Deputy Commissioner of Taxation v Thomas Wilson

[2018] NSWDC 302

District Court

New South Wales

Medium Neutral Citation:	Deputy Commissioner of Taxation v Thomas Wilson [2018] NSWDC 302
Hearing dates:	27 September 2018
Decision date:	19 October 2018
Jurisdiction:	Civil
Before:	Mahony SC DCJ
Decision:	Verdict and judgment for the plaintiff. For orders see [63]
Catchwords:	Statutory claim against director of corporation for monies withheld by corporation for PAYG tax
Legislation Cited:	Civil Procedure Act 2005 Corporations Act 2001 (Cth) District Court Act 1973 Taxation Administration Act 1953 (Cth)
Cases Cited:	Canty v Deputy Commission of Taxation [2005] 63 NSWLR 152 Deputy Commission of Taxation v Coco [2003] QSC 199 Deputy Commissioner of Taxation v Saunig (2002) 55 NSWLR 722 Forsyth v Deputy Commissioner of Taxation (2014) 62 NSWLR 132 Miller v Deputy Commissioner of Taxation (1997) 26 ACSR 533
Category:	Principal judgment
Parties:	Deputy Commissioner of Taxation (Plaintiff) Thomas Wilson (Defendant)
Representation:	Counsel: S T Richardson (Plaintiff)   Solicitors: M Vertes (Defendant)
File Number(s):	17/78625
Publication restriction:	Nil

Judgment

1. By Further Amended Statement of Claim filed with leave on 27 September 2018, the plaintiff claims what are known director penalties in the sum of $111,798.04, pursuant to s 269-20(1) in Schedule 1 of the Taxation Administration Act 1953 (“the TAA”).

2. On 19 April 2015 the defendant had been appointed as a director of Global Piling Contractors Pty Limited (ACN 605361920) (“the company”) upon its incorporation on the same date. On two occasions in 2015, on 25 August and 25 November 2015, the company withheld monies due to the plaintiff under Division 12 Schedule 1 of the TAA. The company lodged Business Activity Statements on 30 July 2015 in respect of the period 1 April 2015 to 30 June 2015, and on 17 December 2015 in respect of the period 1 July 2015 to 30 September 2015. Those statements identified the two amounts withheld for PAYG tax on employee salaries referred to above, which were not paid to the plaintiff.

3. On 10 February 2016 the plaintiff issued a Director Penalty Notice (“DPN”) to the defendant in respect of the two amounts withheld, and following some credits being adjusted to that sum, there is no issue that, as at the date of hearing, the sum of $111,798.04 was claimed by the plaintiff.

4. The hearing proceeded by way of affidavit evidence. The plaintiff relied on the following affidavits:

Affidavit of Ronald Ao sworn on 22 August 2018

Affidavit of Ronald Ao sworn on 26 September 2018

Affidavit of Sarah Farran affirmed on 28 May 2018

None of the deponents were required for cross-examination.

5. The defendant relied on two affidavits sworn by himself on 6 August 2018 and 29 August 2018. He was not required for cross-examination and the factual background to the claim, which is summarised below, is not in dispute between the parties.

6. The plaintiff’s claim is a statutory claim pursuant to the TAA. The plaintiff relies on an evidentiary certificate pursuant to s 255-45 dated 7 August 2018 (Annexure G to the affidavit of Ronald Ao sworn 22 August 2018), which, pursuant to s 255-45 of the TAA is prima facie evidence of the sum of $111,798.04 being a debt due and payable by the defendant to the Commonwealth of Australia in respect of a tax related liability.

7. Section 269-35 of the TAA sets out a number of defences to such a claim. The defendant relies on a statutory defence contained in s 269-35(2) which provides as follows, under the heading “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 s 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 purpose 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.”

8. Given that there is prima facie evidence establishing the plaintiff’s claim, and that the defendant acknowledges receipt of the Director Penalty Notice dated 10 February 2016 (Annexure B to the affidavit of Ronald Ao sworn 22 August 2018), there is no need to rehearse for the purpose of this judgment, the evidentiary material relied on by the plaintiff.

The evidence of the defendant

9. In his two affidavits, the defendant set out the background to the incorporation of the company on 19 April 2015. Prior to the incorporation of the company, the defendant, who was a civil engineer, had known a Mr Ian Wheatley for a number of years. Mr Wheatley was a fitter and turner, and the two men had worked as independent contractors on a number of construction projects together. Mr Wheatly was a consultant to a company called Compile-Ryobi Australia Pty Limited which provided specialist piling and geotechnical services. He became aware that that company was planning to refer surplus work to Mr Wheatley’s company.

10. The defendant deposed that he entered into an agreement with Mr Wheatley to incorporate a new company to provide concrete piling and piling construction services to third parties. The new company would initially take on surplus work from Compile-Ryobi, which was based in Western Australia. The defendant deposed that contractors would work on secondment for the company and that in the future, contractors would be engaged on an “as needed basis”. It was agreed that the defendant and Mr Wheatley, together with Mrs Wheatley, would become directors of the company, although the defendant and Mr Wheatley would each own 50% of the shares in the new company. The defendant was to be responsible for overseeing projects on the east coast of Australia, once the company expanded into such projects. Otherwise he would provide technical engineering expertise.

11. The defendant further deposed that it was agreed that the three directors would not be employees of the company and would not be paid salaries, but rather, would draw money by way of dividends. The company would not have any employees, and if a project required additional resources, the company would engage contractors to provide those additional resources. The company engaged an accountancy firm, ATB Partners, to provide accountancy services.

12. The defendant deposed that from incorporation on 19 April 2015 until he received the DPN in February 2016, he believed the company had systems in place to ensure it complied with its taxation obligations, and remitted all amounts due to the Australian Taxation Office (“ATO”). He believed those sums would be limited to goods and services tax, and when he received the DPN, he did not understand that the amounts claimed were on account of taxes withheld by the company from wages paid to employees, and not remitted to the ATO.

13. When he received the DPN on about 18 February 2016, the defendant phoned Mrs Wheatley and was told that the amounts claimed in the DPN were on account of taxes withheld from wages paid to employees and not remitted to the ATO. He was told that both Mr and Mrs Wheatley had received DPN’s themselves, and the defendant was told that ATB Partners would be engaged to liaise with the ATO to seek to enter into an instalment payment arrangement in relation to the outstanding taxation liabilities.

14. The defendant deposed that he was told that Mr Wheatley had been hiring employees for projects based in Western Australia rather than engaging contractors, and at no time prior to that was he told that that decision had been made.

15. The defendant requested a meeting of the company to discuss the outstanding taxation liability and the company’s ability to pay it. That meeting was held on 22 February 2016 and Mr Wheatley reported as to the financial position of the company. In the opinion of Mr and Mrs Wheatley, the company was only experiencing a temporary lack of liquidity. The defendant was of the opinion that the company was insolvent, as it had no ability to pay its outstanding taxation liability and there was no guarantee as to if and when the company would receive funds from ongoing work in progress. As the defendant had no involvement in the day-to-day running of the company, he was concerned about his exposure as a director under the DPN. He moved a resolution that the directors appoint an administrator, however, it was not carried. He then moved a resolution that the directors convene a general meeting of the members of the company for the purposes of appointing a liquidator. Again, the resolution was not carried.

16. On 26 February 2016, the defendant deposed that he sought legal advice as to what other steps he could take to put the company into administration or cause the company to be wound up in order to avoid liability under the DPN. He received advice that he could not alone put the company into administration, and the only other option for him was to avoid liability under the DPN was for the company to pay its outstanding taxation liabilities, or for him to apply to the Supreme Court or the Federal Court to wind up the company, in his capacity as a director and shareholder of the company. He was advised that such application would require leave of the court, which would only be granted if the court was satisfied that the company was insolvent. He was further advised that it would be difficult for him to provide evidence to the court that the company was insolvent, given that he was not involved in the day‑to‑day running of the company. Further, by the time an application to wind up the company was heard in the Supreme Court or the Federal Court, the time for compliance with the DPN (21 days) would almost certainly have expired.

17. Following receipt of that advice, the defendant was advised by Mrs Wheatley that ATB Partners was liaising with the ATO to arrange a payment plan for the outstanding taxation liabilities. The defendant himself was unable to raise finance personally because of a poor credit history, and was unable to negotiate payment with the ATO because he was not authorised to act on behalf of the company.

18. On 18 August 2016, Mrs and Mrs Wheatley agreed to resolve to appoint an administrator of the company and Mr G Beattie was appointed administrator on that day. He was appointed liquidator of the company by the Federal Court of Australia on 16 September 2016.

19. It was on the basis of that evidence that the defendant relied on the defence contained in s 269-35(2), namely, that he had taken all reasonable steps to ensure that one of the three things happened in s 269.35 (2)(a), as outlined above, and further, that there were no reasonable steps that he could have taken to ensure that any of those things happened in accordance with s 269.35 (2)(b).

The plaintiff’s submissions

20. The plaintiff relied on a detailed written outline of submissions. It first submitted that the court has jurisdiction to hear and determine the plaintiff’s claim pursuant to s 44(1)(a) of the District Court Act 1973, relying on Forsyth v Deputy Commissioner of Taxation (2014) 62 NSWLR 132. Secondly, the plaintiff submitted that the plaintiff had established a prima facie entitlement to the amount withheld by way of PAYGW pursuant to subdivision 16-B in Schedule 1 to the TAA, in the sum of $111,798.04, by virtue of the certificate contained in Annexure G to the affidavit of Mr Ao, referred to above.

21. The plaintiff set out the legislative framework for the Director Penalty Regime, noting the DPN was a preliminary step to commencing proceedings.

22. As to the reasonable steps defence relied on by the defendant, the plaintiff submitted that the onus rests on the defendant to show that he took “all reasonable steps” to make sure the directors cause one of the three things to happen that are set out in s 269-35(2)(a). Alternatively, as pleaded by the defendant, it may be required for a director to show that there are no reasonable steps that he could have taken to ensure that any of the three things happened. The plaintiff submitted that the defences provided for in s 269-35(2)(a) and (b) are “cumulative”, and not mutually exclusive, relying on Canty v Deputy Commission of Taxation [2005] 63 NSWLR 152, where Handley JA stated at [41]:

“If reasonable steps taken in pursuit of one option fail, non-compliance and the obligation of the director or former director will continue. The director or former director will therefore have to take reasonable steps to achieve compliance in another way. If non-compliance continues long enough before a notice is served, each of the four options will eventually have to be addressed and the subsection (3) defences will have to cover all options.”

23. The plaintiff submitted that once the resolution to appoint an administrator failed on 22 February 2016, the defendant’s attention should then have been directed to the other two steps set out in ss 269-352(a). Namely, (2)(a)(i) or (2)(a)(iii). Another reasonable step was to attempt once more to have an administrator appointed.

24. The plaintiff submitted that an evaluation of what reasonable steps were taken was an objective test, relying on Deputy Commissioner of Taxation v Saunig (2002) 55 NSWLR 722. This meant that the defendant must prove that he 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 section”.

25. The plaintiff submitted that his delegation of the financial affairs of the company to Mr and Mrs Wheatley were insufficient to absolve the defendant of responsibility and therefore make out the defence. He could therefore not rely on Mrs Wheatley telling him “everything was under control” and that efforts were being made to negotiate an instalment plan. It was submitted that the defendant was content to leave the DPN issue to his fellow directors. Further, once he obtained legal advice in respect of the notice, he did not confront his co‑directors with that advice about the situation.

26. With respect to ss (2)(a)(ii), it was submitted by the plaintiff that the defence relying on the defendant obtaining legal advice, even though that advice may have been correct, did not align with the requirements of ss (2)(a)(iii), which called for the defendant to cause the company to begin to be wound up. That advice was to the effect that winding up the company “would be difficult”, not impossible. Moreover, the defendant’s evidence had confirmed that he was of the view that the company was insolvent in late February 2016. It must therefore be concluded that the defendant has not proved that a prima facie case of insolvency could not have been established by a director applying to have the company wound up on the grounds of insolvency.

27. The plaintiff submitted that this was not a case where there were no reasonable steps that the defendant could have taken to ensure that the three matters stated in s 269-35(2)(a) would happen.

28. In his oral submissions, counsel for the plaintiff rehearsed his submissions relating to the legislative scheme and the defence relied on by the defendant, namely, taking all reasonable steps. It was submitted that applying the objective test in Saunig, supra, there was much more that the defendant could have done. Once he obtained legal advice for example, he did nothing with it. Nor did he encourage his co-directors to obtain legal advice or to approach the company’s accountant. There were steps which could have been taken to enable compliance, for example, causing an administrator to be appointed. Once the defendant had received legal advice, that amounted to a material change, and if confronted with it, it was entirely possible that a different outcome may have resulted, namely, the directors resolving that the company be wound up.

29. The plaintiff submitted that when assessed objectively, more could have been done here. There were multiple avenues that could have been pursued to explore the defendant’s belief that the company was insolvent. It was unsatisfactory for the defendant to rely on the timing of the legal advice he obtained. He had a continuing obligation to comply.

30. Counsel referred to s 513A of the Corporations Act 2001 (Cth). It was submitted that winding up is not taken to have begun until an order was made for winding up by the court. However, it was unnecessary to decide whether s 269-35(iii) refers to s 513A. The objective test here required him to take all reasonable steps, not obtain final orders for a winding up. At a minimum, an application could have been made by the defendant relying on evidence of insolvency that complied with the section.

The defendant’s submissions

31. The solicitor for the defendant also relied on a thorough written outline of submissions. The defendant alleges that he took all reasonable steps to ensure that:

“(a) The directors of the company caused the company to comply with its obligations in accordance with subdivision 16-B of Schedule 1 to the TAA;

(b) The directors of the company caused an administrator of the company to be appointed under s 436A, 436B or 436C of the Corporations Act 2001; or

(c) The directors of the company caused the company to begin to be wound up (within the meaning of the Corporations Act 2001).

32. Further, the defendant alleges there were “no reasonable steps that he could have taken to ensure that any of those things happened”.

33. The defendant also set out the principles in Deputy Commissioner of Taxation v Saunig, supra, (in which the Court of Appeal construed the former analogue to s 269-35(2)), to establish that the test is objective and the burden of proof falls on the defendant. The fact that the defence must apply to the entire period during which the obligation under s 269-15 existed for a particular director, meant that the reasonable step or steps taken by the director to ensure that all directors complied with s 269-15 cumulatively, had effect over the entire period. It was submitted that the objective test of reasonableness under s 269-35(2) must be applied in the circumstances relating to the particular company, the relevant director and other directors, in order to give effect to the meaning of “reasonable” given by s 269-35(3).

34. The defendant set out the evidence he relied on to make out the defence. It included the pre-incorporation telephone conversations referred to above, outlining the agreement between Mr Wheatley and the defendant, and in particular, their agreement that the new company would not have any employees. It was only after the defendant had received the DPN and spoken to Mrs Wheatley about it that the defendant learnt that the company had been hiring employees rather than engaging contractors, that it had withheld PAYG taxes from wages paid to those employees, and had not complied with its remittance obligations for the periods ending 30 June 2015 and 30 September 2015. The defendant had then called a meeting of directors and moved a resolution that the directors appoint an administrator. That resolution was defeated by Mr and Mrs Wheatley, who were of the opinion that the company was only experiencing a temporary lack of liquidity.

35. It was submitted that until he received the DPN, on the basis of what was agreed by Mr Wheatley and the defendant as to how the company would operate, the defendant believed the company would only have goods and services tax remittance obligations. The defendant relied on the evidence of his belief that he would have required ATB Partners to individually advise each of the directors how much the company needed to pay to the ATO in each quarterly Business Activity Statement on account of tax withheld by the company from wages paid to the two employees. In the event that the company did not have the funds to pay those amounts by the due date, it was the defendant’s belief that he would have arranged a meeting of directors to discuss the company’s ability to pay its outstanding tax liabilities. His belief was that he would have moved a resolution to appoint an administrator or for a meeting of members of the company to be called to put the company into liquidation.

32. For the defence pursuant to s 269-35(2) to be made out, the defendant submitted that what was required was evidence only of the taking of reasonable steps to achieve the three outcomes set out therein, or a demonstration that it was not possible to take reasonable steps. For a director in a small company, it was incumbent upon the defendant to ascertain what the company’s duties in relation to tax instalments deducted from employees’ wages were, and to ensure that some system was in place which would produce compliance. However, given the agreed operational structure of the company here, there was no reason for the defendant to have known that there were payments deducted that should have been passed on to the taxation office. The defendant did not know that the company had strayed from its intended operational structure and there was no reason for the defendant to seek to prove to himself, by demanding access to the company’s books and records, as to whether the company was in fact making PAYG deductions and not remitting them.

33. It was submitted that the reasonableness of the defendant’s actions once he received the DPN must be considered in light of all the relevant circumstances. The defendant here permitted the other directors to undertake negotiations on behalf of the company with the Commissioner, which, if successful, could have resulted in an agreement to pay a negotiated sum. The defendant had no control or access over the company’s bank accounts so as to ensure payment of the deductions. Further, the defendant had convened a meeting and had proposed a resolution which was defeated by his fellow directors.

34. As to winding up the company, the defendant could only have made an application to the court in his capacity as a director for the company to begin to be wound up in insolvency under s 459P(1)(d) of the Corporations Act, with leave of the court. It was submitted that it was highly unlikely that the defendant could have established a prima facie case that the company was insolvent in order to procure such leave. Nor could the defendant, as one of two equal shareholders, have caused the company to resolve to be voluntarily wound up under s 495 of the Corporations Act.

35. After the resolution moved by the defendant was not carried, he sought competent professional legal advice as to any other remaining options available to him in order to comply with s 269-15. It was submitted that the defendant took all reasonable steps to ensure that one of the three steps contained in s 269-35(2)(a) happened. There were no other reasonable steps he could have taken, taking into account his participation in the management of the company and all relevant circumstances. The proceedings should therefore be dismissed.

36. In his oral submissions, the solicitor for the defendant noted that both parties relied on the Court of Appeal’s decision in Saunig, supra. A critical area of the dispute was whether there was a system in place. The plaintiff had submitted that it was incumbent on the defendant to take steps and not delegate his duty, however, the present case was not on all fours with Saunig. Applying the objective test, it was submitted that as far as the defendant knew, a director in his position would not know that the company had employees. Nothing had put him on notice of that fact. It was not until he received the DPN that he knew that was not the case.

37. The defendant also relied on Deputy Commission of Taxation v Coco [2003] QSC 199 as authority for the proposition that s 269-35 must apply to the whole period. The burden sought to be relied on by the plaintiff involved the defendant having to take every step possible, whereas it was the defendant’s submission that he was only required by the section to take all reasonable steps, not any step that would be futile.

38. If the defendant, as a director, had known that there were employees employed by the company, he would be obliged to ensure compliance. The defendant submitted here that that was not the case. Because of the proposed agreed structure of the company, the defendant was not aware that there were employees. It was submitted that he was under no obligation to take any active step to ensure there were no employees. There was no reason why he should do so.

39. Once he received the DPN, the defendant agreed that he was under an obligation to take all reasonable steps thereafter so as to ensure compliance. The defendant had no money to pay the tax liability, and relied on Mrs Wheatley’s advice that she was instructing the company’s accountants to have the ATO agree to an instalment payment scheme.

40. As to the plaintiff’s contention that once he obtained legal advice, he should have convened another meeting of directors and confronted them with it, the defendant submitted that that submission was misconceived, and the court would not require the defendant to berate the other directors so as to change their position.

41. As to the requirement of beginning to wind up the company, all the defendant could do was to seek leave to commence winding up proceedings. Here, the defendant had no evidence to go to court with as to the insolvency of the company. At that time, as there were only 10 days in which the defendant could have applied for leave to commence proceedings, there was no possibility of obtaining a winding up order in the time available and it was therefore not a reasonable step that the court would require the defendant to take. In the defendant’s submission, it was pure conjecture as to the outcome of what would have happened had the defendant sought leave. The defendant asked rhetorically, “What other steps could he take to achieve the outcome”? The answer was, “Nothing”.

42. It was submitted that it was the unique set of facts here which justified a finding that the defendant had taken all reasonable steps. The company was not supposed to have employees, and the defendant had made out his defence on the balance of probabilities.

43. In submissions in reply, counsel for the plaintiff submitted that the timing of the application for leave to wind up, or a winding up order, did not matter. He relied on Canty, supra, at [42] – [45].

Determination

48. I am satisfied that the court has jurisdiction to determine the matter, applying Forsyth v Deputy Commissioner of Taxation, supra. I am further satisfied that the plaintiff has established a prima facie entitlement to the amount withheld by the company by way of PAYGW, pursuant to subdivision 16-B in Schedule 1 to the TAA in the sum of $111,798.04.

49. The real issue in the proceedings is whether the defendant has made out the defence relied on in s 269-35(2) of the TAA. In determining that matter, I am entitled to have regard to the matters set out in s 269-35(3)(a) and (b).

50. An objective test is to be applied in determining the issue, namely, whether the defendant took all reasonable steps to ensure:

(1) That the company complied with its obligation.

(2) That the directors caused an administrator of the company to be appointed, or

(3) The directors caused the company to begin to be wound up (within the meaning of the Corporations Act), or

alternatively, that there were no reasonable steps the defendant could have taken to ensure that any of things happened.”

51. In Deputy Commissioner of Taxation v Saunig, supra, Heydon JA, (with whom Sheller JA and Gzell J agreed), referred to the court’s earlier decision in Miller v Deputy Commissioner of Taxation (1997) 26 ACSR 533, where it was held that the appellant director could not make out a defence under the equivalent section unless he showed reasonableness of his conduct in relation to all four of the options referred to in the section. The taking of all reasonable steps to ensure compliance required each option to be addressed, either in the sense of taking reasonable steps to bring it about, or declining to do anything on the basis there were no such steps that the director could have taken. At [25], Heydon JA held that it was for the defendant to prove that he took all steps that were reasonable, having regard to the circumstances in which the defendant, acting reasonably, knew or ought to have known, to ensure compliance. It was common ground that the test was an objective one.

52. In Canty v Deputy Commissioner of Taxation, supra, Handley JA, (with whom Beazley and Santo JJA agreed), also referred to Miller v Deputy Commissioner of Taxation, supra. His Honour said:

“[37] … Compliance will be achieved if any one of those events were to occur. Thus if payment were made there is no need for an agreement, an administrator or a liquidator. If payment was being pursued, the other courses would for the time being be unnecessary and counter-productive. If payment is out of the question or cannot be achieved the person must address the other steps. If winding up then becomes a preferred option there will be no need for the time being to seek the appointment of an administrator.

[38] The defences under (a) and (b) are cumulative not mutual exclusive. A defendant may establish that there was nothing that could reasonably be done to achieve payment. He or she may also establish that there was no point in attempting to negotiate an agreement with the Commissioner. In such a case the defence under (b) would succeed pro tanto, leaving the defence under (a) to address the remaining options.

[39] In other cases the defence under (b) may succeed in relation to all options, so that the defence under (a) need not be considered. If the only feasible options are the appointment of an administrator or a liquidator a person under the duty, acting reasonably, may decide to seek a winding up. If so, he or she will not be acting unreasonably by doing nothing to secure the appointment of an administrator at that stage. The converse will also be true.

[40] Thus a person under the duty, who acted reasonably in choosing one of the possible events and took all reasonable steps to bring it about would, to that extent, make out the (a) defence, although no attempt was made at that stage to achieve compliance in any other way. A person who acted reasonably in choosing between the alternatives but failed to take all reasonable steps to bring about the selective event would fail, as would a person who acted unreasonably in choosing the option to be pursued.”

53. His Honour went on to decide that the natural meaning of the section was that the combined defences must cover the whole of the period between the breach of the obligation on the due date and the expiry of the DPN.

54. It was not enough for the defendant to rely on the pre-incorporation conversations he had with Mr Wheatley to the effect that the new company would not have any employees. Following incorporation, the defendant, as a director, had an obligation to inform himself of the activities of the company, notwithstanding those activities were carried out in Western Australia, and how the company was carrying out those activities. I find it was not reasonable for him to delegate all responsibility to Mr and Mrs Wheatley, and never inform himself of those matters. As a director, he had a duty to ensure that an appropriate system was in place to manage this company’s taxation liabilities.

55. The defendant’s reliance on his “beliefs’ set out in [34] above, bespeak a subjective reliance on the operational structure of the company and a complete delegation of his duties as a director to Mr and Mrs Wheatley. As Heydon JA made clear in Saunig, supra, the defendant could not rely on his ignorance of the financial systems in place so as to satisfy the objective test required by s 269-35.

56. Once the defendant received the DPN, he did act reasonably by contacting Mrs Wheatley by phone to find out the nature of the monies withheld for the tax liability, and then by calling a meeting of directors. Once he formed the opinion that the company was insolvent, and proposed a resolution to appoint an administrator which was defeated, it was not sufficient for the defendant merely to obtain legal advice, and, accepting that it was properly given, to do nothing more. That advice should have been immediately passed on to the other directors, a further meeting held, and a resolution proposed to appoint an administrator. Further, an application should have been made for leave to wind up the company so as to come within s 269-35(2)(a)(iii).

57. The defendant’s position here was not unlike the respondent’s position in Saunig, supra. There, Mr Saunig sought to obtain further finances for the company to meet its taxation obligations, but was denied agreement to that by the majority on the board. He was unable to put forward any proposal to the Commissioner, absent any refinancing sufficient to warrant an agreement, and although steps were taken towards paying the outstanding taxation liability, its success was dependent upon securing further financing. Further steps were taken to “close down” the company but no agreement was secured in that respect. Whilst the trial judge there found that Mr Saunig “found himself in something of a loop”, she was satisfied that he had taken all reasonable steps, albeit steps that were ultimately inefficient and ineffective, and to the extent that he did not take steps, there were no effective steps available to him, thus the defence was made out. The Court of Appeal disagreed. Like here, the corporation involved was a relatively small commercial operation. In the 17 month period of its operation, Mr Saunig had not attended to the company’s taxation affairs, trusting one or other or both of the other two directors to handle those affairs properly, and was ignorant of the fact that the role was not being satisfactorily performed. Heydon JA said at [28]:

“While even in a relatively small organisation like the company in this case, it may not be right to require each director to take personal steps to ensure compliance with (the section), it was encumbent upon Mr Saunig to ascertain what the company’s duties in relation to tax instalments deducted from the employees’ wages were and to ensure that some system was in place which would produce compliance. There was no evidence of any such system. … Mr Saunig’s conduct must be judged not only by a reference to what he knew, but also by a reference to what he ought to have known. He ought to have known that there were deduction payments, that the deduction payments should have been passed on to the taxation office, and that they were not being passed to the taxation office.”

58. So too here, I find that the defendant ought to have known, in the short period of operation of the company’s affairs, that the company was employing people and withholding PAYG payments for which it incurred a liability to pass on to the taxation office, and had not done so. Like Mr Saunig, the defendant had an ample period within which to take steps to meet the company’s obligations for compliance before he was aware of the problem. Like Mr Saunig, the defendant sought to answer that difficulty by contending that the other directors were not cooperating.

59. Once he was served with the DPN, it was not enough for the defendant to merely speak to Mrs Wheatley. He was told that the company’s accountants would be engaged to liaise with the ATO to enter into an instalment payment arrangement, however, he did nothing more in respect of the company complying with its obligation. It was no answer to merely state that he had been bankrupt and could not raise finance personally.

60. Nor was it sufficient for the defendant to rely on the evidence that he had called a meeting of the company and proposed a resolution that the directors appoint an administrator which was defeated. Once he received the legal advice referred to above, he could have called a further meeting for the purpose of persuading the directors to resolve to appoint an administrator or to begin to wind up the company. He had a further option of applying for leave to begin winding up proceedings on the basis of insolvency. I therefore find that there were steps that could have been taken in respect of each of the three matters in s 269-35(2)(a) and further, that the defendant has not satisfied the onus that there were no reasonable steps he could have taken to ensure that any of those things happened in ss (2)(b).

61. Having regard to all of the evidence, I therefore find that there were reasonable steps the defendant could have taken to ensure at least the matters set out in ss (2)(a)(ii) and (iii) were pursued. Applying the objective test proposed in Saunig, supra, the defendant ought to have known that the company was incurring a tax liability by way of PAYGW and, once served with the DPN, the defendant should have taken the steps outlined above. I am not satisfied that he has made out a defence based on s 269-35(2)(a) or (b), having regard to the manner in which, as a director of the company, he failed to inform himself of the way in which the company was being managed and operated. In all the circumstances, given there were steps that he could have reasonably taken the defendant has not met the onus on him to establish the statutory defence.

62. I therefore find the plaintiff is entitled to a verdict and judgment for the amount it claims.

Orders

63. I make the following orders:

1. Verdict and judgment for the plaintiff against the defendant in the sum of $111,798.00, together with interest pursuant to s 100 of the Civil Procedure Act 2005.

2. The defendant is to pay the plaintiff’s costs of the proceedings.

3. The parties are to file a Consent Order giving effect to these orders.

4. If either party seeks a special costs order, application is to be made by way of Notice of Motion, with affidavit evidence in support outlining the basis of such application.

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Decision last updated: 22 October 2018