Deputy Commissioner of Taxation v Roche
[2014] WASC 222
•26 JUNE 2014
DEPUTY COMMISSIONER OF TAXATION -v- ROCHE [2014] WASC 222
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2014] WASC 222 | |
| Case No: | CIV:2705/2013 | 27 MAY 2014 | |
| Coram: | MASTER SANDERSON | 26/06/14 | |
| 12 | Judgment Part: | 1 of 1 | |
| Result: | Judgment entered for plaintiff | ||
| B | |||
| PDF Version |
| Parties: | DEPUTY COMMISSIONER OF TAXATION SEAN McDERMOTT ROCHE |
Catchwords: | Taxation Application for summary judgment Whether director had 'good reason' for not causing company to make required tax payments Turns on own facts |
Legislation: | Nil |
Case References: | Deputy Commissioner of Taxation v Clark [2003] NSWCA 91 Deputy Commissioner of Taxation v Woodhams [2000] HCA 10; (2000) 199 CLR 370 Miller v Deputy Commissioner of Taxation (1997) 38 ATR 51 Scobie v Deputy Commissioner of Taxation (1995) 59 FCR 177 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CHAMBERS
- Plaintiff
AND
SEAN McDERMOTT ROCHE
Defendant
Catchwords:
Taxation - Application for summary judgment - Whether director had 'good reason' for not causing company to make required tax payments - Turns on own facts
Legislation:
Nil
Result:
Judgment entered for plaintiff
Category: B
Representation:
Counsel:
Plaintiff : Ms C H Thompson & Ms J S M Ding
Defendant : Mr C S Williams
Solicitors:
Plaintiff : Deputy Commissioner of Taxation (Cth)
Defendant : Solomon Brothers
Case(s) referred to in judgment(s):
Deputy Commissioner of Taxation v Clark [2003] NSWCA 91
Deputy Commissioner of Taxation v Woodhams [2000] HCA 10; (2000) 199 CLR 370
Miller v Deputy Commissioner of Taxation (1997) 38 ATR 51
Scobie v Deputy Commissioner of Taxation (1995) 59 FCR 177
1 MASTER SANDERSON: This is the plaintiff's application for an extension of time to bring a summary judgment application and the summary judgment application. These proceedings were commenced by writ issued 7 November 2013 and served on 27 November 2013. The defendant entered an appearance on 6 December 2013. The plaintiff brought this summary judgment on 28 February 2014 - some two months out of time (allowing for the Christmas recess).
2 The plaintiff relies on an affidavit of Suzanne Carol Bradshaw sworn 26 February 2014 and an affidavit of Melissa Anne Spurge sworn 28 February 2014. Ms Spurge in her affidavit explains the delay. Essentially the parties were attempting to negotiate a settlement. The negotiations were undertaken in good faith on both sides. The defendant has suffered no prejudice as a consequence of the delay. There was no serious opposition to the extension being granted. Accordingly the plaintiff will have the necessary extension to bring the summary judgment application.
3 The plaintiff's claim is relatively straight forward. Working from the statement of claim it can be summarised as follows. At all relevant times the defendant was a director of a company known as Fuel Tank & Pipe Pty Ltd. The company withheld tax payable by its employees under div 12 in sch 1 to the Taxation Administration Act 1953 (Cth) (TAA). It is alleged the company failed to meet its obligations under subdivision 16-B in sch 1 of the TAA and pay each amount withheld to the Commissioner. In all, 18 payments which should have been made were not made. The first payment was due on 28 July 2011 and the last on 21 March 2013.
4 The plaintiff alleges the defendant as a director of the company is liable for the payments not made. This is because pursuant to s 269-15 in sch 1 of the TAA the defendant had not caused the company to make payment of its tax liabilities, an administrator had not been appointed to the company nor had the company been wound up. The plaintiff pleads the defendant became liable to pay the tax as a penalty by force of s 269-20(1) in sch 1 of the TAA. Effectively the defendant is said to be personally liable for the money owed to the plaintiff and withheld from the company's employees.
5 Before the summary judgment application was lodged the defendant filed a defence. It is convenient by reference to that pleading to set out the defendant's response to the plaintiff's claim. He does not deny he was a director of the company nor does he deny there was a failure by the company to make payment of tax withheld. Rather it is pleaded the defendant took reasonable steps to ensure that the directors of the company caused the company to comply with its obligations under the provisions of the TAA. The defendant has provided particulars of those reasonable steps and they read as follows:
A. During the period 1 June 2011 to 21 March 2013, FTP experienced cash flow difficulties as a result of the global financial crisis and as a result of the announcing of Mineral and Resources Rent Tax.
B. The defendant received advice from officers and employees of FTP that, notwithstanding those cash flow difficulties, FTP would be able to continue trading and meet all of its liabilities.
C. In or about early 2013, the defendant received advice from officers and employees of FTP that some of its shareholders had negotiated for a third party to make an investment in FTP which would result in FTP being advanced sufficient funds to ensure that all of FTP was able to pay all of its liabilities.
D. In or about June 2013, Mr Raine and other officers and employees of FTP, specifically Geoff Wilton and Darryl Newman, without the defendant's knowledge, consent or approval:
(i) caused to be incorporated Complete Hydrocarbon Systems and Solutions Pty Ltd ('CHSS');
(ii) caused CHSS to commence carrying on business in competition to business of FTP;
(iii) caused commercial opportunities of FTP to be diverted to CHSS; and
(iv) caused parties to contracts with FTP to fail to comply with the obligations owed by those parties to FTP under those contracts.
E. But for the conduct of Messrs Raine, Wilton and Newman described in particular D above, the transaction described in particular C above would have proceeded and all of FTP's liabilities, including any obligations arising under Subdivision 16-B of the Schedule, would have been met by FTP.
6 The defendant then says pursuant to s 269-35(2) in sch 1 of the TAA the defendant is not liable to any penalty pursuant to s 269-20.
7 There is a further defence raised. This is found in par 8 of the defence. It is in the following terms:
8. Further or alternatively:
8.1 on 2 August 2013, the plaintiff gave the defendant notice under s.269-25 of the Schedule in relation to the penalties claimed in this action;
8.2 on 23 August 2013, the defendant caused an administrator to be appointed to FTP under s.436A of the Corporations Act 2001; and
8.3 by reason of the matters pleaded in sub-paragraphs 8.1 and 8.2 above, if any of the penalties claimed by the plaintiff in this action were imposed upon the defendant pursuant to s 269-20 of the Schedule (which is denied), those penalties were remitted pursuant to s.269-30(1) of the Schedule.
8 It is now necessary to set out the facts in a little more detail.
9 The company was incorporated on 13 September 2006 and was at all material times an employer which was liable to withhold PAYG withholdings from payments made to employees. Whilst the company notified the plaintiff through the lodgment of business activity statements (BAS) and instalment activity statements (IAS) that it had withheld amounts in the 18 monthly periods between 1 June 2011 and 28 February 2013 it failed to file any of the BAS or IAS within three months of their due dates. Thus it failed to notify the Commissioner in time of the amounts withheld.
10 The company was liable to remit the amounts withheld on various dates generally being within 21 days after the end of the period to which the BAS or IAS related. The company did not pay any of the amounts withheld on or before their due dates. On 23 August 2013 the company was placed in administration and on 23 September 2013 it was placed into liquidation.
11 The defendant was a director and the secretary of the company from its incorporation and has never resigned those appointments.
12 It is the plaintiff's position as a result of each of the defaults the defendant became liable to pay the plaintiff a penalty of an amount equal to the company's unremitted PAYG amounts: see s 269-20 of sch 1 of the TAA; Scobie v Deputy Commissioner of Taxation (1995) 59 FCR 177, 182. Prior to the issue of a penalty notice the penalty was payable to the Commissioner but not then recoverable by him: see Deputy Commissioner of Taxation v Woodhams [2000] HCA 10; (2000) 199 CLR 370.
13 A director becomes personally liable to pay a penalty of an amount equal to the unpaid amount if they fail to comply with a notice under s 269-15 in sch 1 of the TAA within 21 days.
14 The company did not notify the Commissioner by way of BAS or IAS of the amounts withheld for the periods between 1 June 2011 and 28 February 2013 within three months of their respective due dates. The first notification for any of the withholding periods the subject of this action was on 12 April 2013 with the filing of IAS for the periods 1 October 2011 to 31 October 2011 and 1 November 2011 to 30 November 2011.
15 On 2 August 2013 a director penalty notice (DPN) pursuant to s 269-25 in sch 1 of the TAA was prepared and sent to the defendant. The DPN does not itself impose a liability or create a right of action. It is a pre-requisite to commencing proceedings to recover the penalty.
16 As of 24 August 2013 the plaintiff was entitled to commence recovery proceedings for the debt due by the company for which the defendant was liable as a director. There is no dispute between the parties as to the issue and service of the DPN. The plaintiff was entitled to commence proceedings when he did.
17 By reason of s 255-45 in sch 1 of the TAA, the evidentiary certificate is prima facie evidence that the amount is a debt due and payable by the defendant to the Commonwealth as at 26 February 2014. It is clear then subject to any defence which may be arguable the plaintiff is entitled to summary judgment.
18 For present purposes s 269-35(2) and (3) in sch 1 of the TAA are relevant. They are in the following terms:
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.
(3) In determining what are reasonable steps for the purposes of subsection (2), have regard to:
(a) when, and for how long, you were a director and took part in the management of the company; and
(b) all other relevant circumstances.
20 He says he had periodic meetings with his father and the company's financial controller one Bob Williams. From time to time he was shown cash flow projections for the company and provided with an explanation of the company's outstanding liabilities, its expected expenses and expected revenue. He also saw some cash flow projections but appears not to have considered these in detail.
21 Without providing any supporting detail the defendant says he was told by Mr Williams the company would earn enough money to pay its liabilities. It was not until early 2013 he was advised by his father and Mr Williams that the company was in financial difficulty and would need an equity injection to survive. Initially it appeared that such an equity injection could be arranged. However that did not come to pass and the company eventually stopped trading.
22 What is striking about the evidence of the defendant is its lack of detail. Presumably it reflects the level of his involvement with the day to day operations of the company. Clearly then he knew little of what was happening and how the company was placed financially. He appears to have been what is sometimes called a 'sleeping director'. Being a sleeping director is a very dangerous pastime.
23 The affidavit of Mr Desmond Roche goes into more detail. He says between 2006 and 2013 he was employed as the general manager of the company. He was involved with its day to day affairs. He says around 2011 the company started to experience cash flow difficulties. He confirms the need for a cash flow injection and the failure to raise the necessary capital.
24 Paragraphs 14 - 51 (the last paragraph) of the affidavit then deal with a series of contracts and detail the way in which the company's fortunes declined to the point where it was placed in administration. The plaintiff objected to these paragraphs as irrelevant. In my view the objection is well made. The defence raised is the defendant took 'all reasonable steps' to cause the company to comply with its obligations. What the defendant actually did is what is important. It can be accepted the fortunes of the company within the relevant period declined. But that is not the issue between the parties. It is what the defendant did that is relevant.
25 There appears to be no cases directly dealing with the point in issue. But there are two decisions of the New South Wales Court of Appeal from which some assistance can be derived. The first is Miller v Deputy Commissioner of Taxation (1997) 38 ATR 51. That case dealt with s 222API(3) of the Income Tax Assessment Act 1936 (Cth) which in broad terms was the precursor to s 269-35(2) in sch 1 of the TAA. The Deputy Commissioner had issued penalty notices against a director and obtained summary judgment in the District Court. The Court of Appeal was dealing with an appeal against the entry of summary judgment. One of the arguments put was that the director had taken all reasonable steps to ensure the company complied with its obligations. The section set out four steps which the director could take which would absolve him of liability. Dealing with the section Mason P said:
What the directors have to do to comply with s222APB(1) is cause the company to do at least one of the four matters. If none of the four matters occurs there has been non-compliance by the directors: see s222APB(2). The taking by a director of 'all reasonable steps to ensure' compliance by the directors obviously requires that each option be addressed, either in the sense of taking reasonable steps to bring it about or declining to do anything on the basis that there were no such steps that the director could have taken. The alternative construction would mean that if it were reasonable not to cause the company to pay the estimate to the Commissioner ... because the company were hopelessly insolvent, the director could sit on his or her hands yet still make out the 'defence'. That would be absurd, and would defeat the purpose spelled out explicitly in s222ANA(1) and s222ANA(2) (56).
26 The second relevant decision is Deputy Commissioner of Taxation v Clark [2003] NSWCA 91. The relevant facts were these. The respondent was a director of a company with her husband. The company was wound up in October of 1997. The company's liquidator obtained an order against the Deputy Commissioner of Taxation for the recovery of just over $200,000 paid by way of group tax and under the prescribed payment scheme. The payments were held to be an unfair preference. The respondent's husband was ordered to indemnify the appellant for the amount, but the respondent succeeded in establishing a defence pursuant to s 588FGB(5) of the Corporations Act 2001 (Cth). The Deputy Commissioner of Taxation appealed against the judgment given by Palmer J in favour of the respondent. The issue before the court was whether the respondent had good reason not to take part in the management of the company at the times of the payments.
27 Speigelman CJ undertook an exhaustive examination of the authorities and the legislation in relation to director's duties. His Honour said:
The focus of attention must be on what constitutes a 'good reason' for a director not to participate in management for the purposes of corporations law. This requires consideration of the duties of directors, particularly in, but not limited to, situations of insolvent trading. In my opinion, the process of interpretation should commence with a recognition that, for the reasons outlined above, it is a basal structural feature of corporations legislation in Australia that directors are expected to participate in the management of the corporation [116].
28 His Honour then went on consider the position of wives who are directors of a corporation but really have no interest in the day-to-day management of the business. His Honour then concluded:
In my opinion, there is no justification for a doctrine which would hold sleeping directors to be 'de facto non-directors', who should be relieved of their liabilities. Although, as a practical matter, the conduct of such directors may never meet the requisite standard of participation in management, such conduct should not be excused as a 'good reason' in law [167].
29 The fact is the defendant has failed to adduce any evidence of any steps he took to cause the company to meet its obligations. By the time the obligations in question arose the defendant had been a director of the company for five years. There is no suggestion he did not have access to the company's books or that he was being actively misled by someone in the management team. He just did not take any interest in the affairs of the company. As such it cannot be said he behaved reasonably and in my view no arguable defence is raised on this issue.
30 Turning then to the defendant's claim to an entitlement to a remission of penalties. Since 29 June 2012 the defence provided by s 269-30 in sch 1 of the TAA has been qualified by s 269-30(2): s 2 and div 3 of pt 1 in sch 1 of the Tax Laws Amendment (2012 Measures No 2) Act 2012 (Cth) (the Amending Act). The defendant accepts so far as the penalties were imposed subsequent to 29 June 2012 there is no basis for the remission of penalties. This defence is only concerned with penalties imposed in relation to amounts prior to 29 June 2012.
31 Prior to that date a director was entitled to a remission of a penalty imposed pursuant to s 269-20(1) in sch 1 of the TAA in the event that the director caused a company to be placed into voluntary administration within 21 days of the service of a notice under s 269-25 (a DPN). There is no dispute that the defendant caused the company to enter voluntary administration within 21 days of the service on the defendant of a DPN concerning the penalties the subject of these proceedings.
32 The defendant argues the effect of s 269-30(2) on penalties imposed prior to 29 June 2012 is addressed in s 9 of sch 1 of the Amending Act. Section 9 is in the following terms:
The amendment made by this Division applies, in relation to a penalty under Division 269 in Schedule 1 to the Taxation Administration Act 1953, if the directors of the relevant company stop being under the relevant obligation under section 269-15 in that Schedule on or after the commencement of this item.
33 Section 9 is silent as to whether the penalties referred to in it are penalties that arose prior to 29 June 2012. It is the defendant's position s 9 should be construed as not applying to such penalties. The plaintiff takes the opposite view.
34 On behalf of the defendant it was submitted a director's obligation and the imposition of a penalty upon a director are not matters which are coextensive. Section 269-15 in sch 1 of the TAA imposes an obligation upon directors from the 'initial day' which is specified in the table in s 269-10(1). A penalty is only imposed upon a director under s 269-20(1) if the obligation persists beyond the 'due day' which is again specified in the table in s 269-10(1). Consequently it was submitted as at 29 June 2012 directors may have been subject to penalties that had been imposed upon them as a result of failures to comply with their obligations by that day. Directors may also have had penalties imposed upon them after 29 June 2012 as a direct result of obligations which had been imposed upon them as at 29 June 2012 the due days in respect of which fell after 29 June 2012. Section 9 clearly applies the amendments to s 269-30 to the latter situation. It is silent as to the former.
35 In pressing for his preferred construction of s 9 of sch 1 of the Amending Act counsel points to the fact that if the amendments applied to s 269-30 they would have a significant retrospective effect. That is a director who could have secured the remission of a penalty by causing of the things specified in s 269-15(2) to occur before being served, or within 21 days of being served with a DPN would cease to be able to do so. This it was submitted would constitute a serious increase in the personal liability of directors for past events. Counsel submitted s 9 should not be construed as having such an effect unless the intention to have that effect appears with reasonable certainty. As it does not appear with reasonable certainty in the section it is reasonably arguable the defence is available to the defendant.
36 On behalf of the plaintiff it was submitted s 269-30(2) applies when a director remains under an obligation after 30 June 2012. That obligation is detailed in s 269-15(1) and (2). The defendant continued to be under this obligation until the administrator was appointed to the company on 23 August 2013.
37 Counsel also pointed out there is no increase in personal liability. The liability of the director to pay a penalty remains exactly the same. The only change is that the statutory remission of the penalty by reason of placing the company into administration or liquidation no longer applies when the obligation which has not been complied with and which gives rise to the penalty remains outstanding after the date the new section comes into effect: see Explanatory Memorandum, Tax Laws Amendment (2012 Measures No 2) Bill 2012 (1.169, 1.200, 1.206 - 1.209).
38 In my view the plaintiff's arguments on this question ought be accepted. There is an obligation which arises from time to time if the tax payable is not remitted by the company. The obligation never changes. It may not necessarily be an obligation which is enforceable - for instance, if the requisite notice is not given by the Commissioner. Furthermore a director who was under that obligation could prior to the introduction of s 9 on receipt of the notice have caused the company to go into administration or liquidation and the penalty would have been remitted. The statutory obligation would then no longer exist. But the removal of the remission provision simply means a process which could have led to the termination of the obligation is no longer available. The obligation remains. There has been no change to the status of the director because an obligation which existed continues to exist.
39 In my view the defendant has no answer to the plaintiff's claim. Accordingly there should be judgment for the plaintiff in the amount sought in the chamber summons. The defendant should pay the plaintiff's costs of the application including the reserved costs.
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