Mandalinic v Stone (Liquidator)

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FEDERAL COURT OF AUSTRALIA

Mandalinic v Stone (Liquidator) [2023] FCAFC 146

Appeal from: Stone (Liquidator), in the matter of RIC Admin Pty Ltd (in liq) v Mandalinic [2022] FCA 1346
File number: NSD 1022 of 2022
Judgment of: STEWART, MCELWAINE AND BUTTON JJ
Date of judgment: 4 September 2023
Catchwords: CORPORATIONS – application for leave to appeal and appeal from interlocutory decision of single judge – where the appellant, a director of a company in liquidation, filed an affidavit in Supreme Court of New South Wales proceedings commenced by the Deputy Commissioner of Taxation to recover tax-related liabilities including directors penalties for which he was liable under Division 269 of Schedule 1 to the Taxation Administration Act 1953 (Cth) (TAA) – whether a company director can file an affidavit for the purposes of s 268-40 of Schedule 1 to the TAA in director penalty proceedings brought by the Commissioner against the director, which has the effect of reducing or revoking an estimate of liability issued to the company – whether a director of a company in liquidation can file an affidavit for the purposes of s 268-40 of Schedule 1 to the TAA – leave to appeal granted – appeal dismissed
Legislation:

Corporations Act 2001 (Cth) ss 9, 198A, 198G, 474, 477, 513A, 513B, 588M(2)

Federal Court of Australia Act 1976 (Cth) s 24(1A)

Income Tax Assessment Act 1936 (Cth) ss 6, 222AFA, 22AGA, 222AGC, 222AHA, 222AHE, 222AIA, 222AIB, 222AID, 222AIG, 222AIH

Income Tax Assessment Act 1997 (Cth) s 1-3(1), subdivision 4-5, 995

Insolvency Practice Schedule (Corporations), Sch 2 to the Corporations Act 2001 (Cth) cll 90-10, 90-15

Taxation Administration Act 1953 (Cth) Sch 1 ss 12-35, 12-40, 16-70, 16-75, 268-1, 268-5, 268-10, 268-15, 268‑20, 268-25, 268-30, 268-35, 268-40, 268-45, 268-70, 268-85, 268-90, 286-95, 268-100, 269-15, 269-20, 269-35, 269-40

Explanatory Memorandum, Income Tax Assessment Bill 1996 (Cth)

Explanatory Memorandum, Insolvency (Tax Priorities) Legislation Amendment Bill 1993 (Cth)

Explanatory Memorandum, Tax Laws Amendment (2012 Measures No. 2) Bill 2012 (Cth)

Joint Committee of Public Accounts and Audit, “An Advisory Report on the Delayed Provisions of the Tax Law Improvement Bill (No. 2) 1997”
Cases cited:

Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation [1981] HCA 26; 147 CLR 297

Coverdale v West Coast Council [2016] HCA 15; 259 CLR 164

Lee v Deputy Commissioner of Taxation; Silverbrook v Deputy Commissioner of Taxation [2020] NSWCA 95; 102 NSWLR 825

Priority Matters Pty Ltd v Deputy Commissioner of Taxation [2022] NSWCA 208

Project Blue Sky Inc v Australian Broadcasting Authority [1998] HCA 28; 194 CLR 355

Re Priority Matters Pty Ltd [2022] NSWSC 3; 160 ACSR 1

Transtar Linehaul Pty Ltd v Deputy Commissioner of Taxation [2011] FCA 856; 196 FCR 271

Division: General Division
Registry: New South Wales
National Practice Area: Taxation
Number of paragraphs: 140
Date of hearing: 15 May 2023
Counsel for the Appellant: CD Wood SC and T Cleary
Solicitor for the Appellant: MSD Law
Counsel for the…
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Details
Case
[2023] FCAFC 146
Decision Date

CaseChat Overview and Summary

Mandalinic v Stone (Liquidator) involved a dispute between Mr Mandalinic, a director of a company in liquidation, and the liquidator of that company, who was acting on behalf of the Commissioner of Taxation. The Commissioner had commenced proceedings against Mr Mandalinic to recover tax-related liabilities, including director penalties under Division 269 of the Taxation Administration Act 1953 (Cth). The central legal issue was whether a company director could file an affidavit under section 268-40 of the Act to reduce or revoke an estimate of liability issued to the company, and if such a director could do so after the company had been wound up. The primary judge had ruled against Mr Mandalinic's contention that he could file such an affidavit in the context of director penalty proceedings.

The court considered the statutory language of section 268-40 and its context, including the purpose of the Tax Administration Act to facilitate the recovery of unpaid taxes. It held that the term "you" in section 268-40(1) referred to the entity that was the subject of the estimate notice, which in this case was the company, not the director. The court reasoned that the legislative history and context indicated that the provision was intended to preserve the legal effect of the former regime, where only the person liable could file an affidavit. The court further noted that sections 268-40 and 268-90 were to be read together, reinforcing the conclusion that "you" referred to the company. Consequently, the court dismissed the appeal and denied Mr Mandalinic's attempt to reduce or revoke the estimate through an affidavit filed in director penalty proceedings. The court also set out the procedure for any application for costs related to the appeal.

Orders

Orders of the court

1. The appeal be dismissed.

2. Any application for costs is to be made in writing, limited to three pages and filed within seven days of the publication of these reasons and if made responded to within a further period of seven days.

3. Subject to any further order of the Court, the determination of any costs application will proceed on the papers.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Background

Background to the litigation

For simplicity, all section references below, unless the contrary is indicated, are to Sch 1 of the TAA, ie, the Taxation Administration Act 1953 (Cth).The essential facts By way of recapitulation, the essential facts are straightforward. They are extracted here from the primary judgment (at PJ [16]). The Commissioner issued an estimate for PAYG withholding to the company, RIC Admin Pty Ltd, which the company has never paid although a small amount was recovered by way of garnishee notice. The Commissioner subsequently issued a director penalty notice to the appellant, Mr Mandalinic, who was at all relevant times a director of the company, for the unpaid amount of the PAYG withholding estimate. The company took no steps to contest the estimate. The Commissioner then served a creditor’s statutory demand on the company and thereafter successfully applied for the company to be wound up. The Commissioner then commenced a proceeding in the Supreme Court of New South Wales against Mr Mandalinic to recover the debt reflected in the director’s penalty notice. Mr Mandalinic filed an affidavit in the Supreme Court proceeding purporting to challenge the debt underlying the notice of estimate and to thereby revoke the debt of the company under item 2 of the table in s 268-40(1). The Commissioner then commenced the proceeding below against Mr Mandalinic in which claims for insolvent trading and unreasonable director-related transactions were brought. A component of the insolvent trading claim arises from the company’s indebtedness to the Commissioner as reflected in the notice of estimate. In respect of that aspect of the claim, Mr Mandalinic sought to rely on the affidavit filed in the Supreme Court proceeding to contend that the estimate had been revoked by operation of the item 2 referred to. It was the validity of that contention that arose for determination by the primary judge in an interlocutory application.The appellant’s submissions The appellant submits that the Commissioner’s powers to create a liability by issuing an estimate are “extraordinary” and, unsurprisingly, are tempered by legislative safeguards, which are consistent with the purpose of the TAA to facilitate the recovery of unpaid amounts that are actually owed. The opportunities afforded by the legislative scheme “to overcome the potentially harsh consequences” of the estimates regime are indicative of a legislative purpose to encourage taxpayers to engage with the Commissioner “with a view to ascertaining the true liability”. The appellant submits that the conclusion reached by the primary judge on the first question is wrong for essentially five reasons. First, it is said that the primary judge erred by construing the words “relate to” and “you” in s 268-40 narrowly when a broad reading of those words is not merely open but proper. The words “relate to” in s 268-40 are of “wide import” and broad enough on their face to apply to director penalty proceedings, a position which was noted by the New South Wales Court of Appeal in Lee v Deputy Commissioner of Taxation; Silverbrook v Deputy Commissioner of Taxation [2020] NSWCA 95; 102 NSWLR 825 at [41], and the primary judge considered that director penalties “relate to” unpaid amounts of estimates elsewhere in the primary judgment (at PJ [6]). The appellant submits that the primary judge’s construction of the word “you” in item 2 of s 268-40 is incorrect because each of the items in s 268-40 are independent of each other, providing a separate source of power to reduce or revoke an estimate that may become available at different times. The appellant accepts that the word “you” in item 1 of s 268-40 refers to the company, but contends that the word “you” has a sufficiently flexible meaning such that, in item 2, it can encompass proceedings against a director. It is said that this is a logical reading of item 2 in circumstances where it is conceivable that the Commissioner could elect to bring director penalty proceedings against a director before, or instead of, pursuing a company and so it would be “curious” and unjust if a director were unable to swear an affidavit reducing or revoking the estimate in the context of a director penalty proceeding, rendering them “liable for the payment of taxes that did not exist” should the estimate be wrong.

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

The appellant’s argument is that the reference to “you” in item 2 of the table at s 268-40 is to be construed as extending to a director, in the circumstances of the appellant, of a company that is being wound up and where the director is a party to a proceeding by the Commissioner for recovery of a director penalty pursuant to s 269-20. On that argument “you” is not confined to the company as the recipient of the notice from the Commissioner and is not otherwise affected by the winding up of the company.The primary judgment The primary judge at [18]-[20] set out from three High Court cases the settled principles applicable to statutory interpretation:In Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue(2009) 239 CLR 27; [2009] HCA 41 (Alcan) at [47] (Hayne, Heydon, Crennan and Kiefel JJ) stated:This Court has stated on many occasions that the task of statutory construction must begin with a consideration of the text itself. Historical considerations and extrinsic materials cannot be relied on to displace the clear meaning of the text. The language which has actually been employed in the text of legislation is the surest guide to legislative intention. The meaning of the text may require consideration of the context, which includes the general purpose and policy of a provision, in particular the mischief it is seeking to remedy.(Footnotes omitted).The passage in Alcan was expanded upon by in [sic] Federal Commissioner of Taxation v Consolidated Media Holdings Pty Ltd(2012) 250 CLR 503; [2012] HCA 55 at [39] (French CJ, Hayne, Crennan, Bell and Gageler JJ) where it was stated:This Court has stated on many occasions that the task of statutory construction must begin with a consideration of the [statutory] text. So must the task of statutory construction end. The statutory text must be considered in its context. That context includes legislative history and extrinsic materials. Understanding context has utility if, and in so far as, it assists in fixing the meaning of the statutory text. Legislative history and extrinsic materials cannot displace the meaning of the statutory text. Nor is their examination an end in itself.(Footnotes omitted).In SZTAL v Minister for Immigration & Border Protection and Another; SZTGM v Minister for Immigration and Border Protection and Another(2017) 262 CLR 362; [2017] HCA 34 it was stated at [14] (Kiefel CJ, Nettle and Gordon JJ):The starting point for the ascertainment of the meaning of a statutory provision is the text of the statute whilst, at the same time, regard is had to its context and purpose. Context should be regarded at this first stage and not at some later stage and it should be regarded in its widest sense. This is not to deny the importance of the natural and ordinary meaning of a word, namely how it is ordinarily understood in discourse, to the process of construction. Considerations of context and purpose simply recognise that, understood in its statutory, historical or other context, some other meaning of a word may be suggested, and so too, if its ordinary meaning is not consistent with the statutory purpose, that meaning must be rejected.

Ratio Decidendi

Legal Principle Established

Finally, it is said that it is not “telling” that the Explanatory Memorandum to the Tax Laws Amendment (2012 Measures No. 2) Bill 2012 (Cth) does not identify that a director can extinguish their personal liability by filing an affidavit in director penalty proceedings to reduce or revoke the estimate because the Explanatory Memorandum is only directed to methods of extinguishing the personal liability of directors rather than eliminating the estimate. Consideration and disposition There are a number of cumulative considerations which lead to the conclusion that in item 2 of the table in s 268-40(1) the “you” who can file an affidavit is the person or entity that is the subject of the estimate notice and not some other person or entity the claimed liability of whom is in some way based on or related to the liability under the estimate notice. In the factual circumstances of the present case, the company to whom the estimate notice was directed could avail itself of the opportunity provided by item 2 to revoke or reduce the estimate, but the director who was the subject of a director’s penalty notice could not. First, as submitted by the Commissioner, the provisions containing the word “you” were introduced into the TAA as a result of the Tax Law Improvement Project, which aimed to simplify the legislative scheme without changing the underlying taxation policy: Explanatory Memorandum, Income Tax Assessment Bill 1996 (Cth) at 17–18 and 149; Joint Committee of Public Accounts and Audit, “An Advisory Report on the Delayed Provisions of the Tax Law Improvement Bill (No. 2) 1997” (1997) 1. The predecessor to Div 268 used the term “person liable” rather than “you”, with the words “person liable” being defined as a person who has “become liable under a remittance provision to pay to the Commissioner” and where a “person liable” was the only person (save for their trustee) who could file an affidavit to revoke or reduce the estimate. Therefore, under the former regime the “person liable” was the person who was the subject of the remittance obligations, the recipient of the estimate and the party to the proceedings that related to the recovery of the unpaid amount of the estimate. If the legislative intention behind the amendments to the statutory scheme was to preserve their legal effect then “you” in Div 268 means the company and not the director. Secondly, ss 268-40 and 268-90 are to be read and understood together. That arises from the reference to s 268-90 in note 2 to s 268-40, from the reference to s 268-40 in s 268-90(1), and from the obvious point that the statutory declaration and affidavit referred to in s 268-40 are the same as the statutory declaration and affidavit dealt with in s 268-90. While s 268-40 defines who can give or file the affidavit or statutory declaration and by when they must do so, s 268-90 sets out its requirements as to scope, content and its maker (see the headings within the section). This observation weighs against the appellant’s submission that “you” can refer to different entities in s 268-40 and s 268-90.