Deputy Commissioner of Taxation v Holton
[2016] VCC 516
•17 May 2016
| IN THE COUNTY COURT OF VICTORIA AT MELBOURNE COMMERCIAL DIVISION | Revised Not Restricted Suitable for Publication |
Case No. CI-14-01734
BETWEEN
| DEPUTY COMMISSIONER OF TAXATION | Plaintiff |
| v | |
| DAVID JOHN HOLTON | Defendant |
---
| JUDGE: | HER HONOUR JUDGE KENNEDY | |
| WHERE HELD: | Melbourne | |
| DATE OF HEARING: | 4 and 5 May 2016 | |
| DATE OF JUDGMENT: | 17 May 2016 | |
| CASE MAY BE CITED AS: | Deputy Commissioner of Taxation v David John Holton | |
| MEDIUM NEUTRAL CITATION: | [2016] VCC 516 | |
REASONS FOR JUDGMENT
---
Catchwords: Taxation – director’s liability for penalties for unpaid employee deductions - whether defences available under section 269-35 of Schedule 1 of the Taxation Administration Act 1953 – whether for some good reason it was unreasonable to take part, and the director did not take part, in the management of the company - whether, alternatively, the director took all relevant reasonable steps or there were no reasonable steps he could have taken – defences not sustained
---
APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr T. Connard | Australian Taxation Office |
| For the Defendant | In Person | ------------ |
HER HONOUR:
The Deputy Commissioner of Taxation (“the DCT”) seeks the sum of $264,043.00 in director penalties against the defendant, Mr David John Holton (“Mr Holton”). The penalties related to Pay-As-You-Go (“PAYG”) amounts withheld but not paid by a company, Profile Marketing Pty. Ltd. (“the Company”), under Division 12 in Schedule 1 of the Taxation Administration Act 1953 (Cth) (“the TAA”) which amounts were due on various dates between 21 December 2011 and 27 May 2013.
Mr Holton did not dispute the “debt” itself, but sought to rely on defences under section 269-35 of the TAA. This was appropriate given the primary liability of the Company was established by reason of an affidavit of Ms Usha Ganapathy (“Ms Ganapathy”) sworn 2 May 2016 and also by reason of the defendant’s failure to respond to a Notice to Admit dated 11 April 2015.[1]
[1] Pursuant to Rule 35.03(2) of the County Court Civil Procedure Rules 2008, the defendant is taken to have admitted the matters contained in that Notice to Admit.
In the result, there were two issues in the case.
Firstly:
· Whether Mr Holton took all reasonable steps to ensure that the directors:
(i) caused the company to comply with its obligations;
(ii) caused an administrator of the company to be appointed;
(iii) caused the company to begin to be wound up; or
· There were no reasonable steps he could have taken to ensure that any of those things happened.[2]
[2] Defence of the defendant, dated 12 June 2014 at paragraph 8(a) and (b).
The second issue in the case was whether, for some good reason, it would have been unreasonable to expect him to take part, and he did not take part, in the management of the Company after 24 April 2012.[3]
[3] Defence of the defendant, dated 12 June 2014 at paragraph 8(c).
Witnesses
The DCT did not call oral evidence but relied on the affidavit of Ms Ganapathy and the Notice to Admit.
Mr Holton represented himself, gave oral evidence, and was cross examined.
Mr Holton presented as competent, articulate and generally able to coherently present his case consistent with the Defence which had been prepared by his (previous) lawyers.
Background
Mr Holton was appointed director when the Company commenced operations on 18 July 2000. He described himself as Chairman and Chief Executive Officer (“CEO”) during the currency of his directorship. He described the Company as a “mail house” or a direct mail and direct marketing logistics organisation.
Mr Lance Reagan Irby (“Mr Irby”) was appointed as a director on 20 March 2006 and ceased on 26 March 2015. Mr Irby is now bankrupt.
Mr Andrew John Benjamin (“Mr Benjamin”) was appointed on 17 October 2005 and ceased on 5 March 2015. Mr Benjamin is also now bankrupt.
The evidence of Mr Holton was that it was decided between himself and Mr Benjamin that Mr Benjamin’s role was to be “operational and financial” while his was more “forward thinking operations.”
In January 2008, Mr Holton also said that he engaged HLB Mann Judd (Vic) Pty Ltd (“HLB Mann Judd”) to assist Mr Benjamin with financial and compliance issues. Mr Jeff Long (“Mr Long”), a partner at HLB Mann Judd, was the primary contact person. From January 2008 until March 2012, Mr Holton had regular meetings with Mr Long and Mr Benjamin. HLB Mann Judd continued to act until the Company went into administration.
Mr Holton also engaged Mr Stephen Newman (“Mr Newman”), of Kliger Partners Lawyers, as the Company lawyer.
In 2009 and onwards, Mr Holton was also running an organisation named Jetstream Media which was a media communications business developed within the Company “group.”
Mr Holton claimed that he also engaged 3 book-keepers in about 2011, though one retired and the others claimed they could not work with Mr Benjamin.
Mr Holton alleged that Mr Benjamin was cavalier in handling financial matters, such that he needed to pay company debts out of his own funds. Mr Holton claims he injected some $700,000 into the Company from 2007.
More particularly, Mr Holton said he contributed $150,000 of his own funds to pay the State Revenue Office in about 2011. The circumstances were that Mr Holton was handed a notice by the receptionist. He opened it and saw that it was an immediate payment requirement and then fronted Mr Benjamin who said “how did you get a hold of that” and claimed not to have any money to pay it.
In fact from December 2011 there was a series of email correspondence from Mr Long of HLB Mann Judd addressed to Mr Benjamin which was also copied in to Mr Holton. This revealed that HLB Mann Judd was raising regular concerns regarding Australian Taxation Office (“ATO”) matters. Mr Holton conceded that he was aware there were problems with ATO debts as early as this time.
The first “Due Date” for payment of the withheld amounts was 21 December 2011.
April 2012
In an email from Mr Long of 16 April 2012 there is reference to:
·2 years of Outstanding Income Tax Returns for 2010 and 2011;
·an outstanding superannuation debt in excess of $200,000.00; and
·outstanding Business Activity Statements for December 2011 and March 2012.
Further emails then raised concerns as to an outstanding superannuation questionnaire (26 April 2012) and an outstanding superannuation form (11 May 2012).
The evidence of Mr Holton was that in around April 2012 Mr Benjamin expressed interest in acquiring Mr Holton’s share in the Company. This was because Mr Benjamin wished to work up his relationship (alone) with a new client, OPG Global Solutions (“OPG”) (which he had emailed Mr Holton about in September 2011). Mr Holton agreed to sell though there was never an agreement about price.
According to Mr Holton, the relationship between himself and Mr Benjamin thereafter became untenable. Thus, Mr Benjamin sought to effectively “spirit away” the business and to devalue the existing Company to decrease the purchase price he would have to pay Mr Holton.
In fact the Liquidator’s Report lends some support for this given it states:
“In this regard, allegations have been made to the effect that one director had, in conjunction with a major customer of the company, sought to transfer the company’s business away from the existing ownership. In the context of the Administration, this would have had the effect of reducing the value of the business and, by extension, the quantum of funds ultimately available for distribution to the company’s creditors and, in particular, priority (employee) creditors.
Email evidence in the possession of the Liquidators suggests that this may have been the case.”
The Liquidator’s Report also states:
“A review of the company’s bank statements and MYOB accounting records indicate that, since 1 January 2011, a substantial quantum of funds (i.e. in excess of $650,000) was drawn in favour of Andrew Benjamin.
Whilst Mr Benjamin may argue that a portion of these payments may constitute either reimbursement of company expenses paid personally, repayment of loans or director’s drawings, the company’s MYOB records do not adequately describe the nature and purpose of those payments.”
In the result, Mr Holton claims that after 24 April 2012 there was no communication between himself and Mr Benjamin or the other director, Mr Irby, until the day of the administrator’s appointment other than through their lawyers. Also that staff were essentially “against him.” Further, that he ceased drawing funds.
Post April 2012 - May 2013
On 9 May 2012 the National Australia Bank requested information failing which the Company account would be “stopped.”
On 11 May 2012 Mr Newman of Kliger Partners Lawyers wrote to Mr Benjamin (copying in Mr Holton):
“As you know, Profile got into a heap of difficulties last year because of various failures to comply with statutory obligations. It took all of my litigation skills to stave off the company being wound up and a very significant cash injection from David as well.
I genuinely shudder when I see emails from Jeff complaining that compliance requirements have not been met as they should have been, especially those for the ATO which are crucial.”
By email of 17 May 2012 HLB Mann Judd wrote regarding the Company defaulting on its Superannuation Guarantee Charge Payment Arrangement Instalment. The letter also raises concerns that 2 years of Income Tax Returns have not been lodged and notes that 7 Business Activity Statements were also outstanding.
By email of 4 September 2012 Mr Holton raised concerns regarding the lack of accurate financial statements and talks of “historical lies.”
By email of 23 January 2013 Mr Holton was advised that an ATO audit had been scheduled.
On 15 February 2013 Mr Long advised that Director penalty notices would be issued.
The evidence of Mr Holton was that, following this advice, he walked into the office of Mr Benjamin who advised him that he would “fix” the problem which Mr Holton believed at the time.
By email of 3 May 2013 Mr Long’s assistant at HLB Mann Judd then advised of a range of outstanding ATO liabilities as follows:
· PAYG Withholding $303,283;
· GST $221,466;
· Superannuation $151,836; and
· Income Tax $42,292.
The last “Due Date” was then 27 May 2013.
After May 2013
On 19 November 2013 penalty notices were served on Mr Holton.
Mr Benjamin subsequently became bankrupt. However, Mr Holton claims that Mr Benjamin is now working with OPG under a different business name, Profile 3PL Proprietary Limited. Mr Holton claims that Mr Benjamin’s wife is the director of the new entity and that Mr Benjamin is a “shadow director.”
An Administrator was appointed to the Company on 6 June 2014.
The liquidation of the Company then occurred on 3 September 2014.
Provisions
Division 269 in Schedule 1 of the TTA provides for the imposition of penalties on directors of non-complying companies. It provides that directors have a duty to ensure that the Company either meets it obligations or goes promptly into voluntary administration or liquidation.
Section 269-15 provides for a continuing obligation on the director to cause the company to comply with its obligation until compliance occurs or an administrator is appointed or the company begins to be wound up. Section 269-20 then provides that the director is liable to a penalty if at the end of the due day he/she is still under such an obligation.
In terms of defences, the DCT provided the relevant form of section 269-35 of the TTA which provides as follows:
269-35 Defences
Illness
(1) You are not liable to a penalty under this Division if, because of illness or for some other good reason, it would have been unreasonable to expect you to take part, and you did not take part, in the management of the company at any time when:
(a) you were a director of the company; and
(b) the directors were under the relevant obligations under subsection 269-15(1).
All reasonable steps
(2) You are not liable to a penalty under this Division if:
(a) you took all reasonable steps to ensure that one of the following happened:
(i)the directors caused the company to comply with its obligation;
(ii)the directors caused an administrator of the company to be appointed under section 436A, 436B or 436C of the Corporations Act 2001;
(iii)the directors caused the company to begin to be wound up (within the meaning of that Act); or
(b) there were no reasonable steps you could have taken to ensure that any of those things happened.
The onus is on Mr Holton to prove the matters specified above (in section 269-35(4)).
It is therefore important to consider whether Mr Holton has made out these defences on the basis of the evidence adduced.
Whether, for some good reason, it was unreasonable to expect him to take part, and he did not take part, in the management of the company.
As the above chronology reveals, after April 2012 Mr Holton continued to be party to communications from the Company lawyers and accountants and, on his own evidence, was able to instigate a discussion with Mr Benjamin about the penalty notices in February 2013.
However, for the purpose of this defence, I have presumed that Mr Holton did not actually take part in the management of the Company after mid 2012 (as he alleged). The issue therefore becomes whether for some “good reason” it was “unreasonable” to expect him to take part.
In evidence Mr Holton said it was unreasonable for him to take part given his role in Jetstream Media; given the roles were divided such that Mr Benjamin was in charge of financial responsibilities; and also given he was shut out from the Company from April 2012.
However, the involvement of Mr Holton with another business cannot constitute a “good reason” to avoid his responsibilities in respect of the Company.
The division of roles is also insufficient. Thus as stated in Deputy Commissioner of Taxation v Clark (“Clark”) non-participation per se is impermissible. Accordingly, reasons which cause a director never to participate in management are not capable of constituting “good reason” for not participating.[4]
[4] (2003) 57 NSWLR 113 at p144.
Moreover, in DCT v Stenner[5] (“Stenner”), Judge Brabazon states:
It is difficult for a director to escape liability. A director has to show that he or she took no part in the management of the company, and did not do so for some good reason. The fact that he or she was not immediately interested in the financial affairs of the company does not matter, because of the strict requirement of s 222AOJ(2).
[5] [2003] QDC 53 at 32.
In Stenner, the relevant director left the handling of financial difficulties to his co-director father. This was insufficient to constitute a defence.
In Clark, the respondent’s total reliance on her husband in the management of the company was also not a “good reason” for non-participation in the management of the company.
Although there may have been significant relationship issues with Mr Benjamin post April 2012, this is also insufficient. Indeed the obvious concerns about Mr Benjamin’s compliance issues should have caused a much more stringent approach from a CEO than was demonstrated. Even if Mr Holton was not aware (as he claims) of the extent of Mr Benjamin’s misconduct, the email correspondence above demonstrated that there were grave issues with compliance with the Company which meant it was necessary for Mr Holton to take a much more active role.
In such circumstances, the defence is not established as I am not satisfied that for “some good reason” it was unreasonable to expect Mr Holton to take part in the management of the Company.
Whether reasonable steps taken
The test incorporated in the provision is an objective test. In Deputy Commissioner of Taxation v Saunig[6] (“Saunig”), Heydon JA (as he then was) states that the provision gives a defence if the defendant proves that he or she “took all steps which were reasonable, having regard to the circumstances of which the defendant, acting reasonably, knew or ought to have known, to ensure that the directors complied” with the provision.
[6] (2002) 43 ACSR 387 at 25.
In closing Mr Holton submitted that he took reasonable steps given he:
· arranged for Mr Benjamin to take responsibility for finance/compliance;
· engaged HLB Mann Judd (Mr Long) in 2008 which was continuing as well as 3 book-keepers and a lawyer;
· maintained regular contact with his professional advisors including by attending meetings with Mr Long; and
· contributed funds to meet obligations.
However, as already noted, the delegation of the financial affairs to another director is insufficient.[7]
[7] Deputy Commissioner of Taxation v Clark (2003) 57 NSWLR 113; Deputy Commissioner of Taxation v Stenner [2003] QDC 53.
Moreover, even if there might be circumstances wherein a director might rely on information given by another director, there was no basis for such a principle to operate here. Thus, as Mr Holton was aware, the Company was already having extensive compliance issues under the management of Mr Benjamin.[8] There was also no evidence that he received any assurances whatsoever about compliance with the PAYG obligations.[9]
[8] And see Canty v Deputy Commissioner of Taxation (2005) 63 NSWLR 152, 161.
[9] And see Roche v DCT [2015] WASCA 196, 45.
Although Mr Holton did engage advisors, his evidence was that he did not understand that the Company had any obligations in respect of income tax amounts withheld from salaries of employees “until after it actually occurred.” At one stage Mr Holton also said he could not recall if he had a specific discussion about his own personal exposure to the ATO. However, Mr Holton ultimately gave evidence that he did not actually ask his advisors about his own or the other directors’ liabilities for unpaid PAYG.
As highlighted already, the test is also what he “ought to have known” not what he actually did know. As outlined in Saunig, it is incumbent on a director to ascertain what a company’s duties were in respect of tax instalments deducted from wages and to ensure that there was some system in place to ensure compliance.[10] This he did not do, apparently because he did not directly broach the matter with his advisors.
[10] Deputy Commissioner of Taxation v Saunig (2003) 43 ACSR 387 28; Roche v Deputy Commissioner of Taxation [2015] WASCA 196, 44 – 45.
The contributing of funds per se is also of no utility given no effort appears to have been directed to ensuring there was actually compliance with remitting the PAYG instalments themselves.
In Saunig the relevant defence was not made out notwithstanding that the director took measures to calculate what was owing and tried to raise money to pay it. Further that he contacted the ATO and tried to resolve the matter as well as having meetings with directors and trying unsuccessfully to put the Company into liquidation.[11]
[11] Deputy Commissioner of Taxation vSaunig (2002) 43 ACSR 387, 7.
This is to be compared with the present case wherein Mr Holton appeared to take no steps to become aware of the amounts outstanding nor to pay them. In particular, he appears to have not asked his advisors about this liability given he simply never turned his mind to the issue.
Mr Holton further made no attempts to arrange a meeting of directors and/or to persuade them to put the Company into administration or liquidation. In closing Mr Holton alleged that his advisors did not tell him that the Company should be wound up or placed in administration, and, further, that he never held the view that the Company was insolvent. However, his subjective beliefs/knowledge are of no assistance given the objective nature of the test. In any event, when asked under cross examination as to why he did not appoint an administrator or wind up the Company his answer was because they were “buying him out” anyway (with no mention made about the lack of advice). Mr Holton also should have been gravely concerned about the ability of the Company to meet its obligations given the tenor of the email correspondence already cited.
In such circumstances I am unable to be satisfied that Mr Holton took all reasonable steps to ensure that the requisite steps were taken.
The result is that the defence raised is rejected.
The result may be seen as harsh given Mr Holton appears to be less blameworthy than his co-director. However, as Heydon JA states in Saunig:
The harshness was no doubt seen as appropriate, because the evils of taxpayers deducting taxation payments from employees’ wages and not passing them to the authorities are considerable and perhaps widespread. The evils are not limited to the tax avoided: they extend to the use made of the money, namely either theft or use as working capital, thereby permitting companies to continue to trade which in truth are not capable of continuing to trade lawfully. To adopt the language of Gzell J in Deputy Commissioner of Taxation v George [2002] NSWCA 336; BC200206048 at [33] “an early sign of problems in a company is its living on the false reserves of non-remitted” deductions from employees’ wages….”[12]
[12] Ibid at 29.
Whether no reasonable steps he could have taken
As highlighted already, there were, objectively, a number of steps Mr Holton could have taken, including putting systems in place to ensure compliance; paying the amounts owing; and calling a meeting of directors. There was also no evidence that Mr Holton even tried to persuade his other directors to place the Company into administration and/or liquidation.
This defence is not established.
Conclusion
The defences are not established.
The result is that the plaintiff is entitled to judgment of $264,043.00.
I will hear from the parties on the form of final order including the question of costs.
5
7
0