Deputy Commissioner of Taxation v Moss

[2003] VSC 294

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE

COMMON LAW DIVISION

No. 5602 of 2000

DEPUTY COMMISSIONER OF TAXATION OF COMMONWEALTH OF AUSTRALIA	Plaintiff
V
CHRISTOPHER MOSS	Defendant

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JUDGE:	SMITH J
WHERE HELD:	Melbourne
DATE OF HEARING:	23 and 24 July 2003
DATE OF JUDGMENT:	14 August 2003
CASE MAY BE CITED AS:	Deputy Commissioner of Taxation v Moss
MEDIUM NEUTRAL CITATION:	[2003] VSC 294

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Income Tax – s 222ALA agreement – expectation of director of compliance with agreement – reasonableness of expectation – whether reasonable steps taken to comply.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Ms. C. Mavroudis	ATO Legal Practice
For the Defendant	Mr. S. P. Hardy	The Law Offices of Barry Fried

HIS HONOUR:

Proceeding

1. The plaintiff seeks to recover the sum of $ 253,130.87 from the defendant pursuant to Section 222 AQA of the Income Tax Assessment Act 1936 ("the Act"). That section provides that where a company makes an agreement with the Commissioner of Taxation under Section 222ALA of the Act, the directors of the company must cause the company to comply with the agreement. It also provides that if the company contravenes the agreement, each person who is a director of the company at any time between the day of the agreement and the day of the contravention is liable to pay to the Commissioner, by way of penalty, the amount equal to the balance payable under the agreement. There are statutory defences available to directors relied upon by the defendant. I will refer to them in due course.

Background facts

1. It is common ground that the defendant is and was at all relevant times a director of a company Wardhire Pty. Ltd (the company). It failed to pay certain group tax liabilities. On 8 July 1997, the defendant, on behalf of the company, entered into an agreement with the Commissioner of Taxation pursuant to Section 222ALA of the Act under which the company agreed to make payments to discharge the debt totalling $253,130.87, as follows: --

$50,000 on or before 1 September 1997;

$50,000 on or before 30 September 1997;

$50,000 on or before 30 October 1997;

$50,000 on or before 1 December 1997;

$50,000 on or before 31 December 1997; and

$3,130.87 on or before 30 January 1998. 

The company failed to make any of the specified payments and so defaulted under the agreement.  The total debt remains unpaid.

1. Subject to the statutory defence provided by Section 222AQD of the Act, the plaintiff is entitled to recover the amount of $253,130.87 from the defendant. I turn to the issue of the statutory defences.

The defences

1. Section 222 AQD relevantly provides as follows;

"(1)     This section has effect for the purposes of:

(a)proceedings to recover from a person a penalty under section 222AQA; or

(b)proceedings under section 222AQC against a person of the kind referred to in paragraph 222AQC(d).

. . .

(3)     It is also a defence if it is proved that:

(a)the person took all reasonable steps to ensure that the company complied with the agreement; or

(b)there were no such steps that the person could have taken.

(4)     In subsection (3):

"reasonable" means reasonable having regard to:

(a)when, and for how long, the person was a director and took part in the management of the company; and

(b)all other relevant circumstances.

(5)If the person was a director of the company at the time when the agreement was made, he or she is not entitled to rely on a defence under subsection (2) or (3) unless it is also proved that, at the time, the person had reasonable grounds to expect, and did expect, that the company would comply with the agreement."

1. It is common ground that in determining whether reasonable steps were taken or whether there were reasonable grounds, at the time of the agreement, to expect that the company would comply with the agreement, it is necessary to consider what a reasonable person in the position of the defendant would or ought to have known at the time.[1]  As to the other aspect, the concept of expectation involves more than mere hope or possibility.  It involves a prediction as to events and the prediction must be sufficiently reliable for it to be regarded as reasonable.[2]

   [1] Deputy Commissioner of Taxation v Ruddy (2001) Queensland Lawyer Reports 65, paragraphs 30, 31 and 37; Maclean Tecnic v Digi-Tec (2002) 55 NSWLR. Deputy Commissioner of Taxation v Solomon (2003) 52 A. T. R. 729.; 

   [2] Deputy Commissioner of Taxation v Ruddy(above); Deputy Commissioner of Taxation v Moss [2003]333 and cases there cited.

1. It is also common ground that the defendant carries the onus of proving the statutory defences.

Defendant's submissions

1. Counsel for the defendant submitted that his client had, at the time of the agreement, reasonable grounds to expect and did expect that Wardhire Pty Ltd would comply with the agreement. He submitted that there was a reasonable expectation at the relevant time that the company would be able to make payments out of funds provided by the group of companies controlled by him.  Those funds would be made available in return for the company making its tax losses available to those providing the funds.  In particular, the expectation at the time was that business profits would be generated by a new company Snow White Milling Company which it was intended would acquire a milling business.  The other businesses in the group controlled by the defendant were not generating income.  Specifically it is put that the expectation at the relevant time was that the milling business would be acquired and would provide the necessary cash flow to enable the tax losses of the company to be used and to provide the funds required to meet the obligations under the agreement.  It is put that, on the evidence, the defendant had this expectation and it was a reasonable one.  Counsel submitted that although a loan was required to enable the company to acquire the business, the defendant knew that a loan facility had been approved and it was reasonable for him in all the circumstances to expect that loan to proceed and the purchase to proceed.

1. Counsel for the defendant also submitted that the defendant had taken all reasonable steps to ensure that the company complied with the agreement.  He submitted that regard should be had only to steps taken after the agreement.  Further, counsel submitted that the defendant could not have been expected to do more than he did, in taking reasonable steps, to pursue the purchase of the business and the obtaining of finance from the National Australia Bank for that purpose.  In particular, it was put that a director is not obliged to establish the defence by providing money from his or her own personal resources or to provide funds in circumstances where it is clear that they will be lost.

1. Counsel for the defendant also submitted that once the bank withdrew its offer of funding, there were no steps that the defendant could take to ensure that the company complied with the agreement.[3]

   [3]S 222 AQD(3)(b).

Reasonable Expectation -- Analysis

1. In response, counsel for the plaintiff referred to a number of matters arising from the evidence.  I suggest that the following are of particular relevance:

•at the time of the agreement the company had not been trading for approximately 12 months, its cash flow was almost non-existent and the Trust, of which it was trustee, owed substantial sums to creditors including secured creditors;

•all the company's assets were the subject of a debenture and a fixed and floating charge held by the National Australia Bank;

•the defendant's group of companies owed the National Australia Bank $1.8 million;

•unless the purchase of the mill proceeded, and proceeded expeditiously, there was no cash flow sufficient to meet the terms of the agreement;

•at the time of the agreement, the only source of the bulk of the $1.35 million required to purchase the mill was the loan offer from the National Australia Bank;

•         the Bank, however, was not prepared to lend more than $1 million;

•as to the balance of $350,000.00, the defendant gave evidence that he had paid $143,000.00 by way of deposit but provision of the remaining $157,000.00 was still to be organised;

•the offer from the bank was conditional, among other things, on an updated sworn valuation of the mill property, a personal guarantee from the defendant and a first mortgage[4] over a house property owned by the defendant in Brunswick;

•at the time of the agreement, an updated sworn valuation had not been provided and no steps had been taken to discharge the first mortgage or to have additional funds in place for that purpose;

•the proposed borrower and purchaser of the mill business and property, Snow White Milling Company Pty Ltd, did not exist at the time of the agreement.[5]

•Snow White Milling Company Pty Ltd did not have funds to meet the agreement obligations or to enable the company to do so; [6]

•         the defendant had had no experience in the flour mill industry. 

The defendant has led no evidence that, at the time of the agreement, he or anyone on his behalf had done any calculations to determine whether there would be sufficient income from the business to meet both the commitment to the Bank and to the plaintiff.  The defendant produced some cash flow spreadsheets but did not offer a detailed analysis to support an argument, on the basis of the figures shown, that payment to the plaintiff pursuant the agreement was reasonably possible.  Absent confirmation of the figures from a qualified accountant, however, I am not prepared to accept the cash flow projections as realistic.

[4] The documentary evidence is to be preferred to the unsatisfactory oral evidence led for the defendant suggesting that the requirement of the bank was for a second mortgage. 

[5] The defendant registered a company Independent Mills Pty Ltd, on 1 July 1997.  It purported to accept the Bank’s offer but the defendant had failed to produce the required notice to the Bank that the offer would be accepted by that company instead of Snow White Milling Company Pty Ltd.

[6] Nor did Independent Mills Pty Ltd.

1. No evidence has been led that any specific or detailed analysis had been carried out by a qualified person to establish how the tax losses could be used and the likely impact on the availability of funds to meet the debt.  No such analysis was proffered in this trial.

1. In further submissions the parties have analysed the legal feasibility of the company using its tax losses to secure the funding to pay its debt to the plaintiff.  That analysis raises several fundamental obstacles that the defendant and the company had not addressed at the time of the agreement.

•The companies involved, in any tax loss arrangements had to be members of the same wholly owned group.[7]  The Moss group did not come within the definition of "wholly owned group"[8] because the shares were owned by individuals.

•The companies involved in any tax loss arrangements had to have been in existence during part of the loss year, the deduction year and any intervening year[9].  Independent Mills Pty Ltd and Snow White Milling Co Pty Ltd did not meet that requirement and would, therefore, not have been able to use the tax losses.

•An agreement to transfer tax losses had yet to be reached.

[7]Income Tax Assessment Act 1997 Subdivision 170-A; s 170-5(2) and 170-30(2).

[8]One a 100% subsidiary of the other or each a 100% subsidiary of the same third company.

[9]S 170-30(1) of ITAA 97.

1. As to the further funding required for the removal of the first mortgage and for the purchase of the business and property, the defendant has placed no evidence before the court

•of any steps having been taken prior to or subsequent to the agreement to organise such funds;

•from any independent source, to suggest that such funding would have been available.

1. Finally, there is no evidence that any concluded or enforceable agreement had been reached for the purchase of the business and property of the mill.

1. In light of the above matters, I have come to the conclusion that the defendant had at best a hope and not an expectation that funds could be found to meet the obligations under the agreement.  Further, having regard to the parlous state of the defendant's group of companies, and the lack of any proper consideration of the proposal and its extremely preliminary state, the defendant could not have had a reasonable expectation that the company would comply with the agreement.  There was no reasonable basis for thinking that the additional funding needed could be obtained.  Alternatively, the failure of the defendant to place before the Court the

   
   

   above-mentioned evidence has the result that he is unable to prove on the balance probabilities that any hope or expectation he may have had was reasonable.

1. I note that on 10 July 1997 one of the Moss group of companies DJA Manufacturing Pty Ltd provided an amount of  $270,000 to a Mr Larkins at the request of Mr Holko, the then branch manager of the National Australia Bank.  I have also referred above to the payments allegedly made by the defendant in the first half of 1997 totalling approximately $143,000 as deposit for the purchase of the flour milling business.  The defendant has not relied upon the capacity of his group to make these payments to support an argument that he had a reasonable expectation that the agreement with the plaintiff could be met.  Accordingly, they do not need to be considered in that context.  They need to be considered, however, in the context of whether the defendant took reasonable steps to ensure that the company complied with the agreement.

Reasonable Steps -- analysis

1. The payments of $270,000.00 and $143,000.00 indicate that the Moss group was able to find funds prior to the agreement sufficient to meet the debt owed to the plaintiff.  The source of the monies paid to Mr Larkins is unclear.  It may have come from the National Australia Bank credit facility.  It may have come from the proceeds of sale of plant and equipment and other items of property of the company.  On the other hand, the latter may also have been a source of the alleged deposits paid.

1. The defendant, however, has failed to place before the court the financial information required to determine whether, in light of these matters, his conduct was reasonable.  It is therefore, not possible to come to a conclusion as to whether the steps he did take were reasonable or whether there were no steps that he could have taken after the Bank withdrew its conditional approval of the loan in August 1997. 

Conclusion

1. The defendant has failed to discharge the burden of proving that at any material time he took the relevant reasonable steps or was unable to do so.

1. As to the other aspect of the statutory defences, I have come to the conclusion as noted above, that he had at best a hope and not an expectation that the company would be able to comply with the agreement at the time it was made.  Alternatively, on any view, he has failed to place sufficient evidence before the Court to support the conclusion that, assuming he had a bona fide expectation that the company could meet its obligations under the agreement, such an expectation was reasonable.  The defendant has therefore failed to establish the statutory defences and is liable for the amount claimed.

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