Eaton v Deputy Commissioner of Taxation

[2006] NSWCA 283

Reported Decision: 67 NSWLR 205

Court of Appeal

CITATION:	EATON and Others v DEPUTY COMMISSIONER OF TAXATION [2006] NSWCA 283 This decision has been amended. Please see the end of the judgment for a list of the amendments.
HEARING DATE(S):	23 August 2005
JUDGMENT DATE:	19 October 2006
JUDGMENT OF:	Handley JA at 1; Hodgson JA at 2; Santow JA at 3
DECISION:	Appeals dismissed with costs.
CATCHWORDS:	TAXATION – Three directors’ parallel liability in circumstances where company’s tax liability entirely cancelled by Deed of Company Arrangement – entry of judgment against the directors – whether enforcement of judgment could be resisted on basis of unfairness.
LEGISLATION CITED:	District Court Act 1973 s44(1)(a), s83A Income Tax Assessment Act 1936 (Cth) s160M(3), s222ALA, s222AOB, s222AOC(1), s222A0G, s22AOH, s222AOI, Supreme Court Rules Part 12 rule 5(b)(vi)
CASES CITED:	Commissioner of Taxation v Orica Limited [1998] 94 CLR 500 DCT v Harrington (Walmsley DCJ (No 9568/01), 1 October 2003, unreported) Forsyth v Deputy Commissioner of Taxation (2002) 62 NSWLR 132 Stewart v DCT (1997) 38 ATR 26
PARTIES:	Stuart Alexander EATON (Appellant CA 40911/04) Kristine Gardner EATON (Appellant CA 40912/04) Glyn Lloyd JONES (Appellant CA 40913/04) DEPUTY COMMISSIONER OF TAXATION (Respondent in each matters)
FILE NUMBER(S):	CA 40911/04; 40912/04; 40913/04
COUNSEL:	H R SORENSEN/ R L SEIDEN (Appellants in each matter) S GAGELER, SC/ P RODIONOFF (Respondent in each matter)
SOLICITORS:	Rodd Peters Lawyers (Appellants in each matters) Office of the Chief Tax Counsel, Australian Taxation Office (Respondents in each matters)
LOWER COURT JURISDICTION:	District Court
LOWER COURT FILE NUMBER(S):	DC4215/03; DC4216/03; DC4217/03
LOWER COURT JUDICIAL OFFICER:	Sidis DCJ
LOWER COURT DATE OF DECISION:	1 July 2004

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CA 40911/04 (DC 4215/03)
CA 40912/04 (DC 4216/03)
CA 40913/04 (DC 4217/03)

HANDLEY JA
HODGSON JA
SANTOW JA

19 OCTOBER 2006

Stuart Alexander EATON v DEPUTY COMMISSIONER OF TAXATION

Kristine Gardner EATON v DEPUTY COMMISSIONER OF TAXATION

Glyn Lloyd JONES v DEPUTY COMMISSIONER OF TAXATION

Judgment

1 HANDLEY JA: I agree with Santow JA.

2 HODGSON JA: I agree with Santow JA.

3 SANTOW JA:

INTRODUCTION
Three directors of the company are rendered liable under the terms of the Income Tax legislation to pay a penalty which parallels tax liability of the company of which they are a director. The primary question posed by this appeal is thus: what happens to the three directors’ parallel liability if the company’s tax liability to the Deputy Commissioner of Taxation (“DCT’) is entirely cancelled by a Deed of Company Arrangement under the Corporations Act ? Is the operation of the Income Tax Assessment Act 1936 (Cth) (“ITAA”) such that the three directors would then be discharged from any tax liability? Sidis DCJ answered that question in favour of the DCT, so that the company’s directors necessarily remained liable for the full amount.

4 That conclusion, and the jurisdiction of the District Court to determine such questions, are both challenged in this appeal. However, the challenge to jurisdiction is only on a formal basis. To be successful Forsyth v Deputy Commissioner of Taxation (2002) 62 NSWLR 132, a decision of the Court of Appeal, would have to be overruled.

5 There is a final question. It is whether the trial judge was correct in concluding that the DCT was entitled to enter judgment against each of the three directors in the same amount or whether this was so unfair as to preclude the DCT from enforcing any such judgment. The appellant seeks imposition of a permanent stay on the basis of unfairness to the three appellants.

SALIENT FACTS

6 The three appellants were directors of Lofeze Pty Ltd (“the Company”).

7 The Company failed to remit “group” taxes withheld to the DCT between 1 December 2000 and 30 June 2001 as required by the provisions of the ITAA.

8 On 11 July 2002, a director penalty notice was issued to each of the appellants in accordance with s222AOE.

9 The appellants failed to secure the company’s compliance with the requirements of s222AOB within 14 days as required by s222AOG of ITAA to obtain remission of the penalty.

10 Section 222AOB was not complied with in that the directors did not cause the company to:

(a) comply with its obligations in respect to the amounts withheld,

(b) make an agreement with the DCT in relation to the amounts withheld under s222ALA of ITAA,

(c) appoint an administrator, or

(d) begin to be wound up.

11 As a consequence, in accordance with s222AOC(1) ITAA the appellants as directors of the company at the relevant times became liable to pay to the DCT by way of penalty an amount equal to the company’s liability.

12 On 2 July 2003, a further director penalty notice was issued to the appellants for amounts not claimed in the proceedings.

13 On 17 July 2003, an administrator was appointed to the company.

14 On 14 August 2003, the DCT lodged a proof of debt with the administrator claiming $638,026.93 for “running balance account in respect of BAS amounts”.

15 On 23 September 2003, the company’s creditors entered into a deed of company arrangement (“the Deed”). The deed required the company to pay the administrator $51,000 by instalments. There was no provision requiring any payment specifically to the DCT, but only to creditors generally.

16 Clause 10.1 of the deed provided:

“Upon payment of the $51,000 referred to in clauses 7.2 and 7.3 and upon the deed company complying with clause 9.3 the deed company is released from the debts of all creditors of the deed company other than related party creditors and secured creditors and the debts from which the deed company is released are forever extinguished.”

17 All instalments were paid by 31 March 2004 (Appellant affidavit 25 June 2004; Orange, 5M, 7M]). This does not appear to be contested.

18 The DCT claimed against each of the appellants, as directors of the Company, a penalty alleged to be payable under s222AOC ITAA. This was in the sum of $110,736 plus interest, calculated in accordance with s83A District Court Act 1973 at $7959.49 totalling $118,695.49 on the day proceedings were heard.

The primary judgment

19 At trial, the appellant directors sought to defeat the claim of the DCT against them on two principal bases which depended upon the following contentions:

(i) that the District Court did not have jurisdiction to deal with the proceedings, and

(ii) that as the Company’s debts had been extinguished pursuant to the Deed of Company Arrangement of 23 September 2003, the effect was to extinguish the liability of the appellant directors to the DCT, by reason of the operation of the relevant provisions of the ITAA following such extinction.

20 The appellants argued that the District Court no longer has jurisdiction in debt recovery actions instituted by the DCT. That argument had the following steps:

(i) section 44(1)(a) District Court Act provides that the District Court has jurisdiction to hear and dispose of actions which if brought in the Supreme Court would be assigned to the Common Law Division,

(ii) section 53(1) Supreme Court Act provides that all proceedings that are not assigned to the Equity Division are assigned to the Common Law Division,

(iii) Part 12 rule 5(b)(vi) Supreme Court Rules assigns to the Equity Division proceedings in relation to any provision in any Act or Commonwealth Act by which a tax, fee, duty or “other impost” is levied, collected or administered by or on behalf of a State or the Commonwealth,

(iv) It was agreed by the parties that the amounts sought to be recovered by the DCT are “imposts” within the meaning of the Rule.

21 The reference in s44(1) District Court Act to actions “assigned to the Common Law Division of [the Supreme] Court” may apply to:

(a) those actions assigned to the Common Law Division on the date upon which s44(1)(a)(i) was enacted in its present form (in 1997), or

(b) those actions assigned to the Common Law Division from time to time (the “ambulatory” or “always speaking” approach) (Red, 16D-M).

22 Following the decision of Walmsley DCJ in DCT v Harrington (Walmsley DCJ (No 9568/01), 1 October 2003, unreported) the trial judge preferred the first interpretation (Red, 16M-V). As there had been no such assignment to the Equity Division until 1 August 2000, it followed that there was jurisdiction (Red, 17O-P).

23 I here interpolate that the issue is in any event resolved in favour of jurisdiction by the decision of the Court in Forsyth v DCT (2002) 62 NSWLR 132, though leave to appeal was subsequently obtained from the High Court. That leaves the appellants’ primary submission, namely that the Deed of Company Arrangement extinguishes their liability.

24 For convenience, I quote the principally relevant provisions of the ITAA the subject of this appeal, below:

222AOB. Directors to cause company to remit or to go into voluntary administration or liquidation—deductions and amounts withheld
(1) 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 its obligations in relation to deductions (if any) and amounts withheld (if any) 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 (if any) and amounts withheld (if any);
(c) appoint an administrator of the company under section 436A of the Corporations Act 2001;
(d) begin to be wound up within the meaning of that Act.
(1A) For the purposes of paragraph (1)(a), the obligations are:
(a) to comply with Division 1AAA, 3B or 4, as the case may be, in relation to each deduction (if any):
(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; and
(b) to comply with Subdivision 16-B in Schedule 1 to the Taxation Administration Act 1953 in relation to each amount that the company has withheld (if any):
(i) for the purposes of Division 12 of that Schedule; and
(ii) whose due date is the same as the due date.
(2) This section is complied with when:
(a) the company complies as mentioned in paragraph (1)(a); or
(b) the company makes an agreement as mentioned in paragraph (1)(b); or
(c) an administrator of the company is appointed under section 436A, 436B or 436C of the Corporations Act 2001; or
(d) the company begins to be wound up within the meaning of that Act;
whichever first happens, even if the directors did not cause the event to happen.

(3) 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.
………

222AOC. Penalty for directors in office on or before due date
(1) 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 or amounts withheld:
(a) that the company has deducted for the purposes of Division 1AAA, 3B or 4 of this Act, or withheld for the purposes of Division 12 in Schedule 1 to the Taxation Administration Act 1953 (as the case requires); and
(b) whose due date is the same as the due date.

(1A) If section 222AOBAA is not complied with before the end of the payment day, each person who is a director of the company on the payment day is liable to pay to the Commissioner, by way of penalty, an amount equal to the unpaid amount or amounts that the company is required to pay under section 13-5 in Schedule 1 to the Taxation Administration Act 1953 in respect of the payment or payments relating to the payment day.
(2) If section 222AOBA is not complied with before the end of the benefit day, each person who is a director of the company on the benefit day is liable to pay to the Commissioner, by way of penalty, an amount equal to the unpaid amount or amounts that the company is required to pay under Subdivision 16-B in Schedule 1 to the Taxation Administration Act 1953 in respect of the benefit or benefits provided on the benefit day. [emphasis added]

222AOG. Remission of penalty if section 222AOB, 222AOBAA or 222AOBA complied with before notice period ends
If:
(a) a penalty is payable by a person under this Subdivision; and
(b) section 222AOB, 222AOBAA or 222AOBA (whichever relates to the penalty) 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.

222AOH. Effect of director paying penalty or company discharging underlying liability
(1) If one or more persons are liable to a penalty under this Subdivision, the following are “ parallel liabilities ”:
(a) the liability of that person, or of each of those persons, to the penalty;
(b) the liability referred to in subsection 222AOC(1), (1A) or (2) (whichever relates to the penalty);
(c) liability under a judgment, so far as it is based on a liability referred to in paragraph (a) or (b).
(2) This means that if, at a particular time:
(a) an amount is paid or applied towards discharging one of the parallel liabilities; or
(b) because of section 222AHA, one of the parallel liabilities is discharged to the extent of a particular amount;

each of the others that is in existence at that time is discharged to the extent of the same amount. However, this subsection does not discharge a liability to a greater extent than the amount of the liability.

222AOI. Director’s rights of indemnity and contribution
A person who pays an amount under section 222AOC or 222AOD has the same rights:
(a) whether by way of indemnity, subrogation, contribution or otherwise; and
(b) against the company or anyone else;
as if the payment had been made under a guarantee:
(c) of the liabilities referred to in section 222AOC; and
(d) under which the person, and every other person who has paid, or from whom the Commissioner is entitled to recover, a penalty under this Subdivision, were jointly and severally liable as guarantors.”

25 Section 222AOH ITAA creates parallel liabilities which operate so that the liability imposed upon the defendant by way of penalty is parallel to the liability of the Company to remit amounts of tax which it has withheld. This does not mean that the DCT can recover the same amount from each of the Company and its directors cumulatively. What it does mean is that the DCT can choose to recover from each of them up to the full amount of the unremitted withholding tax (Red, 17Q-Y).

26 The question is whether clause 10.1 of the Deed which extinguished the Company’s debt, also extinguished the parallel liability of the appellant (Red, 18B-F).

27 The trial judge cited the obiter remarks of Pincus JA in Stewart v DCT (1997) 38 ATR 26. These were that “if a s222ALA agreement is made and faithfully complied with, still the penalty payable by the Director under s222AOC remains undiminished once it has come into being by virtue of s222AOB” (Red, 19E-I). (A s222ALA agreement is a creature of the ITAA, whereby a tax liability owed by a person may be agreed with the Commissioner to be paid by instalments.)

28 Section 222AOG provides a means of securing a remission of the penalty imposed by s222AOC (that is, by securing the company’s compliance with the obligations imposed by s222AOB). The trial judge correctly found that, if the company’s compliance is not so secured, a separate parallel liability is imposed by way of penalty on the directors of the company. That liability is not affected by arrangements entered into by the DCT with the company or any other director. This is except to the extent that the parallel nature of the liability means that any amount “actually paid” in reduction of the amount of the unremitted withholding tax thereby reduces the parallel liability of the company and those upon whom the penalty has been imposed (Red, 19R-20B).

29 The trial judge therefore found for the DCT in the amount of $118,695.49 in respect of each appellant (Red, 20B-21J).

30 The trial judge ordered the appellant/s to pay the DCT’s costs (Red, 20M).

DISPOSITION
Jurisdiction

31 As I have earlier noted, on the jurisdictional challenge the matter is governed by Forsyth v DCT, there being only a formal challenge to its correctness. Thus I proceed on the basis that this basis of the challenge must fail.

Whether Deed of Company Arrangement extinguished appellants’ liability.

32 The first argument put by the appellants was only faintly pressed. The nub of that argument turned upon the meaning of s222AOC and in particular the meaning of the expression “an amount equal to the unpaid amount of the company’s liability” in the opening words of subclause (1).

33 Under the Corporations Act a deed of company arrangement releases the company from a debt where the deed, as here, provides for that release. The creditor concerned is bound by the deed. Then it is said to follow by the appellants that any liability on the director’s part to pay a penalty to the Commissioner under s222AOC must therefore be satisfied. This is because there is no longer an amount which is an “unpaid amount” of “the company’s liability”, as that liability has been released or extinguished by the deed of company arrangement.

34 The fundamental difficulty with that contention is that s222AOC(1) is predicated upon the amount of “the unpaid amount of the company’s liability” upon “the due date”, not some later date. The definition of “the due date” is to be found in s222AOA. It refers to “the earliest day” on which the company had the relevant liability to make a relevant deduction or withhold a relevant amount. Thus it follows that the Deed of Company Arrangement coming into effect later can have no bearing so far as s222AOC is concerned.

35 The appellants then concentrated on an argument based upon s222AOH and the effect of the Deed of Company Arrangement.

36 That contention, expressed in various attempts at refinement, really amounted to this. Under s222AOH(2), where “an amount is paid or applied towards discharging one of the parallel liabilities”, here by reason of the extinction of the debt in return for payment of $51,000 under the Deed of Company Arrangement, that necessarily discharged each director’s parallel penalty liability in equivalent amount.

37 There are several difficulties with this contention. The first is that the expression “paid or applied” in s222AOH(2)(a) must necessarily refer to a payment or application of money to the Commissioner. Otherwise it could hardly go towards “discharging” one of the parallel liabilities, being a parallel liability to the Commissioner in each case. Here the $51,000 is paid under the Deed of Company Arrangement to the Company itself thence to be applied in accordance with the Deed. There is no evidence that any amount is payable pursuant to the Deed to the Commissioner. One could not assume that the whole or indeed any part of the $51,000 would be paid to the Commissioner. But even if one could, this would only mean that the discharge would be so much of $51,000 as was actually paid to the Commissioner. As I have said, there is simply no evidence that any amount was or would be paid to the Commissioner pursuant to the Deed of Company Arrangement.

38 Nor do the difficulties stop there. The natural meaning of the word “discharging” and the corresponding term “discharge” in a context such as this, must mean discharging not by release or extinction by operation of law pursuant to the deed of company arrangement. Rather, it must mean release or extinction by the “fulfilment, performance, execution (of an obligation, duty, function, etc)” in accordance with the sixth sense of that term in the Oxford English Dictionary, 2nd ed (1989). “Discharge”, may likewise extend to “the act of clearing off a pecuniary liability; payment”, where “clearing off” has the sense of payment. The High Court in Commissioner of Taxation v OricaLimited [1998] 94 CLR 500 at 539, in the context of the capital gains tax provisions of s160M(3) of the ITAA took up these meanings of “discharge” at [94] (omitting footnotes):

[94] There is no basis for confining “discharge” or “satisfaction” in this way. First, as a matter of ordinary language, “discharge” can be used in the sense of “[t]he act of clearing off a pecuniary liability; payment” or “[f]ulfilment, performance, execution (of an obligation, duty, function, etc)”.

39 It follows that this basis for challenging the Commissioner’s determination must also fail.

40 A further matter pressed by the appellants was that the judgments taken out against more than one defendant amounted to an abuse of process. This was said to be because of the oppressive consequences including loss of any right to contribution upon judgment. This was said to constitute a verdict in favour of the DCT three times the value of the underlying liability, though that logic assumes each director was good for the money. The consequence pressed by the appellants was that, to avoid so oppressive a consequence, the DCT ought to have made an election as to which of the appellants was to be proceeded against. This Court was therefore asked to assist, by refusing to enter judgment or granting a stay of execution.

41 The argument that contribution would not be available is in my opinion fallacious. It depends upon a strained construction of s222AOI whereby payment of the judgment debt was said to fall outside its ambit, leaving no room for contribution. This was on the premise that s222AOI was an exhaustive code on contribution. That argument was based upon the premise that s222AOH(1)(c) makes express reference to parallel liabilities arising “under a judgment”. Section 222AOH(2) then provides for consequential discharge of other parallel liabilities when one of these parallel liabilities is discharged. Then, because under s222AOI there is no such express reference to discharging liability under a judgment but only reference to paying an amount under the relevant statutory provisions, it is said there can be no contribution.

42 While it is not necessary to reach any concluded view on this, in my view the terms of s222AOI are wide enough to encompass contribution in the present circumstances of the judgment debt. However, even if that were not so, there remains an equitable right of subrogation in any event. And even if neither conclusion were correct, it by no means follows that s222AOH should be interpreted in the manner pressed by the appellants.

43 There is no oppressive result in denial of contribution. Nor is there any abuse of process in the fact that there are three judgments against three directors, so enabling the DCT to proceed against any one or more of them. That is simply a statutory consequence of the penalty regime where the company concerned fails to remit deductions or amounts withheld. It reflects a decision by the legislature to enable the DCT to hold directors jointly and severally liable for tax penalties in these circumstances.

OVERALL CONCLUSION

44 In my opinion, the appellants have not succeeded on any of their grounds of appeal. I would propose orders as follows:

(1) Appeals in each of No. 40911/04, 40912/04 and 40913/04 be dismissed.

(2) Appellants to pay respondent’s costs of the appeal in each of the above proceedings.

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