossiter v. Miller (1878) 3 App. Cas. 1124. Lord O'Hagan said: "Undoubtedly, if any prospective contract, involving the possibility of new terms, or the modification of those already discussed, remains to be adopted, matters must be taken to be still in a train of negotiation, and a dissatisfied party may refuse to proceed. But when an agreement embracing all the particulars essential for finality and completeness, even though it may be desired to reduce it to shape by a solicitor, is such that those particulars must remain unchanged, it is not, in my mind, less coercive because of the technical formality which remains to be made" (1878) 3 App. Cas., at p. 1149. And Lord Blackburn said: "parties often do enter into a negotiation meaning that, when they have (or think they have) come to one mind, the result shall be put into formal shape, and then (if on seeing the result in that shape they find they are agreed) signed and made binding; but that each party is to reserve to himself the right to retire from the contract, if, on looking at the formal contract, he finds that though it may represent what he said, it does not represent what he meant to say. Whenever, on the true construction of the evidence, this appears to be the intention, I think that the parties ought not to be held bound till they have executed the formal agreement" (1878) 3 App. Cas., at p. 1152. So, as Parker J. said in Von Hatzfeldt-Wildenburg v. Alexander (1912) 1 Ch. 284, at p. 289 in such a case there is no enforceable contract, either because the condition is unfulfilled or because the law does not recognize a contract to enter into a contract.
The defendant sees this as a case of the first kind; the plaintiff sees it as a case of the third kind.
[1](1954) 91 CLR 353 at 360-361
Mr Pirrie, for the defendant, relied on the actions described in [9] above, and Mr Linden’s concession in his letter of 27 April 1998 that there was “an agreement in December 1997”, as evidencing the intention of the parties to be immediately bound by that agreement, proposing only to have the terms of the agreement restated in a form which would be fuller or more precise, but not different in effect.
I note, however, that both Mr Tiernan and the defendant, in oral evidence, conceded that each of conditions 6 and 8 of Mr Linden’s letter of 3 December 1997 required the execution of a further document. It is to be noted that condition 6, in particular, envisages the possibility that the proposed deed will not be executed within the 21 days prescribed. The expression “my client is willing to agree to a scheme of arrangement” in Mr Linden’s letter would seem to indicate a concern that his client should not be bound at that stage.
Mr Bearman submitted that, given that the defendant was in breach of section 222ALA(5) of the Tax Act, and thus by virtue of that provision the whole of the balance owing under the original agreement had then become due and payable, there was nothing which the Commissioner could do by way of agreement to make that amount not payable. In support for that proposition he relied on Federal Commissioner of Taxation v Wade[2] where Kitto J said:
No conduct on the part of the Commissioner could operate as an estoppel against the operation of the Act.
So, he submitted, the Commissioner was not in a position to effect any variation to the original agreement made under section 222ALA(1) by anything short of a written agreement given statutory authority by section 222ALA(7). However, the original agreement was a simple agreement to pay specified amounts on specified days. Once the balance had become due, by virtue of the operation of sub-section (5), on the defendant’s failure to pay those amounts, there was effectively no agreement to be varied under sub-section (7), because the contractual obligation to pay those amounts was replaced by a statutory obligation to pay the whole of the balance owing.
[2](1951) 84 CLR 105 at 117
Mr Bearman submitted further that as section 222ALA(7) provided for an agreement varying an agreement under section 222 ALA to be made “by the Commissioner”, such an agreement, to be effective, must be executed by or on behalf of the Commissioner or someone authorised by the Commissioner for the purposes of that section. He relied on the passage from the judgment of Gibbs CJ in O’Reilly v State Bank of Victoria Commissioners[3] where his Honour said:
There can be no doubt that as a general proposition at common law a person sufficiently "signs" a document if it is signed in his name and with his authority by somebody else, but if by statute a document has to be personally signed the duty of signing cannot be delegated to a third person: see London County Council v. Agricultural Food Products Ltd. [1955] 2 Q.B. 218, at pp. 223-224. Exactly the same principles apply when the power is given by statute to a designated person to issue a notice. The notice may be given by the authorized agent of the designated person, whose act will be the act of the principal, unless the statute on its proper construction requires the notice to be issued only by the person who is designated.
He submitted that, as Mr Linden had signed the letter of 3 December 1997 as a solicitor, on the letterhead of the Australian Government Solicitor, even if he had some delegation or authority on behalf of the Commissioner, he had not purported to sign in that capacity, and accordingly it could not be said that the Commissioner had entered into any agreement by virtue of Mr Linden’s signature of the letter.
[3](1983) 153 CLR 1 at 11
Mr Pirrie submitted that in the events described in [9] above, the plaintiff had taken the fruits of an amending agreement and had then refused to be bound by it. However, it should be remembered that the original agreement was not a contract involving the creation of new rights and liabilities, such as a contract to provide goods or services in return for payment. The original agreement was made pursuant to a statutory power conferred on the Commissioner to agree to the discharge by instalments of what was in this case a substantial existing liability to the Commonwealth. Any “fruits” received by the Commissioner were no more than part reduction of that existing liability.
Having considered the matter, I accept the submissions of Mr Bearman. I am satisfied that the correspondence of 26 November and 3 December 1997 did not operate to vary the original agreement made under section 222ALA(1) on 19 March 1997. Counsel may wish to make submissions as to the form of the orders and as to costs.
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