Consideration
101 I turn then to first consider whether, in this case, there is sufficient reason to question whether there is a real debt behind the Default Judgment.
102 It is convenient to commence the analysis with a consideration of the Default Judgment itself. That was entered in September 2014 in circumstances where Mr Bobos had failed to file a defence in the District Court Proceeding. In May 2017 Mr Bobos filed an application to have the Default Judgment set aside which was heard by Neilson DCJ over two days. In his reasons Neilson DCJ noted that the primary consideration for the court on the application was whether there was an arguable defence. In relation to that part of the statement of claim seeking payment of the amount the subject of the Penalty Notice Neilson DCJ noted that Mr Bobos' proposed defence essentially raised two matters: first, that the ATO failed to allocate payments made by him to the correct account; and secondly, that there was a concluded agreement for Bobos Engineering to repay the debt and the DCT submitted a proof of debt to the liquidators of Bobos Engineering, thus holding them liable for the debt.
103 Judge Neilson referred to the March 2014 Proposal and the August 2014 Letter, both of which were in evidence before him. As to the March 2014 Proposal at [11] of his reasons his Honour said:
It is clear from what I have quoted that this letter was written by the applicant in response to a letter of 11 February 2014, which is likely to have made a demand on the applicant for a director penalty, and have given him 21 days in which to pay the claim. It is also clear from what I have quoted, that the relief or benefit which the applicant sought was merely a period of indulgence, a deferral of the due date for the payment of the amount demanded. As is clear from what I have quoted, the applicant had been given 21 days from 11 February 2014, which probably amounts to about 3 March 2014.
104 In relation to the August 2014 Letter at [13] his Honour said of that letter that it "does not dispute any indebtedness" but "merely seeks further time in which to pay the claim, an accommodation".
105 At [14] his Honour concluded that no agreement had been reached between Mr Bobos and the ATO prior to entry of the Default Judgment and that there was never any protestation on the part of Mr Bobos that he was not indebted as alleged by the ATO. Rather, there were admissions that he was so indebted and the March 2014 Proposal and August 2014 Letter were no more than requests by Mr Bobos for further time in which to discharge his indebtedness. Judge Neilson found that nothing that occurred amounted to an agreement between Mr Bobos and the ATO pursuant to which the ATO agreed to forego its debt or was estopped from enforcing it.
106 Judge Neilson also considered the effect of the February 2015 Letter and the subsequent correspondence from the ATO. At [25] his Honour found that it was clear from the February 2015 Letter that Mr Bobos was aware that he was personally liable for the debts of Bobos Engineering and that there was nothing in the correspondence indicating that he was to be absolved of his personal liability arising from the default by Bobos Engineering or that the ATO had waived his liability.
107 At [28] of his reasons Neilson DCJ addressed Mr Bobos' submission based on the proof of debt lodged by the ATO in the liquidation of Bobos Engineering. His Honour noted that Mr Bobos' argument that the proof of debt amounted to some form of election by the ATO to pursue Bobos Engineering for debts owing to it, rather than Mr Bobos personally, was based on a misapprehension of the position. His Honour noted that Mr Bobos and Bobos Engineering had co-ordinate responsibility for the debt of Bobos Engineering and that insofar as Bobos Engineering might satisfy the debt it would reduce Mr Bobos' indebtedness and vice versa.
108 Commencing at [32] Neilson DCJ dealt with a number of other issues raised by Mr Bobos including that the ATO should have hypothecated payments made by Bobos Engineering to PAYG debts rather than to other debts, in particular those described by Mr Bobos as "BAS" payments. His Honour said in relation to that issue:
32 … The simple fact is that, according to the evidence of Ms Crump, which I have no hesitation in accepting, the principle applied by the ATO is that payments were assigned administratively by the ATO to the oldest debt owed by the taxpayer. Furthermore, how the ATO treats debts is a matter purely for it. I have earlier referred to the Taxation Administration Act 1953 by the acronym given to it in documentation, TAA. Section 8AAZL of the TAA provides in its first two subsections this:
"(1) This Division sets out how the Commissioner must treat the following kinds of amount:
(a) a payment the Commissioner receives in respect of a current or anticipated tax debt or tax debts of an entity;
(b) a credit (including an excess non RBA credit) that an entity is entitled to under a taxation law;
(c) an RBA surplus of an entity.
(2) The Commissioner must treat each such amount using the method set out in section 8AAZLA or 8AAZLB (but not both)."
A "RBA" means a running balance account established for a taxpayer under s 8AAZC. There is no dispute about that. The applicant had an RBA with the ATO. Section 8AAZLA is this:
"(1) The Commissioner may, in the manner he or she determines, allocate the amount to an RBA of the entity or, if the entity is a member of an RBA group, to an RBA of another member of the group.
(2) The Commissioner must then also apply the amount against the following kinds of debts (if there are any):
(a) tax debts that have been allocated to that RBA;
(b) general interest charged on such tax debts.
(3) To the extent that the amount is not applied under subsection (2), it gives rise to an excess non-RBA credit in favour of the entity that:
(a) is equal to the part of the amount that is not applied;
(b) relates to the RBA to which the amount was allocated."
Section 8AAZLB provides for the second method provided for in s 8AAZL but it is not applicable to the applicant or his associated companies. Section 8AAZLE contains a heading "Instructions to Commissioner not binding" and provides this: "In doing anything under this Division, the Commissioner is not required to take account of any instructions of any entity."
33 It is therefore completely irrelevant that the applicant wished to hypothecate payments to his PAYG liability but the Commissioner allocated the payment to some earlier outstanding liability that the applicant or one of his associated companies had. How the payment is dealt with by the ATO is a question for it in accordance with its policies and it is not subject to any direction by the taxpayer or any entity related to the taxpayer.
109 At [38] Neilson DCJ found that Mr Bobos had failed to establish a prima facie defence to the claims made in the DCT's statement of claim and that no bona fide or arguable ground of defence had been established nor was there any adequate explanation as to why Mr Bobos permitted judgment to be entered against him or why it took him over two and a half years to seek to set aside the Default Judgment. His Honour continued at [39]:
He has, at all material times, admitted that the liability existed and it appears that only when pressed with what might be a third bankruptcy notice has he decided to try to set aside the default judgement entered regularly in this Court. …
110 As set out at [58] above, Mr Bobos sought leave to appeal and an extension of time for leave to appeal from the District Court Judgment in the Court of Appeal. In dismissing Mr Bobos' application, that court (Beazley P and Macfarlan JA) noted that the Default Judgment related primarily to Mr Bobos' liability as a director of Bobos Engineering in respect of income tax withheld from its employees but not remitted to the DCT. After referring to the reasons of Neilson DCJ, at [10] their Honours said that none of the points raised by Mr Bobos in support of his application for leave to appeal had any merit. They addressed the principal points as follows:
(1) contrary to Mr Bobos' submission, the arrangement in the February 2015 Letter and the ATO's response did not purport to affect Mr Bobos' personal liability as distinct from that of Bobos Engineering. In any event, as the primary judge found, the arrangement ceased to have effect upon Bobos Engineering's default in making the payments;
(2) while sympathetic to the claim by Mr Bobos that he has suffered depression since 2002, that condition is not an answer to the ATO's claim and would not have provided any defence under s 269-35(1) of the TAA 1953. Their Honours noted that for illness to attract the operation of that section, the illness has to have led to the director not taking part in the management of the company which was not the case for Mr Bobos;
(3) for the reasons given by Neilson DCJ the ATO did not err in its allocation of payments made to it by Bobos Engineering or Mr Bobos; and
(4) as was found by Neilson DCJ, there was nothing in the dealings between Mr Bobos and the ATO to support Mr Bobos' assertion that the ATO acted in such a way as to lead him to believe that it had agreed to allow Bobos Engineering to complete the litigation with a party to a construction contract with whom it was in dispute.
111 The Default Judgment was obtained because of Mr Bobos' failure to file a defence in the District Court Proceeding. It is not in dispute that Mr Bobos was aware of the District Court Proceeding before the entry of the Default Judgment, as evidenced by the August 2014 Letter (see [30] above). The DCT did not apply to enter judgment until approximately one month after receipt of that letter.
112 On his evidence, Mr Bobos was aware that the Default Judgment had been entered since at least late October 2014 when he said he received a letter dated 25 September 2014 notifying him of that fact. Despite that it was not until May 2017 that Mr Bobos filed an application in the District Court to set aside the Default Judgment. That application was heard over two days and Neilson DCJ delivered detailed reasons dismissing it. It is evident from those reasons that his Honour carefully considered Mr Bobos' proposed grounds of defence before dismissing the application. As set out above, Mr Bobos' application for leave to appeal from the District Court Judgment was unsuccessful.
113 In those circumstances, despite the fact that the Bankruptcy Notice is based on the Default Judgment, it cannot be said that Mr Bobos has been denied the opportunity to present his case. On the contrary the merits of his claims have been tested, albeit after entry of the Default Judgment, and have been the subject of the "rigorous processes of adversarial litigation". Nor is this a case where it could be said that there was any fraud or collusion which resulted in the obtaining of the Default Judgment.
114 I address two further matters raised by Mr Bobos by which Mr Bobos appears to challenge findings made by Neilson DCJ.
115 First, contrary to Mr Bobos' submissions, there was no concluded agreement for payment of the debt the subject of the Penalty Notice on the basis of which Mr Bobos was not required to file a defence in the District Court Proceeding. That argument was raised before and rejected by Neilson DCJ at [14], [15] and [17] of the District Court Judgment. I respectfully agree with his Honour's conclusion. There is no evidence to support the existence of any such agreement.
116 In the March 2014 Proposal, which was dated approximately 21 days after the Penalty Notice was sent, Mr Bobos, in effect, acknowledged that the amount claimed in the Penalty Notice was owing. He explained why that amount had not been paid and sought a deferment of enforcement action, pending which Bobos Engineering would continue to maintain the current payment arrangement of $27,936, as a minimum, on the seventh day of each month. On 9 April 2014 the ATO rejected the March 2014 Proposal. Mr Bobos relies on the August 2014 Letter to establish his "estoppel" ground. However, the August 2014 Letter, which was sent by Mr Bobos after receipt of the statement of claim filed in the District Court Proceeding, does not assert any agreement as contended for by Mr Bobos. Rather, in that letter Mr Bobos notes that Bobos Engineering is unable to pay the amount claimed as at that date and again seeks more time to pay. In those circumstances it could not be said that there was any agreement such that the DCT was precluded from entering judgment against him.
117 Similarly, Mr Bobos' contention that there was an agreement reached in February 2015, by reason of the ATO's acceptance of the proposal in the February 2015 Letter which was to repay the debts of Bobos Engineering, Boss Constructions and Mr Bobos personally, cannot succeed. This argument was addressed at [20]-[26] of the District Court Judgment. There Neilson DCJ found that Mr Bobos was aware that he was personally liable for the debts of Bobos Engineering and that nothing in the February 2015 Letter, or in the response from the ATO, indicated that Mr Bobos would be absolved of his personal liability based on a default of Bobos Engineering. Those findings were affirmed on appeal: see [11]-[12] of the CA Judgment.
118 As the evidence discloses, the agreement reached in February 2015 was between Bobos Engineering and the ATO for payment of Bobos Engineering's debts, there was no waiver of Mr Bobos' liability or transfer of it to Bobos Engineering. In any event, the agreement came to an end shortly after it was made when Bobos Engineering defaulted. Further, Mr Bobos' subsequent conduct after Bobos Engineering went into liquidation, as set out at [46]-[49] above, is entirely inconsistent with his contention that his personal liability was somehow waived by reason of the February payment arrangement or otherwise transferred to Bobos Engineering.
119 For those reasons, Mr Bobos has not established that there is sufficient reason to question whether there is a real debt behind the Default Judgment and I would decline to exercise my discretion to go behind the Default Judgment.
120 Notwithstanding that I turn to consider the other issues raised by Mr Bobos which he also contends would cause me to exercise my discretion to go behind the Default Judgment.
121 Mr Bobos relies on the availability of the defences under s 269-35 of the TAA 1953, some of which were raised by Mr Bobos on his application to set aside the Default Judgment and again before the Court of Appeal.
122 First, Mr Bobos says that he was ill in 2014 and he suffered major mental health issues and traumatic stress with led to severe depression making it hard for him to fully understand the severity of the Penalty Notice and relies on the defence in s 269-35(1) of the TAA 1953. Mr Bobos has provided evidence of his medical conditions in the period 2012 to August 2014. However, while I accept that he suffered from such conditions and was under some pressure, Mr Bobos has not made out the defence in s 269-35(1). As the Court of Appeal observed at [13] of the CA Judgment, for illness to attract the operation of s 269-35(1) of the TAA 1953 the illness must have led to the director not taking part in the management of the company at all relevant times.
123 The evidence before me is that Mr Bobos participated in the management of Bobos Engineering at the time he was under the obligation in s 269-15. Throughout 2013 and in 2014, as set out in the March 2014 Proposal, Mr Bobos took steps in his capacity as director of Bobos Engineering in relation to Bobos Engineering's contract with Cristal Mining as well as causing Bobos Engineering to seek out and obtain other work. It is apparent from the content of the March 2014 Proposal and other evidence before me that Mr Bobos was engaged in the management of Bobos Engineering. The evidence about Mr Bobos' health issues does not establish that his health concerns at the time meant that he could not and did not take part in the management of Bobos Engineering.
124 Further the defence in s 269-35(1) relying on illness can only succeed if the illness continued for the whole of the time the director was in office and the obligation to comply with s 269-15 continued: see Canty v Deputy Commissioner of Taxation (2005) 63 NSWLR 152 (Canty) at [48] in relation to a provision in substantially the same terms in the Income Tax Assessment Act 1936 (Cth) (ITAA). Mr Bobos has not established that his illness continued for the whole of the relevant period, being December 2012 to February 2014. That is, the evidence goes no higher than observations made by lay people who described his demeanour and the effect of his work pressures and evidence that he consulted a naturopath. There is no conclusive medical evidence that Mr Bobos was suffering from an illness for the whole of the relevant period. The medical certificate provided does not speak to the whole of the period and does not, in any event, provide sufficient detail about Mr Bobos' condition.
125 Secondly, Mr Bobos says that there was "some other good reason" under s 269-35(1) why it would have been unreasonable to expect him to take part, and he did not take part, in the management of Bobos Engineering at the relevant time. Mr Bobos said that the "other good reason" is that he did not place Bobos Engineering into voluntary administration at the time of the Penalty Notice and allowed it to continue to trade to enable it to continue its litigation against Cristal Mining and submit payment claims under the Security of Payment Act in order to recover unpaid invoices.
126 That defence cannot be made out. It requires that there is some other good reason why Mr Bobos did not take part in the management of Bobos Engineering. But the very reason he proffers for why he comes within the defence demonstrates that he did take part in its management. That is, he made the decision not to put Bobos Engineering into voluntary administration but to allow it to continue to trade so that it could continue to pursue recovery against Cristal Mining.
127 Thirdly, Mr Bobos said that pursuant to s 269-35(2) he took reasonable steps to ensure that Bobos Engineering complied with its obligations by entering into a payment arrangement with the ATO and by placing the company into external administration.
128 In Canty Handley JA (with whom Beazley and Santow JJA agreed) considered the defence in s 222AOJ(3) of the ITAA which provided that a person sued for a penalty under s 222AOC of the ITAA has available to him or her a defence if it is proved that the person took all reasonable steps to ensure that the directors complied with s 222AOB(1) or there were no such steps that the person could have taken. Similarly to s 269-15 of the TAA 1953, s 222AOB(1) of the ITAA required directors of a company that had failed to remit group tax instalment deductions to cause that company to do at least one of four things specified in the subsection on or before the due date. Those four things were to comply with Div 1AAA, make an agreement with the Commissioner in relation to the company's liability under a remittance provision in respect of such deductions, appoint an administrator to the company or commence the winding up of the company. At [32]-[33] Handley JA referred to dicta in Miller v Deputy Commissioner of Taxation (1997) 98 ATC 4,059 where his Honour observed, Mason P, Beazley JA agreeing, had considered whether in order to make out a defence under s 222API(3), the equivalent of s 222AOJ(3), it was necessary for the person to show the reasonableness of his conduct in relation to all four of the available options. At [33] and [35] his Honour said:
33 However there are dicta in Miller which appear to address the present issue. Mason P, with the concurrence of Beazley JA, said (at 4,063-4,064):
"…According to the DCT, the appellant could not make out 'a defence' under s 222API(3) [the equivalent of the defence under s 222AOJ(3)] unless the appellant showed what I shall loosely call the reasonableness of his conduct in relation to all four of the options offered to the directors …
The appellant submits that a director need only address one of the four options…and that it suffices if he or she proves that, in relation to that option, all reasonable steps were taken by that person to ensure that the directors caused the company to do one of the four options, or that there were no such steps that the person could have taken …
I would reject this submission. What the directors have to do to comply with s [222AOB(1)] is cause the company to do at least one of the four matters. If none of the four matters occurs there has been non-compliance by the directors … The taking by a director of 'all reasonable steps to ensure' compliance by the directors obviously requires that each option be addressed, either in the sense of taking reasonable steps to bring it about or declining to do anything on the basis that there were no such steps that the director could have taken."
…
35 The critical passage in the judgment of Mason P ("a director need only address one of the four options") summarises the argument for the appellant. This was that it was open to the recipient of a notice, acting reasonably, to select one of the four steps and in relation to that step prove the par (a) defence or the par (b) defence without having to prove the par (b) defence in relation to the other steps. Mason P rejected that submission and was clearly correct to do so.
(emphasis added.)
129 By way of further explanation at [41] Handley JA said:
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 subs (3) defences will have to cover all options. Compare Deputy Commissioner of Taxation v Solomon (2003) 199 ALR 325 at 337; 52 ATR 729 at 740.
130 His Honour then went on to consider whether the defences must be established for the whole of the period between the due dates and the expiry of the penalty notice and concluded at [45] that "the natural meaning is that the combined defences must cover the whole of the period between breach of the obligation on the due date and the expiry of the notice".
131 Based on Canty the DCT submitted that in order to make out the defence in s 269-35(2), Mr Bobos has to prove that he took the three steps set out in s 269-35(2) throughout the entire period, ie from the due dates to the expiry of the Penalty Notice, and that he had failed to do so. I accept that is so. The evidence before me does not demonstrate what steps Mr Bobos was taking throughout 2013 vis-a-vis the matters specified in s 269-35(2).
132 As to the specific matters raised which Mr Bobos contended constituted "reasonable steps":
(1) the question of whether Mr Bobos entered into a payment arrangement with the ATO was addressed in the District Court Judgment. As set out at [103] above, Neilson DCJ concluded, based on the evidence before him which appears to be the evidence that was before me, that no agreement had been reached between Mr Bobos and the ATO prior to entry of the Default Judgment, there were no protestations on the part of Mr Bobos that he was not indebted as alleged by the ATO and, on the contrary, there were admissions that he was so indebted. I agree with that conclusion;
(2) as set out at [38] above on or about 16 February 2015 the DCT accepted the payment plan included in the February 2015 Letter. That occurred more than 21 days after the Penalty Notice had been issued to Mr Bobos and thus could not be relevant to a defence under s 269-35(2). In any event, there was a subsequent default of that agreement by Bobos Engineering which brought it to an end; and
(3) Bobos Engineering was placed into voluntary administration on 23 March 2015. That was well after expiry of the Penalty Notice. Prior to that time, as the evidence establishes, despite advice to do so from Mr Munro, Mr Bobos elected not to place Bobos Engineering into voluntary administration because to do so would mean that it could no longer pursue its claims against Cristal Mining. There is no evidence that the ATO agreed that Bobos Engineering should continue to trade. This issue was, in effect, also addressed and dismissed in the District Court Judgment at [9]-[14] and the CA Judgment at [15].
133 Mr Bobos next contends that the ATO was precluded from relying on the Penalty Notice as it did not challenge the liquidators' adjudication of its proof of debt which was admitted, in part, for approximately $375,000. This contention was addressed in the District Court Judgment at [28]-[30]. As the relevant provisions of the TAA 1953 demonstrate and as Neilson DCJ explained, the liability of Bobos Engineering and Mr Bobos is co-ordinate so that any payment by Bobos Engineering of the outstanding amount of PAYG withholding tax would reduce Mr Bobos' liability and vice versa. But here, as is clear from the ATO's Proof of Debt and the Liquidators' Report:
(1) the Proof of Debt sought a total amount of $3,172,831.37 made up of the running balance account (RBA) "deficit debt" of $1,412,970.88 and superannuation guarantee charge for the period 1 September 2002 to 31 December 2014 of $1,759,860.49;
(2) the Liquidators' Report disclosed that:
(c) at that time there were funds on hand of $1,029,034;
(d) the liquidators were in a position to pay a dividend to priority creditors, namely claims for employee entitlements as at their appointment; and
(e) one of the priority payments to be made was for superannuation. In that regard the liquidators noted that the Proof of Debt sought arrears of superannuation of $1,759,860 but they had adjudicated that claim and reduced it to $375,027.56 which was the amount they would pay.
134 That is, the dividend to be paid to the ATO was for that part of the Proof of Debt relating to the outstanding amount claimed for the superannuation guarantee charge and not for any part of the amount claimed to be outstanding for the RBA. There has been no adjudication of that part of the Proof of Debt. The same conclusion was reached by Neilson DCJ at [30] of the District Court Judgment. Further, given that the Liquidators' Report states that it is not expected that a dividend will be paid to unsecured creditors, I infer that an adjudication of the balance of the Proof of Debt relating to the RBA is unlikely.
135 The final matter raised by Mr Bobos is that the Penalty Notice relates to Bobos Engineering's PAYG obligations, Bobos Engineering was in a payment arrangement at the time the Penalty Notice was issued and the ATO did not take payments of $27,936 into account. The particular payments are set out in an internal Bobos Engineering document titled "Bobos Engineering Australia Pty Ltd Find Report All Transactions" (Bobos Engineering Report). It purports to record 12 payments, each of $27,936, made to the ATO over the period 10 June 2013 to 12 May 2014.
136 This issue was also raised before Neilson DCJ who addressed it at [32] of the District Court Judgment (see [107] above). Ms Crump gave evidence in the District Court Proceeding as well as before me. His Honour noted that before him Ms Crump's evidence, which his Honour accepted, was that the ATO applies payments to the oldest debt owed by the taxpayer. Ms Crump's evidence before me was to like effect:
Ms Crump: Your Honour, could I ask - answer that one from my affidavit dated 1 September 2017 in my exhibit JAC1, page 41. There are some payments there of $27,936 which corresponded against Mr Bobos' financial report and they are payments that have been allocated to oldest debt.
Her Honour: Mr Bobos.
Mr Bobos: And you can confirm that all them payments weren't allocated - some were allocated to P-Y - pay as you go tax and some weren't?
Ms Crump: Correct.
Mr Bobos: Isn't it true that them payments have been allocated to other debts to leave the director liable for a director penalty notice?
Ms Crump: No. Payments were made to the oldest debts.
Mr Bobos: If payments were made to the oldest debts, they - them payments would have went to the oldest debts and the oldest debts - them payments haven't gone to the oldest debts.
Mr Swan: I object, your Honour. I don't think that was a question.
Her Honour: Yes. What's the question, Mr Bobos?
Mr Bobos: Is it the ATO practice for payments to go to the oldest debt?
Ms Crump: That's correct; as per practice statement 2011/20, payments are allocated as per that practice statement.
Mr Bobos: But these payments weren't allocated to the oldest debt, were they?
Ms Crump: Yes, they were.
137 I too accept Ms Crump's evidence that payments made to the ATO are applied by it to the oldest debts first. Mr Bobos has not led any evidence to the contrary of any agreement about the manner in which these payments were to be allocated or the basis on which they were made.
138 Further, ss 8AAZL, 8AAZLA and 8AAZLE, found in Div 3 "treatment of payment, credits and RBA surpluses" of Pt IIB of the TAA 1953, are also relevant to this issue. Those sections, which were also discussed in the District Court Judgment and set out therein (see [107] above), permit the DCT to allocate a payment received from a taxpayer to a tax liability of that taxpayer in the manner in which the DCT sees fit. In doing so the DCT is not required to take into account the taxpayer's instructions as to how payments should be allocated.
139 Given these matters there was no obligation for the ATO to allocate the payments identified by Mr Bobos to reduce his liability under the Penalty Notice. Mr Bobos has not established that the amount claimed in the Penalty Notice is not owing or that it is overstated.