Corporate Affairs Commission v Drysdale

ASC register not brought up to date Notwithstanding this, the original notification of change of officeholders lodged with the Australian Securities Commission, dated 30 October, showed that Mr Austin was continuing in his role as director, that Ms McKay had resigned as a director and secretary and that Mr Manasseh had been appointed in her stead. It seems that this was the result of an error in the accountant's office. A further document which would have amended that notification was prepared in the accountant's office for lodgment; its effect was to record that, as well as Ms McKay, Mr Austin had resigned as director, that Mrs Austin and Mrs Manasseh had been appointed as the new directors, and Mrs Austin was appointed as secretary. It appears, however, that by oversight the amendment was never lodged with the ASC by the company's accountant or by the company. It is common ground that Mr Austin continued to carry out some functions for the company after his resignation.

Negotiations about outstanding group tax On 13 March 1996 the DCT, in reliance on the ASC records, served Mr Austin, as a director of the company, with a notice of liability to pay a penalty equal in amount to the company's then outstanding group tax, pursuant to s 221F of the Income Tax Assessment Act 1936, in a sum of around $100,000. Mr Austin undertook negotiations on behalf of the company with the DCT's delegate and made decisions to arrive at an agreement for the repayment of the outstanding tax plus the attached penalties. A payment schedule was agreed to between the company and the DCT on 25 March 1996. It is clear from the contemporaneous notes of the DCT's officer that, in the negotiations, Mr Austin gave the impression that he was in charge of the company. Mr Austin co-signed the agreement on behalf of the company with Mr Manasseh. The company's seal was affixed to the agreement. The form of the agreement provided for the witnessing of that affixation by two persons who would be either directors or the secretary of the company. The text provided, for example, spaces for "signature of *Director/Secretary" with the instruction "strike out whichever is not applicable". Both Mr Austin and Mr Manasseh signed in the relevant spaces but neither heeded the instruction to strike out the inapplicable appellation. Neither in any other way purported to distinguish on the face of the agreement whether he was signing in the capacity of a director or otherwise. The secretary, according to the unfiled "correct" ASC return was, it will be recalled, Mrs Austin. I do not accept Mr Austin's assertion that he signed the agreement for repayment of the penalty "as a private citizen". He would certainly have understood that, by signing the agreement, he intended to bind the company to its terms and that he was suggesting that he was either a director or the secretary of the company; he knew that he had never been appointed as the secretary. It seems clear that Mr Austin had the authority to negotiate the agreement on behalf of the company, without first seeking Mr Manasseh's concurrence. The agreement went to the very essence of the solvency of the company. Further, the potential personal liability of directors had been pointed out by the DCT's officers. Mr Austin's authority is something which, in the circumstances of this company, one would expect only of a person acting as a director or of a person specifically granted such authority by all those who might conceivably have been thought to be directors. The latter would, on Mr Austin's own case, have included the two wives. There is no evidence that they so authorised Mr Austin and, even making due allowance for their grief and turmoil, this is surprising, unless they were in no real sense directors.

Other activities of Mr Austin Other steps taken by Mr Austin were relied on by the DCT to support the conclusion that he had continued to act in a directorial capacity. He countersigned cheques in favour of the DCT that were drawn in accordance with the agreed payment schedule and also signed by either Mr Manasseh or Ms McKay. Apparently as a result of Mr Austin's activities, the company strayed beyond its originally intended role. It was used as the vehicle to pay ordinary trade creditors of the business. Mr Austin countersigned company cheques payable to such creditors and authorised a stop notice to the company's bank to prevent payment of some of those cheques. More significantly, he negotiated time to pay with some of those creditors. All this suggests that he had the authority and a sufficient degree of control to determine how much of the business's debts should be treated as the company's debts, which of the latter would be paid, and when and how they would be paid. He continued to try to negotiate the sale of the other restaurant. Although that restaurant was not a company asset, that is a matter of significance for the nature of Mr Austin's relationship with the company because of the use of the company to incur debts for the business and the use of company assets to meet those debts. He was the one who mainly dealt with the company's accountant. At the relevant times, there was apparently nothing more important for the company's continued existence and welfare than the matters dealt with by Mr Austin.

Family tragedies and confusion Mr Austin gave evidence about various personal tragedies, the nature of which need not be set out, facing his family and Mr Manasseh's family during the relevant period immediately following and after his resignation from the company. I do not doubt Mr Austin's sincerity about those matters or that, during that trying time in his and his family's lives, the precise legal characterisation of his role within the company was the last thing on his mind. Nor do I doubt that, with the exception of signing the agreement with the DCT, he believed that, in law, he was not acting as a director once he had formally resigned. He was simply doing his best to help in a bad situation. That help and that situation appear to have extended from the end of 1995 for at least nine months - he was negotiating with the DCT for the rescheduling of tax payments until at least the end of July 1996.

Acting as a director: the law The Corporations Law defines a "director" in s 60 to include a reference to: "(a) a person occupying or acting in the position of a director of the body, by whatever name called and whether or not validly appointed to occupy, or duly authorised to act in, the position; (b) a person in accordance with whose directions of instructions the directors of the body are accustomed to act; (c) …" This case is only concerned with part (a) of that definition. The relevant question is whether, for the purposes of the Law, Mr Austin "occupied or acted in the position" of a director during the period from 17 April to 21 June 1996, even though it is clear that in late 1995 he intended to resign from that position. The historical background to the relevant part of the definition was discussed in some detail by Mason and Aickin JJ in Corporate Affairs Commission v Drysdale (1978) 141 CLR 236. In that case, Mason J held (at 242-3) that:

"To say that a person occupies a position or office is to say something more than that he holds the position or office. The first statement denotes one who acts in the position, with or without lawful authority; the second denotes one who is the lawful holder of an office … The case of the de facto director who holds over his office after his appointment as a director has terminated, accords with the assumptions which [s124 of the Companies Act, see now s232(2)] makes. He continues to occupy the office of a director, albeit now without lawful authority, and discharges the duties attaching to that office." I do not, however, think it necessary to show that Mr Austin performed duties that could only be performed as a director. In Re Valleys Rugby League Football Club Ltd (1997) 2 Qd.R. 645 at 657 Williams J expressed himself as satisfied that an employed manager, seeking priority for her unpaid wages in a winding-up, had: "performed acts which could only be done by a director in accordance with the Articles when she was asked to do so. She was also prepared to hold herself out as a director when, for example, giving instructions to the club's solicitors." In my view, Williams J was simply describing what had happened in that case, where the main issue was what the putative director had done, rather than purporting to lay down a general test. Companies come, of course, in many sizes. They also come, one may say, in many shapes as to the actual role of their directors, managers and other employees and agents. This, like many another, was a $2 company conducted with great informality. Some guidance to what the legislature had in mind in such varying circumstances can, in my view, be gleaned from the present terms of the Law and its original progenitor. Subs (3) of s 60 provides: "For the purposes of subsection (1), if there are no positions of director (by whatever name called) in relation to a body, the reference in paragraph (1) (a) to a position of director of the body is a reference to a position the holder of which has control, or shares control, over the general conduct of the affairs of the body." Schedule 1 Table A contemplates the following, among other things, as usual attributes and responsibilities of directors: · They are directly responsible to and must have the confidence of the shareholders for their anticipated term of office (regs 57-63); · the "business of the company shall be managed" by them and they may exercise all of the company's powers except those reserved for a general meeting; it is they who may borrow money or give security for a debt (reg 66) · they are to sign cheques or to determine who shall sign them (reg 68) · the company seal is only to be used by their (or their committee's) authority and sealed documents are to be signed by one of them and countersigned by another or a person authorised by them (reg 84). The original definition in s 3 of the Companies Clauses Consolidation Act 1845 (U.K.) fastened on the inclusion as directors of all persons "having the direction of the undertaking". Thus it seems to be a necessary condition of acting as a director, whether properly appointed or not, that one exercises what might be called the actual (and statutorily extended) top level of management functions. However, that is not necessarily a sufficient condition for such a conclusion, nor is it the same as saying that one must do things which only a director can do. Directors are, of course, subject to the Law and the company's articles, entitled to delegate their powers and functions to other officers or employees of a company; in the case of a large company, this would appear inevitable. But that is not to say that those others necessarily then act in the capacity of a director (nor that a director who has delegated a substantial part of his or her authority ceases to act in that capacity). Whether a delegate or intermeddler is acting as a director will depend upon the nature of the functions or powers which are exercised and the extent of their exercise. The considerations relevant to criminal liability of corporations can serve to illumine the point. In Tesco Supermarkets Ltd v Nattrass [1972] AC 153 at 171, Lord Reid said:

"Normally the Board of Directors, the Managing Director and perhaps some other superior officers of a company carry out the functions of management and speak and act as the company. Their subordinates do not. They carry out orders from above and it can make no difference that they are given some measure of discretion. But the Board of Directors may delegate some part of their functions of management, giving to their delegate full discretion to act independently of instructions from them. I see no difficulty in holding that they have thereby put such a delegate in their place so that within the scope of the delegation he can act as the company." If, in the case of a small company, a person has, with full discretion, "acted as the company" in relation to matters of great importance to the company, and other than as an arms' length expert engaged for a limited purpose, the conclusion that that person has acted in the capacity of a director may well be justified. The extent to which and the circumstances in which the person has so acted will nevertheless be of importance. The variety of commercial and corporate life is such that it seems to me unprofitable to attempt a general statement as to what is meant by "acting as a director". Whether a person does so act will often be a question of degree, and requires a consideration of the duties performed by that person in the context of the operations and circumstances of the particular company concerned. I have, for example, referred to the circumstance of the size of the company. In a large and diversified company, great discretion to deal with very important matters must be reposed in employees. In the case of a supermarket chain, as in Tesco, it would hardly occur to anyone to suggest that a managerial employee held to have "acted as the company" in breaking a consumer protection law at a particular store was acting as a director of the vast company concerned. As suggested above, in the case of a single person making decisions for a company the business of which was confined to the operation of a corner store, a different view might be taken. Similarly, the internal practices or structure of the company may be relevant: commonly a director with particular expertise is assigned particular concerns, and has a bare minimum to do with the general affairs of the company. In such a case, the circumstances may bear the conclusion that such work is more done as an expert employee or consultant than as a director c.f. Mistmorn Pty Ltd (in liq) and Anor v Yasseen (1996) 21 ASCR 173 at 183 (the cases cited at that reference appear to have been included in error). Another relevant factor may be how the person who is claimed to have acted as a director was reasonably perceived by outsiders who deal with the company. This may aid a conclusion that the supposed director has held himself or herself out as such. Express holding-out was treated as a relevant factor in the Re Valleys case and, with respect, this appears obviously correct. However, an express claim to be a director may, in some cases, be carefully not made. That would not prevent a conclusion, nevertheless, that a person's dealings with third parties point to his or her having acted as a director. This case raises the position of one who steps in, in circumstances of some emergency, to lend a hand to friends or relatives operating a small company and who becomes, for a period, the "driving force" (to pick up a phrase of Davies J in Mistmorn) or one of the principal driving forces of the operation. The question whether in such a case the help-giver is to be held to have "occupied or acted in the position" of a director of the company is not, in my opinion, a simple matter. On the one hand the language of the section is plain and, at first blush, inelastic. On the other, the legislation can hardly have been intended to stifle such charitable impulses. The effects and therefore the likely purposes of s 60 are in general to impose legal duties on a person described therein and to give other persons, including the company itself, legal rights against such a person. The justification for this is no doubt that, in some way, the powers or conduct of the person, or the practical necessities of commercial life, if the device of the limited liability company is to play a part in such life, warrant so treating the person. It is difficult to see how these justifications extend to the imposition of liabilities on, as it were, one who renders first aid at the scene of an accident. But if the saviour goes on to act for an extended period as if having a full power of attorney, then even where altruism is the continuing motivation, it seems inescapable that there cannot be a holiday, for the entire period of so acting, for such person from the ordinary legal consequences of his or her actions. I think that the language "occupying or acting in the position of" is, on closer analysis, flexible enough to accommodate such notions: there is an element of some degree of continuity inherent in both verbs.

Conclusions There is objective evidence to contradict Mr Austin's assertions that he was not acting as a director. I accept that, although there was some irregularity in the process of notifying the ASC which was beyond his control, Mr Austin had, in effect, formally resigned. However, I do not accept Mr Austin's submission that, if one accepts that after he tendered his resignation, he was only acting in circumstances of emergency or as a friend of those legally bound to run the company, this puts him beyond the reach of s 60. The length of time he so acted puts the matter beyond the realm where it could be said that, because of an informal act of assistance, he was not "occupying or acting in the position of" a director. It seems to me that that was his role. The functions of this company were limited. They were, firstly, to incur debts for and in respect of the wages and other entitlements of employees of the business and the supply of goods and services for it. Secondly, it was also a function of the company to limit the liability of the business partners for such debts. In that setting, it seems clear that Mr Austin exercised the top level of management functions in relation to the company. He seems to have had, indeed, the practical direction of the company. It is not clear on the evidence when or how Mr Manasseh became a director. It appears that he did nothing or very little specifically in relation to the company: his work seems to have been on behalf of the business partnership, in trying to sell the restaurants. So far as appears, Mr Manasseh did not assert any power of veto over Mr Austin. Because of the breadth of the activities undertaken by Mr Austin on behalf of the company, it cannot be said that he was a specialist aide or consultant. Counsel for Mr Austin argued that, although the work he performed was important to the normal running of the company, none of Mr Austin's actions was such as could have only been performed by a director. For example, the company's Articles allowed for persons other than directors to sign cheques and company sealed documents. Taking Mr Austin's actions individually, and in some instances stretching matters to the limit, the point might be granted. But looking at the sum of Mr Austin's actions at directly relevant times (that is, when the cheques constituting the preferential payments were signed) and, because of their contribution of nuance and flavour, indirectly relevant times, the submission cannot be sustained. Nobody other than the person, or at least one of the persons, in ultimate command of the company was likely to be acting as Mr Austin did. Counsel also argued that, as an Act which imposes a statutory right of indemnity for a tax liability, s 588FGA as augmented by s 60 ought to be strictly construed. Such an approach, it was submitted, would require the Court to conclude that Mr Austin was only involved in the management of the company rather than its control, control being evidenced by the performance of acts which only a director could lawfully perform. While I agree that the Act

imposes a rather draconian liability upon some directors and I have no antipathy to the view that "it is for the Crown to show that a taxing statute imposes a charge on a person sought to be taxed" (per Scarman LJ in C&J Clark Ltd v Inland Revenue Commissioners [1975] 1 WLR 413 at 419), there is in my view no ambiguity in the relevant provisions. It is not necessary in all cases, in my opinion, to show that the supposed director has done acts which only a director can do. I have largely explained my reasons for this conclusion above, but I would add this. The test in the statute is not whether a person has done acts which only a director can lawfully do, but whether he or she has occupied or acted in the position of a director. Directors commonly do not confine their actions to things which only they can lawfully do. Sometimes, indeed, they do quite unlawful things while still acting as directors. It was argued that, even if Mr Austin did perform functions that could be categorised as being those of a director, he did not do so at the time each of the payments were made, and therefore the potential indemnity under s 588FGA(2) did not crystallise. However, I am satisfied that Mr Austin continued to participate in controlling and directing the affairs of the company throughout the relevant period. The last cheque paid according to the agreement and signed by Mr Austin was dated 14 June 1996 and he continued to deal with the ATO on behalf of the company at least until 30 July 1996. Questions were also raised about whether the legal or evidential onus of proof had shifted to Mr Austin, having regard to the state of the ASC register - see ss 242B, 242C - and its "database" - s 1274B. Cases such as Crawford Earthmovers Pty Ltd v Fitzsimmons (1972) 20 FLR 123and Federal Commissioner of Taxation v Karageorge (1996) 22 ASCR 199 were referred to. It will be apparent that I have been able to determine the matter on the assumption that the onus throughout has remained on the DCT. In my opinion the DCT is entitled to the substance of the relief sought. The cross-respondent is to pay to the cross-claimant the sum of $52,463.25, and is to pay the cross-claimant's costs. Interest was also claimed "from the date of payment" by the DCT of the amount ordered to be paid by it to the liquidator and the DCT should have such interest at 10.5% p.a. (O35 r8

Federal Court Rules). The parties should be able to agree on the calculation and I will deal with this by giving liberty to apply.

I certify that this and the preceding ten (10) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Madgwick

Associate: Dated: 27 August 1998 Counsel for the Cross Claimant: D Godwin

Solicitor for the Cross Claimant: Australian Government Solicitor

Solicitor for the Cross Respondent: Gordon and Johnstone

Date of Hearing: 22, 23, 26 June 1998

Date of Judgment: 27 August 1998