Deputy Commissioner of Taxation v Solomon; Deputy Commissioner of Taxation v Muriwai

[2003] NSWCA 62

CITATION:	Deputy Commissioner of Taxation v Solomon; Deputy Commissioner of Taxation v Muriwai [2003] NSWCA 62
HEARING DATE(S):	25/03/03
JUDGMENT DATE:	24 April 2003
JUDGMENT OF:	Handley JA; Sheller JA; Gzell J
DECISION:	Leave to appeal granted. Appeals allowed with costs.
CATCHWORDS:	TAXES AND DUTIES - Income tax and related legislation - Liability of directors to penalty for PAYE deductions not remitted to Commissioner of Taxation - Construction of penalty and defence provisions - Continuing obligation - Income Tax Assessment Act 1936 (Cth), s 222AOB, s 222AOC, s 222AOD, s 222AOJ
LEGISLATION CITED:	Income Tax Assessment Act 1936 (Cth) Corporations Law Corporations Act 2001 (Cth)
CASES CITED:	Deputy Federal Commissioner of Taxation v George (2002) 55 NSWLR 511 Deputy Commissioner of Taxation v Austin (1998) 28 ACSR 565 Natcomp Technology Australia Pty Ltd v Graiche (2001) 19 ACLC 1117 Corporate Affairs Commission v Drysdale (1978) 141 CLR 236 Miller v Deputy Commissioner of Taxation (1997) 26 ACSR 533 Deputy Commissioner of Taxation v Saunig (2002) 43 ACSR 387
PARTIES :	Deputy Commissioner of Taxation - Appellant Peter William Muriwai - Respondent Peter John Solomon - Respondent
FILE NUMBER(S):	CA 40493/02; 40494/02; 40495/02; 40496/02
COUNSEL:	Mr N Cotman SC/ Mr P A Fury - For the Appellant Mr C W Robinson - For the Respondent
SOLICITORS:	ATO Solicitor - ATO Legal Practice - Appellant Collin Biggers & Paisley - Respondent

LOWER COURTJURISDICTION:	District Court
LOWER COURT FILE NUMBER(S):	1090/01; 1091/01; 1092/01; 1093/01
LOWER COURT JUDICIAL OFFICER :	Herron DCJ

CA 40493/02
CA 40494/02
CA 40495/02
CA 40496/02

HANDLEY JA
SHELLER JA
GZELL J

THURSDAY 24 APRIL 2003

DEPUTY COMMISSIONER OF TAXATION v MURIWAI

DEPUTY COMMISSIONER OF TAXATION v SOLOMON

Judgment

1 Handley JA: I agree with Gzell J.

2 Sheller JA: I agree with Gzell J

3 Gzell J: Copanat Pty Ltd and Copalock Pty Ltd were wholly-owned subsidiaries of Deemah Marble & Granite Pty Ltd. The three companies operated as a single business unit and had common directors. The business of the companies was the installation of stone finishes to the foyers and other parts of major building projects in Sydney. Deemah had another wholly-owned subsidiary that conducted a similar business in Singapore.

4 Copanat and Copalock made deductions from salaries or wages payable to employees under the former pay as you earn system (Income Tax Assessment Act 1936 (Cth), s 221C(1A)). Both companies were medium remitters required to pay to the Commissioner of Taxation the amount of any PAYE deductions during a month not later than 21 days after the end of that month (s 220AAM(1)). With respect to the months of April, May and June 2000, Copanat failed to remit to the Commissioner amounts totalling $157,169.78 and Copalock failed to remit sums totalling $138,462.08. However, there was a credit to be accorded to Copalock of $20,598.06 reducing the total to $117,864.02.

5 Section 222AOC and s 222AOD exacted penalties from directors of companies that failed to remit PAYE deductions. Mr Muriwai and Dr Solomon were directors of Copanat and Copalock. Herron DCJ found that they had made out a good defence against recovery of the penalties and entered judgment in their favour. The Commissioner appeals from the judgment in favour of Dr Solomon and seeks leave to appeal from the judgment in favour of Mr Muriwai.

6 It is not in issue that, but for the defences to the recovery proceedings, the respondents were liable for the penalties. The structure of the provisions was explained in Deputy Federal Commissioner of Taxation v George (2002) 55 NSWLR 511. The provisions applied to Dr Solomon in this way. He was re-appointed as a director of each company on 23 June 2000. Because neither company had by then remitted the April and May 2000 PAYE deductions by 21 May and 21 June 2000 respectively, s 222AOB(3) applied to him and cast upon him an obligation to comply with s 222AOB(1). Section 222AOB(3) was in the following terms:

“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.”

The due day was the date by which a PAYE deduction was to be paid to the Commissioner (s 222AFB(1)).

7 The earliest day on which a company made a deduction from salary or wages of an employee under the PAYE system was called the first deduction day. Section 222AOB(1) obliged persons who were directors from time to time on or after the first deduction day to cause the company to take at least one of four alternative steps before the due date. It was in the following terms:

“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 1AAA, 3B or 4, as the case may be, in relation to each deduction:
(i) that the company has made for the purposes of Division 1AAA, 3B or 4; 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 be wound up within the meaning of that Law.”

Copanat and Copalock made the PAYE deductions under Division 1AAA but failed to comply with that Division by not remitting those deductions to the Commissioner by 21 May and 21 June 2000 respectively.

8 Dr Solomon had 14 days from his re-appointment as a director to discharge the obligation cast upon him under s 222AOB(3). He failed to cause the companies to take at least one of the four steps set out in s 222AOB(1) and was, in consequence, on 7 July 2000 liable to a penalty in an amount equal to the unpaid April and May 2000 PAYE deductions. That liability arose under s 222AOD which was in the following terms:

“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 being 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.”

The amount referred to in s 222AOC was the unpaid amount of each company’s liability under a remittance provision in respect of the PAYE deductions.

9 When Dr Solomon was re-appointed as a director of the two companies, the due date for payment to the Commissioner of the June PAYE deductions had not arrived. That date was 21 July 2000. Thus, in terms of s 222AOB(1), Dr Solomon came under an obligation to cause the companies to remit PAYE deductions for June 2000 by 21 July 2000 or to cause them to take at least one of the other steps mentioned in that provision.

10 The failure of the companies to remit the June 2000 PAYE deductions by 21 July 2000 subjected Dr Solomon to a penalty on that date in an amount equal to the PAYE deductions for June 2000 under s 222AOC which was in the following terms:

“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 to the Commissioner, by 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 purposes of Division 1AAA, 3B or 4, as the case may be; and
(b) whose due date is the same as the due date.”

11 Dr Solomon resigned as a director on 12 July 2000. The above provisions, however, applied to a person who was a director at any time, on the one hand between a first deduction date and a due date, on the other hand when there had been non-compliance with s 222AOB(1) following the 14th day after appointment or re-appointment.

12 Mr Muriwai was appointed a director of Copanat and Copalock on 23 June 2000 and resigned on 28 June 2000. The Commissioner sought against him a penalty only in the amount of the unremitted June 2000 PAYE deductions of $44,390.90 in the case of Copanat and $44,873.29 in the case of Copalock. Like Dr Solomon, Mr Muriwai came under an obligation under s 222AOB(1) to cause the companies to remit the PAYE deductions to the Commissioner by 21 July 2000, or cause the companies to enter into an agreement under s 222ALA, or cause the companies to go into administration or begin to be wound up. His failure to achieve one of those results by 12 July 2000, caused him to become subject to a penalty under s 222AOC.

13 Before the Commissioner was entitled to recover the penalties from Mr Muriwai and Dr Solomon, he was obliged to serve a notice giving them a further period of 14 days in which to cause Copanat and Copalock to comply with s 222AOB(1). Section 222AOE was in the following terms:

“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.”

14 Section 222AOE notices were posted to Mr Muriwai and to Dr Solomon on 17 January 2001. None of the four steps in s 222AOB(1) was taken. Had one been taken, the penalties would have been remitted under s 222AOG which was as follows:

“If:
(a) a penalty is payable by a person under this Subdivision; and
(b) section 222AOB is complied with at a time when the Commissioner has not yet given the person a notice under section 222AOE, or within 14 days after the Commissioner gives the person such a notice;
the penalty is remitted because of this section.”

15 The Commissioner commenced proceedings for the recovery of the penalties on 13 February 2001. Defences to those proceedings were contained in s 222AOJ which was in the following terms:

“ Defences
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).
222AOJ(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:
(a) the person was a director; and
(b) the directors were under the obligation to comply with subsection 222AOB(1).
222AOJ(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.
222AOJ(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.”

16 Herron DCJ concluded, in terms of s 222AOJ(3)(b), that there were no reasonable steps that the respondents could have taken to ensure that the directors complied with s 222AOB(1). In arriving at this conclusion his Honour accepted the evidence of Mr Muriwai and Dr Solomon.

17 Mr Muraiwai had considerable experience in the construction industry which he joined in 1970. Before joining the Deemah group he was the general manager of Multiplex Asset Management Pty Ltd. Mr Muraiwai had, in the past, advised Raymond Bechara and Camile Chanine who then owned the entire issued capital of Deemah. A majority of those shares were sold to Oren Benton, a resident of the United States of America who had been a senior partner of Arthur Andersen. He began to pursue Mr Muriwai to take over the management of the Deemah group. Mr Muriwai had been shown copies of the March 2000 accounts including profit projections. This confirmed the view he held of the group as a highly profitable one.

18 Mr Muriwai commenced work at Deemah on 21 June 2000. He was appointed managing director of Deemah and a director of the other two companies on 23 June 2000. Mr Muriwai said that the three companies were treated as one and he regarded himself as the managing director of the business operations. On 23 June 2000 Mr Muriwai and Dr Solomon joined Benton and Randal Jones as directors. Mr Jones ceased to be a director soon afterwards, on 27 June 2000.

19 Mr Muriwai’s examination of the business caused him concern over project cost over-runs, a lack of new contracts and the level of long overdue creditors. He was provided with April 2000 trial balances by the group’s financial controller, Choong Liaw, which differed from the projections he had been given by $3 million to $4 million. He was told that Benton had made adjustments to the March 2000 figures. Mr Muriwai spoke to Dr Solomon about this, precisely when he could not remember.

20 By 27 June 2000, Mr Muriwai was alarmed at the state of the business and the differences between the financial information he had been shown by Benton and what was becoming increasingly apparent to him. He had a telephone conversation with Benton. Benton said the adjustments were normal accounting practice. Mr Muriwai said that, regardless of adjustments, more cash had to be injected into the business to minimise a further blow-out of project costs. Mr Muriwai said that henceforth instructions to Mr Liaw or anyone else in the companies in relation to financial matters should be directed through him. Benton refused. Benton said he would inject funds in a matter of days. The amount was to be A$1.2 million

21 In the afternoon of the 27 June 2000, Mr Muriwai went to Singapore with Mr Bechara. The original intention had been to look over the Singapore operations but Mr Muriwai thought there was a possibility of selling it off to obtain an injection of cash.

22 On 28 June 2000, Mr Bechara informed Mr Muriwai that Benton had taken $250,000 out of the Deemah group notwithstanding that Mr Bechara had supplied the company with materials to help it out and was supposed to have been paid something towards the reduction of his outstanding account. Mr Muriwai’s concerns were increased. He telephoned Dr Solomon and informed him of his intention to resign as a director. He telephoned Benton and tendered his resignation as a director of the companies in the group. He expressed his concern at the financial state of the companies. Benton asked whether he would stay on if he arranged for an injection of capital. Mr Muriwai said he was prepared to stay as an employee to try to manage a way out of the mess, but not as a director.

23 Mr Muriwai returned to Sydney on 30 June 2000 having arrived at an agreement in principle that Mr Bechara and his family would purchase the Singapore operations. Mr Muriwai spoke with Benton and persuaded him to sell the Singapore operations.

24 At the end of June 2000, Mr Muriwai became aware of the extent of the unremitted PAYE deductions. He spoke with Mr Jones who informed him that he had instructed Mr Liaw to write two cheques each week on account of wages, one to pay the employees and the other for the PAYE remittances. He was later told by Mr Liaw that Benton had countermanded those instructions.

25 Towards the end of June or early July 2000, Mr Muriwai recommended that Dr Solomon resign as a director because Benton’s investment was not forthcoming. Mr Muriwai continued to press Benton in early July to inject the further capital.

26 Mr Muriwai had conversations with Dr Solomon about the business on a daily basis in early July 2000. A projected cash flow was prepared on 11 July 2000 by Mr Muriwai, Dr Solomon, Mr Liaw, Ms Chanine and Mei Farro, the construction manager of the group. Mr Muriwai regarded the moneys from the sale of the Singapore operations as simply tiding the companies over for four to six weeks after which they would be back in the same position unless Benton injected the further funds.

27 Mr Muriwai said that throughout July 2000, when it became evident to him that Benton was not going to advance funds, he tried to convince him to put the companies into administration or into liquidation but Benton refused.

28 Through his excellent relationship with the directors of Multiplex, Mr Muriwai was able to obtain payment of progress claims immediately or within seven days in the lieu of the normal practice of thirty days.

29 Approximately A$1.7 million was received from the sale of the Singapore operations about 20 July 2000. It was used to pay as many outstanding creditors as possible and to make payment of approximately $600,000 to the Commissioner under an arrangement Dr Solomon was instrumental in having negotiated.

30 Mr Muriwai said that Benton had been withdrawing management fees of approximately $120,000 per month as well as sundry payments that added up to more than $4.5 million over the period of his majority ownership of the companies. His Honour concluded that Benton was “milking” the companies.

31 Mr Liaw approached Mr Muriwai and said that Benton had instructed him to pay an outstanding American Express bill of his son in law. Mr Muriwai instructed Mr Liaw not to make the payment. Mr Liaw obeyed that instruction. Mr Muriwai said that although he was not a director at that time, the staff looked to him to try to manage a way through to enable the companies to survive and them to keep their jobs. Mr Muriwai said in cross-examination that he performed the same duties after he resigned:

“Q. …I suggest to you, sir, that in fact in staying on in such a managerial role you were simply doing exactly the same duties, performing exactly the same duties, as you had been when you were the formally appointed managing director?
A: I was performing the same duties because the alternative was that if I was to walk out the door there would be no-one there.
Q: So you were performing the same duties after you had formally resigned as before. Is that the case?
A: Yes.
Q: For how long did that continue?
A: Until a week prior to the liquidation application. The week--
Q: We’re looking at then, say, early August or --
A: First week in August or somewhere round there.”

32 Mr Muriwai said that Dr Solomon had little to do with the day-to-day activities but he assisted with the staff both with respect to long-term employees and with respect to people who had been brought out to the group under an immigration scheme.

33 On 1 August 2000, the CFMEU staged a march on the group’s Macquarie Street office. The protesters occupied the office for a short time and demanded an apology. Mr Muriwai made that apology.

34 At the end of July 2000, Mr Muriwai took advice from the group’s auditors as to whether the group was trading insolvently. The auditors advised that the group might be trading insolently if Benton did not inject the promised funds. Mr Muriwai formed the view that Benton would not inject the funds. He arranged a meeting with Deemah’s solicitors who, on 2 August 2000, advised that the minority shareholders could place the companies in administration. On that day Mr Muriwai conveyed this information to the Mr Bechara and Ms Chanine. On 8 August 2000 a provisional liquidator was appointed to Deemah and it was wound up on 7 September 2000. Copanat and Copalock were not wound up until 19 April 2001.

35 Dr Solomon was originally a geologist but later developed expert knowledge of the use of stone. He was a director of the three companies from September 1999 to March 2000 when he stood down as he was nearing the end of his professional work for the companies and Benton wanted his family to be directors. He remained, however, involved with the companies. In May 2000 Mr Liaw asked for assistance in relation to outstanding tax. Dr Solomon telephoned the person at the Australian Taxation Office mentioned in a letter setting out the liability of the group. Dr Solomon discussed with that person a schedule for payment of arrears of tax. He was requested to forward the schedule to the ATO and he assumed, since he heard nothing further from Mr Liaw, that the matter had been resolved. Dr Solomon recommended that holding accounts be set up to avoid any recurrence of the problem. His arrangement with the ATO did not constitute an agreement under s 222ALA. That section required a written agreement.

36 Dr Solomon was overseas when he was re-appointed a director of each of the three companies on 23 June 2000. On 27 June 2000 he had a telephone conversation with Mr Muriwai in Singapore. Dr Solomon was aware that Mr Muriwai was conducting negotiations to sell the Singapore operatoins. Mr Muriwai informed Dr Solomon that Benton had not transferred funds to the group. Mr Muriwai said he did not believe that Benton was going to put in money and he had decided to resign as a director, but he would stay on and help. Following this conversation, Dr Solomon was aware that the moneys promised by Benton were needed in a few days. Dr Solomon then telephoned Benton who assured him that the funds were on the way.

37 Dr Solomon returned to Australia about 30 June 2000. He attended the premises of the companies on 3 July 2000. Mr Muriwai told Dr Solomon that he had reached a final agreement in principle for the sale of the Singapore operations for about A$2 million. Dr Solomon expressed his concurrence. Dr Solomon told Mr Muriwai that A$1.2 million was on the way from Benton. Mr Muriwai said: “I doubt it but we can always live in hope”. Mr Muriwai informed Dr Solomon that there was unpaid tax and unpaid wages in the group.

38 Dr Solomon underwent surgery for colon cancer on 4 July 2000 and returned to the office on 6 July 2000 when he was refused access to the accounting records of the company by Mr Liaw. Like Mr Muriwai, Dr Solomon was determined to save the companies if he could. He was concerned with the welfare of employees who had been sponsored by the companies as immigrants from the Levant. Dr Solomon had further conversations on how stone trading could be used to enhance revenue as there were large stocks on hand in the companies’ yards.

39 On 11 July 2000, Dr Solomon was involved in the preparation of the projected cash flow. His contribution was in relation to the funds expected to flow from Singapore. He was aware of the bottom line in those projections. He became aware that the moneys from Singapore would only tide the companies over for four to six weeks.

40 From 29 June 2000 to 12 July 2000, Dr Solomon was the sole Australian resident director of the three companies. In his letters of resignation of 12 July 2000, Dr Solomon said he was available in a consultancy capacity to assist Mr Muriwai in his efforts to save the companies. Thereafter, he came in when he was needed. He gave technical advice whenever it was required. Dr Solomon said he was a non-executive director of the Deemah group. Almost half his time as a director was spent overseas and the other half was spent in investigating the situation.

41 Dr Solomon recalled that some money was paid to the ATO from the proceeds of sale of the Singapore operations but he did not recall that it was he who negotiated this arrangement. He was instrumental in having the payment made. The outstanding tax liability was so large that the companies were not in a position to pay it immediately. Hence the need to negotiate an arrangement with the ATO.

42 Dr Solomon was also responsible for investigating the stockpile of stone to see what could be recovered. He proceeded on a pro bono basis to do anything he could to help things along. He spoke with employees about their family affairs and how they could carry on for the present. Mr Muriwai indicated which employees were having the greatest distress and Dr Solomon visited those families.

43 Dr Solomon and Mr Muriwai met with accountants and, on 2 August 2000, they met with solicitors. Urgent advice was sought as to the solvency of the group. Following that meeting, Dr Solomon assisted Mr Muriwai in convincing Mr Bechara and Ms Chanine to place the companies in liquidation.

44 Section 222AFB(1) defined the term “director” in relation to a company to mean someone who was a director of the company for the purposes of the Corporations Law which, in s 60, provided that a reference to a director included a reference to:

“a person occupying or acting in the position of director of the body, by whatever name called and whether or not validly appointed to occupy, or duly authorised to act in, the position.”

45 Herron DCJ found that Mr Muriwai and Dr Solomon fell within this definition and remained directors of Copanat and Copalock notwithstanding their resignations.

46 By notices of contention, the respondents attacked these findings of his Honour. It was submitted that the activities of Dr Solomon did not constitute sufficient involvement to amount to a continuation of his position as a director.

47 In Deputy Commissioner of Taxation v Austin (1998) 28ACSR 565 Madgwick J identified performance of top level management functions, acting as the company in matters of great importance and the reasonable perception by outsiders that a person was a director of the company as factors in determining whether the extended definition in s 60 of the Corporations Law applied. Those observations were endorsed by this court in Natcomp Technology Australia Pty Ltd v Graiche (2001) 19 ACLC 1117. His Honour had regard to Austin in arriving at his conclusion. There was ample evidence to justify that conclusion. When Dr Solomon resigned he offered to continue to act in the interests of the company. In his daily contact with Mr Muriwai, his approval of the sale of the Singapore operations, his attempts to generate revenue from stone stock sales, his involvement in the preparation of the July 2000 projected cash flows, his involvement in the arrangement with the ATO to receive $600,000 in reduction of the group’s taxation liabilities and his involvement with the employees of the group, Dr Solomon continued to perform the sort of high level non-executive tasks he had undertaken while an appointed director.

48 It was submitted that Dr Solomon was in a similar situation to the respondent in Natcomp Technology who was held not to be a director. But Dr Graiche was not involved in the company’s main activity of retail sale of computer packages, his involvement being limited to the development and marketing of new products. By contrast, Dr Solomon was involved in the main activity of the Deemah group.

49 As for Mr Muriwai, it was argued that his involvement after his resignation was not that of a director de facto but that of a senior employee of the companies. I reject that submission. Mr Muriwai acted as the managing director of the business of the Deemah group. He continued to carry out the same tasks after his resignation. There was no one else.

50 The definition of the term “director” in the Corporations Act 2001 (Cth), s 9 includes, unless the contrary intention appears, a person who is not validly appointed as a director if they act in the position of a director. It was submitted that Austin is distinguishable because it was decided with respect to the definition in the Corporations Law and did not include the reference to contrary intention.

51 The Corporations Act 2001 (Cth) commenced on 15 July 2001. The position of Mr Muriwai and Dr Solomon is to be determined in June, July and August 2000. The definition of the term “director” in the Corporations Law, considered in Austin, is the appropriate one. In any event, even if the later definition were relevant, I fail to see how the reference to contrary intention affects the matter. There is nothing in the context of s 222AOB and the following provisions to indicate that they are limited to directors de jure (cf Corporate Affairs Commission v Drysdale (1978) 141 CLR 236).

52 In my view Herron DCJ was correct in his conclusion that Mr Muriwai and Dr Solomon remained directors of Copanat and Copalock until early August 2000.

53 It was pointed out by this court in Miller v Deputy Commissioner of Taxation (1997) 26 ACSR 533 that a defence under provisions comparable with s 222AOJ(3) required demonstration, in respect of each of the four options, that all reasonable steps had been taken or there were none that could have been taken. Having referred to Miller, and having observed what Mason P said at 540 of the directors failing to consider an agreement under a provision comparable with s 222ALA “in the single-minded pursuit of their own interests”, Herron DCJ said:

“In the extraordinary circumstances here the defendants have satisfied me that they were not merely pursuing their own interests. They were directors for but a very short time or times in the case of Dr Solomon and this coupled with the unusual but relevant circumstances I have sought to relate, enable them in my view to rely upon the defence contained in section 222AOJ(3)(b) and in the circumstances from a practical point of view there were no steps which they could have taken in all the peculiar circumstances.”

54 His Honour had understandable sympathy for Mr Muriwai and Dr Solomon. They inherited obligations in a company group they believed to be in good financial shape. However, directors have an obligation to ensure that moneys deducted from the salaries or wages of employees are remitted to the Commissioner and not misused as part of the floating capital of a corporation. In my view, the defences under s 222AOJ(3) were not made out.

55 The first alternative open to Mr Muriwai and Dr Solomon under s 222AOB(1) was to cause the companies to remit the funds to the Commissioner. Dr Solomon was informed on 3 July 2000 that group tax was owed to the Commissioner. He was put on notice that the arrangement he had established with the ATO in May 2000 was in doubt. A$1.7 million was due in the near future from the sale of the Singapore operations. Dr Solomon led no evidence as to why he did not ensure, either before or after his resignation, that, in addition to the $600,000 paid to the Commissioner, the $275,000 odd also owed by the companies was paid out of those proceeds.

56 Mr Muriwai was a director de jure for only 5 days. But he remained a director de facto until early August 2000. He, too, led no evidence as to why the moneys owed to the Commissioner were not paid out of the proceeds of sale of the Singapore operations.

57 The second alternative open to the directors was to make an agreement with the Commissioner under s 222ALA. That section provided, amongst other things, that the Commissioner might make with a person a written agreement under which the person was to pay specified amounts on specified days for the purpose of discharging one or more specified liabilities of the person that was a liability under a remittance provision.

58 Dr Solomon had negotiations with the ATO in May 2000 with respect to a schedule of payments of the outstanding PAYE remittances. There was no explanation as to why an agreement under s 222ALA was not then negotiated. The only explanation was his ignorance of the existence of the provision. Unfortunately for him, ignorance is no excuse. The test of reasonableness in s 222AOJ(3) is objective and means reasonable having regard to the existing circumstances of which a director is aware or ought to be aware (Deputy Commissioner of Taxation v Saunig (2002) 43 ACSR 387).

59 Likewise, there was no evidence from either Mr Muriwai or Dr Solomon as to why an agreement for payment by instalments of the outstanding tax under s 222ALA was not negotiated with the ATO after 3 July 2000 when Dr Solomon became aware that the remittances were in arrears. He knew that A$1.7 million was due from the sale of the Singapore operations and he had over a week before his resignation, let alone the period after it, in which to negotiate an agreement with the Commissioner.

60 The third alternative was to cause the company to appoint an administrator under s 436A of the Corporations Law. That provision required a resolution of the board of directors. It was submitted that the board of directors was confined to directors de jure and as Benton was opposed to the notion, he would have ensured that any resolution at a meeting between him and Dr Solomon up to 12 July 2000 would not have been carried and he would not have so resolved thereafter when he was the sole director of the companies.

61 There is force in this argument. However, Mr Muriwai and Dr Solomon were in close contact with Mr Bechara and Ms Chanine. After taking legal advice in early August 2000, Mr Muriwai and Dr Solomon persuaded them to take action. That they did in consequence of which, Deemah was wound up.

62 In Saunig this court made the observation that had legal advice been sought at an early stage it might have stimulated compliance with one or other of the obligations under s 222AOB(1). Likewise, had Mr Muriwai and Dr Solomon sought legal advice consequent upon the revelations of 3 July 2000, the minority shareholders might have reconstituted the board of directors and voted to appoint an administrator. The point is that the opportunity was there. It was incumbent upon the respondents to establish that they took all reasonable steps to ensure compliance. In light of the subsequent approach to Mr Bechara and Ms Chanine, I am by no means convinced that all reasonable steps were taken with respect to the third alternative.

63 It is unnecessary to decide whether the respondents demonstrated that there were no reasonable steps they could have taken to ensure the appointment of an administrator in light of Miller and my conclusions that they failed to establish that they took all reasonable steps, or there were none to be taken, with respect to the other alternatives.

64 The final option open to the respondents was to cause Copanat and Copalock to begin to be wound up.

65 The Corporations Law, s 459P provided that a company, a creditor, a contributory, or a director, amongst others, might apply for a company to be wound up in insolvency. There was ample evidence before Dr Solomon’s resignation as a director on 12 July 2000 that the group was insolvent. Dr Solomon was a director de jure. He led no evidence to establish that he took all reasonable steps to cause the company to begin to be wound up. He failed to establish that there were no reasonable steps he might have taken.

66 It was submitted that these considerations did not apply to Mr Muriwai because, even if he was a director de facto in July 2000, the reference to a director in s 459P(1)(d) of the Corporations Law should be restricted to a director de jure. I reject that submission. Winding up proceedings in insolvency might have been commenced by a company as well as by a director. The relevant organ of the company was the board of directors. The fact that any director was also given the right to commence proceedings is a powerful reason for interpreting the term “director” in that provision in terms of the definition in s 60 and its extension to a director de facto.

67 A director was under a duty to prevent insolvent trading under s 588G of the Corporations Law. It was important, therefore, that a director had the right to commence winding up proceedings in insolvency. There can be no question but that s 588G applied to directors de facto (Drysdale). All the more reason for giving the term “director” its extended meaning in s 459P(1)(d).

68 In my view, therefore, neither Mr Muriwai nor Dr Solomon established that they took all reasonable steps to ensure that the companies began to be wound up or established that there were no such steps they could have taken.

69 Section 222AOJ(4) provided a definition of the term “reasonable” for the purposes of s 222AOJ(3). It meant reasonable having regard to when, and for how long, the person in question was a director and took part in the management of the company and all other relevant circumstances. It was submitted that when that concept was interpolated into s 222AOJ(3), consideration of the period in which the defence was to be made out was limited to so much of the period during which a person was a director as the person took part in the management of the company.

70 That submission has ramifications that are unnecessary of resolution in these proceedings. I say no more about them. The above analysis has been confined to the periods during which Mr Muriwai on the one hand and Dr Solomon on the other were directors and participated in the management of the companies.

71 In the proceedings against Mr Muriwai (CA 40493 of 2002) the orders I would propose are:

1. Leave to appeal is granted.

2. The appeal is allowed.

3. The orders of the trial judge are set aside.

4. There will be a verdict for the appellant and judgment in the sum of $44,873.29 together with interest pursuant to s 83A of the District Court Act 1973.

5. The respondent is to pay the appellant’s costs of the appeal and of the proceedings in the District Court.

6. The respondent is to have a certificate under the Suitor’s Fund Act 1951.

72 In the proceedings against Mr Muriwai (CA 40494 of 2002) the orders I would propose are:

1. Leave to appeal is granted.

2. The appeal is allowed.

3. The orders of the trial judge are set aside.

4. There will be a verdict for the appellant and judgment in the sum of $44,390.90 together with interest pursuant to s 83A of the District Court Act 1973.

5. The respondent is to pay the appellant’s cost of the appeal and of the proceedings in the District Court.

6. The respondent is to have a certificate under the Suitor’s Fund Act 1951.

73 In the proceedings against Dr Solomon (CA 40495 of 2002) I would propose the following order:

1. The appeal is allowed.

2. The orders of the trial judge are set aside.

3. There will be a verdict for the appellant and judgment in the sum of $157,169.78 together with interest pursuant to s 83A of the District Court Act 1973.

4. The respondent is to pay the appellant’s cost of the appeal and of the proceedings in the District Court.

5. The respondent is to have a certificate under the Suitor’s Fund Act 1951.

74 The proceedings against Dr Solomon (CA 40496 of 2002) I propose the following orders:

1. The appeal is allowed.

2. The orders of the trial judge are set aside.

3. There will be a verdict for the appellant and judgment in the sum of $117,864.02 together with interest pursuant to s 83A of the District Court Act 1973.

4. The respondent is to pay the appellant’s cost of the appeal and of the proceedings in the District Court.

5. The respondent is to have a certificate under the Suitor’s Fund Act 1951.

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Last Modified: 04/28/2003