Deputy Commissioner of Taxation v Dick

Commissioner for Corporate Affairs v Bracht [1989] VR 821 ASIC v Vines (2005) 55 ACSR 617 Deputy Commissioner of Taxation v Clarke [2003] NSWCA 91 Canty v Deputy Commissioner of Taxation 59 ATR 408 Deputy Commissioner of Taxation v Saunig 55 NSWLR 722 CASES CITED: Neath Rural District Council v Williams [1951] 1 KB 115 Deputy Commissioner v Keck [2006] NSWSC 677 Daniels v Anderson (1995) 37 NSWLR 438 Edwards v Attorney-General (2004) 60 NSWLR 667 Commonwealth Bank v Friedrich (1991) 5 ACSR 115 Williams v Lever (1974) 2 NSWLR 91

PARTIES: Deputy Commissioner of Taxation George Dow Taylor Dick

COUNSEL: Mr R Quinn [Plaintiff] Mr D P Robinson SC [Defendant]

SOLICITORS: Ms E Whan - Australian Government Solicitor [Plaintiff] Mr A Salgo - Baker & McKenzie [Defendant]

The proceedings 1 The Northern Spirit Football Club 2000 Pty Ltd failed to remit to the Commissioner by the due dates monthly PAYG income tax deducted from the salaries and wages of employees between 1 June 2002 and 31 March 2003.

2 The defendant was a director of the Northern Spirit Club from 19 January 2001 to 14 March 2003. He was under a statutory duty to ensure that the Club either remitted the PAYG deductions by the due dates or to take other remedial steps specified in s 222AOB(1) of the Income Tax Assessment Act 1936 ("the ITAA36").

3 The defendant failed to comply with the requirements of s 222AOB(1).

4 The plaintiff, a Deputy Commissioner for Taxation, alleges that by operation of the relevant tax legislation, the defendant, as a director of Northern Sprit, became liable to the Commissioner for penalties in an amount equal to the PAYG deductions withheld by Northern Spirit.

5 The plaintiff claims penalties from the defendant totalling $141,295.19.

6 The defendant says he is not liable for the penalties and relies on the defence under s 222AOJ(2) of the ITAA36.

7 Alternatively, the defendant says he ought fairly to be excused for his default and asks the court to relieve him of that liability, under s 1318 of the Corporations Act 1936.

The evidence 8 The plaintiff relied on the pleadings and various documents exhibited or tendered, and read affidavits by Neil Wood and Grahame Wilson (who were cross-examined).

9 The defendant relied on various documents exhibited or tendered, and read affidavits by the defendant, George Dick, and William ("Bill") Collins (who were also cross-examined).

The plaintiff's prima facie case 10 Northern Spirit was required, under Div 12 in Schedule 1 to the Taxation Administration Act 1953 ("the TAA53"), to make PAYG deductions from the salaries and wages of its employees, and was required, under Div 16 in Schedule 1 to the TAA53, to remit the amounts deducted to the Commissioner.

11 Northern Spirit was required to remit the PAYG deducted during each month by prescribed due dates, as set out at paragraph 4 of the Amended Statement of Claim: s 16-75 of the TAA53.

12 Between 1 June 2002 and 31 March 2003, Northern Spirit made PAYG deductions totalling $332,109 from the salaries and wages of its employees. However, Northern Spirit failed to remit to the Commissioner the PAYG amounts deducted during those months by the due dates.

13 A duty is imposed on the directors of a company to ensure that the company either meets its obligation to remit PAYG deductions by the due date, or to otherwise take specified remedial action: s 222AOB of the ITAA36.

14 Section 222AOB(1) of the ITAA36 provides as follows:

" 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 before the due date: (a) comply with its obligation 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."

15 The defendant, a director of the Club, did not comply with the requirements of s 222AOB(1).

16 Breach of that duty results in each director becoming automatically liable to pay to the Commissioner, by way of penalty, an amount equal to the unpaid PAYG deductions: s 222AOC(1) of the ITAA36.

17 The defendant therefore became liable to the Commissioner for penalties in a total amount equal to the PAYG deductions not remitted to the Commissioner.

18 However, before the Commissioner may recover such a penalty he must first give a written notice to the director concerned: s 222AOE of the ITAA36.

19 A notice under s 222AOE must set out details of the unpaid PAYG instalments and state that the penalty will be remitted if, at the end of 14 days after the notice is given, one of the following options has occurred:

" (i) the liability has been discharged; or (ii) an agreement relating to the liability is in force under section 222ALA; or (iii) the company is under administration within the meaning of the Corporations Act 2001; or (iv) the company is being wound up."

20 If one of those options has occurred within the14 days, in compliance with s 222AOE, the penalty for which the director is liable is automatically remitted: s 222AOG.

21 The Commissioner gave to the defendant three separate notices under s 222AOE in respect of the PAYG deductions which Northern Spirit had failed to remit:

Notice Period of deduction Amount 23 November 2002 June, August, September 2002 $108,838.63 23 January 2003 October, November 2002 $103,024.00 8 July 2003 December 2002, January, $146,793.00 February, March 2003

22 Notwithstanding these notices, none of the options in s 222AOE was brought about within 14 days. The liability was not discharged, there was no agreement with the Commissioner regarding the liability, the company was not put into administration, nor were any steps taken to wind the company up.

23 The relevant notice for the purpose of these proceedings was the third notice, which issued on 8 July 2003 ("the Penalty Notice Demand"), relating to the December 2002, January 2003, February 2003, and March 2003 withholding periods (Annexure 'I' to the affidavit of Neil Wood sworn 1 April 2005).

24 The Table in that Penalty Notice Demand set out the following:

Particular withholding period Amount withheld Unpaid amount of company's liability 1-31 December 2002 38,196.00 $38,196.00 1-31 January 2003 44,005.00 $44,005.00 1-28 February 2003 32,590.00 $32,590.00 1-31 March 2003 32,002.00 $32,002.00

25 The defendant failed to comply with the Penalty Notice Demand and the Commissioner became entitled to recover from the defendant the penalties for which he was liable. The Commissioner claims $141,295.19 as set out below: Period of withholding Due date Amount December 2002 28 February 2003 $32,698.19 January 2003 21 February 2003 $44,005.00 February 2003 21 March 2003 $32,590.00 March 2003 12 May 2003 $32,002.00 The first deduction day fell within this period (except for the final period where it fell before 13.3.03) Total $141,295.19

26 The plaintiff relies upon an averment and a certificate, under s 255-45 and s 255-50 of the TAA53, to establish a prima facie case.

The defendant 27 The defendant swore two affidavits, the first and longer affidavit was sworn on 5 December 2005, and the second on 22 June 2006. Extensive objections were made to the affidavits on the basis of hearsay and relevance. I admitted most of the contents of the affidavits, subject to relevance, and in the case of hearsay, on the limited basis that the evidence was not as to the facts, but as to the defendant's belief. He also gave oral evidence and was cross-examined.

28 The defendant was born in Scotland on 4 May 1929 and is now 78. He went to high school outside of Aberdeen, and left at the age of 16. He was then accepted into a training program for technical officers at the British Post Office. This was a two-year course relating to the installation and maintenance of telephone equipment, at the end of which it was necessary to pass exams.

29 Thereafter he continued working for the British Post Office, apart from two years national service from 1947.

30 Due to his mother's poor health, the family migrated to New Zealand in 1951, where the defendant was hired by the New Zealand Post and Telegraph Service as a technical officer for the installation and maintenance of telephone exchanges.

31 He met his wife, who was on a working holiday in New Zealand from Australia, in 1954. He moved to Melbourne with her in 1960.

32 In Melbourne the defendant worked for various employers in the telecommunications sector, before moving to Sydney with his family in 1965. In Sydney he continued working in the telecommunications sector for various employers, including roles as an administration officer and manager.

33 He retired in 1991 at the age of 63, after a life-long career in the telecommunications industry, primarily as a technical officer.

34 The defendant had an interest in soccer (football) from his childhood, and became involved in the administration of soccer since after World War II.

35 Following his retirement in 1991 he became involved in soccer in Australia through a number of clubs and associations, in varying capacities, including work as a coach, as a club secretary, as a manager and as an administrator.

36 This involvement in soccer administration included the role of manager, and later as President, of the Manly-Warringah Federation Team from 1969 to 1984 when he became a member of the NSW Federation Executive. He became Vice-President of the Executive a position he held till 1991, an unpaid role. During this period he also served as a delegate to the Australian Soccer Federation for a number of years.

37 In the meantime, from 1998 he became involved in the Oceania Football Confederation, which organised games and training for countries in this region. He served as the Vice-President for two four-year terms, also unpaid, eventually becoming an honorary life member.

38 He was also involved in the World Youth Cup. This started in 1991 when he went to Portugal as Head of the Australian Delegation to the U/20 World Youth Cup. He was then asked to work full time for the U/20 World Youth Cup to be held in Australia in March 1993. He then took early retirement from his full time job and commenced working as the project manager for the Local Organising Committee, chaired by Mr Neville Wran. He was responsible for the planning of the event.

39 After the World Youth Cup he assisted on various other projects such as the Brazilian Olympic Team trip and the Manchester United Team visit to Australia. He worked part-time on a range of projects for Soccer Australia, 2 to 3 days a week. This included the re-organisation of Indoor Soccer. He became the secretary of the National Futsal Commission, which supervises indoor soccer in Australia, from August 2001 until July 2005.

40 In January 2005 he was awarded the Order of Australia for services to soccer.

Northern Spirit Football Club 2000 Pty Ltd 41 Northern Spirit was established in 1998 by a group of interested persons to create a professional league team covering the areas of Manly-Warringah, Ku-ring-gai and Gladesville/Hornsby, where there were some 30,000 soccer players. Northern Spirit became a member of the Australian National Soccer League and began playing in the competition of 1998/99.

42 One of the co-founders of Northern Spirit was Mr Bill Collins, a physiotherapist, who had previously worked in the UK where he met people associated with the Glasgow Rangers, a well-known and wealthy soccer club in Scotland. When he returned to Australia in 1994 he became acquainted with the defendant. Mr Collins was the Club physiotherapist and later became the Director of Football Operations for the Club.

43 In 2000 the Glasgow Rangers became involved in Northern Spirit, acquiring a shareholding, and later buying the Club outright. Mr Colin Mitchell was sent to Sydney from Glasgow by the Glasgow Rangers as its full-time representative. Mr Mitchell then took over the management of Northern Spirit as General-Manager.

44 Mr Mitchell managed the Club from that time until June 2002, when he returned to Scotland.

45 Following a review of its involvement, the Glasgow Rangers decided to withdraw from Northern Spirit and commenced a process of pulling out of the Club over a period of time from about the middle of 2002 until September 2002.

46 There was a transition period, during which the majority ownership was transferred from the Glasgow Rangers to a Mr Antonio Gelonesi and his interests.

47 Day to day management of the Club devolved to the defendant and Mr Collins.

48 Ultimately, Mr Gelonesi acquired, through 4A Management Pty Limited, a majority shareholding (Exhibits 6 and 12) and took over control of the Club. He was appointed Chairman of the board on 1 October 2002. The Club name was changed to "New Northern Spirit".

49 The defendant was asked to stay on in his role as interim General Manager.

50 This interim state of affairs came to an end on or about 6 January 2003 when Mr Gelonesi appointed his brother-in-law, Mr Michael Dicembre, as the full-time Financial Controller of the Club. From that date all the day-to-day financial management and administration was conducted by Mr Dicembre. The defendant's role at the Club became limited and discrete, and related to football organisation and administration ("football matters").

51 This situation continued until 14 March 2003 when the defendant ceased his involvement with the Club and resigned as a director.

The defendant's involvement in Northern Spirit 52 In August 2001 Mr Collins suggested to the defendant that he would be a suitable board member for the club. The Board needed expertise and experience in football matters. This was at a time when the Glasgow Rangers were in effective control of the Club and their representative, Mr Mitchell, was General Manager. There were then four other directors: Mr Mitchell, Mr Jackson, a New Zealand businessman, Mr Martin, a partner of law firm Allen, Allen and Hemsley, and Mr Wheatley a former soccer player. (Mr Wheatley resigned in April 2002).

53 The defendant agreed to accept the position of an unpaid non-executive director. (He did not then know the other directors were receiving a fee). He saw Northern Spirit as an exciting development for Australian soccer generally and for the north of Sydney in particular. At that time the Club was prospering, attracting significant crowds to home matches at North Sydney Oval.

54 There was a professional staff running the club including accounting staff, marketing staff, and others, including Mr Collins as Director of Football. There was also a full coaching staff for the players.

55 Board meetings were generally held monthly. There were formal agendas and board papers were circulated in advance of meetings.

56 Initially the defendant's involvement was to attend board meetings. Soon after he was invited to attend National Soccer League and Soccer Australia meetings as the Club's representative. Over time became increasingly involved in the Club's football operations, but had no involvement in management or financial administration.

57 Around May 2002, with the Glasgow Rangers in the process of deciding to withdraw from Australia, discussions were entered into with Mr Gelonesi.

58 Mr Collins introduced Mr Gelonesi as someone who might be able to become involved in and provide future finance for the Club. Meetings took place, some of which involved the defendant.

59 Prior to the departure of the General Manager, Mr Mitchell, it was suggested to the Board that the defendant might manage the Club on a part-time basis until the new management took over. A temporary arrangement was entered into by Mr Mitchell with the defendant, who took over as manager of the Club, working approximately two days a week, on an hourly basis at the rate of $40.00 an hour. He was paid for the months of July, August and September, but thereafter received no further payment from the Club. At this stage it was still contemplated that the Glasgow Rangers would maintain a limited minority involvement.

60 During this transition period till Mr Gelonesi took full control of the Club and its affairs, the defendant acted as the part-time "interim general manager". A marketing manager, an accountant, an accounts clerk and the football manager, Mr Collins, assisted him on a full-time basis.

61 The accountant, Mrs Sarah Millard, had replaced her husband, Mr Andrew Millard, in February 2002. Late in 2002 she went on maternity leave for a couple of months, but her husband returned to cover that period. The Accounts Clerk was Ms Anna Boroczy.

62 The defendant played a "stabilising role" and was available to guide and assist staff by discussing problems. He dealt with incoming correspondence and directed it to the relevant staff. He also acted as the liaison and contact between the Club and Soccer Australia, and attended National Soccer League meetings as the Club's representative.

63 At this time there were also issues to be managed in respect of the players, involving the negotiation of a collective bargaining agreement and discussions with the Professional Players Association. He attended meetings in connection with these issues.

64 The majority of the defendant's time as interim General Manager was spent in connection with these player issues and in discussions and meetings connected with the looming possible restructure of the National Soccer League. As to other management matters, these were dealt with by the full-time staff, including the accounting staff, which handled all the day-to-day financial matters.

65 Upon the arrival of Mr Gelonesi, it was agreed that the defendant should remain on in his part-time general management role. This was confirmed at the October Board meeting, at which Mr Gelonesi was appointed Chairman. His duties between October and December of 2002 remained much the same, except that he began going into the office of the Club an extra day each week, due to the imminence of the soccer season and the need for organisation of such activities as soccer camps and to attend "match days".

66 However, thereafter Mr Gelonesi made all major decisions. Mr Gelonesi insisted on dealing with any creditors and dealing with all financial issues. Accounts and financial reports were prepared by the accounting staff and sent directly to Mr Gelonesi. All cheques had to be approved by Mr Gelonesi. Monthly Board meetings were held only up until November, after which they ceased, by which time the only remaining directors were Mr Gelonesi and the defendant.

67 Meanwhile there was a protracted and complicated process by which the approval of the transfer of ownership of the Club by Soccer Australia was negotiated and finalised. This required the provision by Mr Gelonesi of considerable financial information to Soccer Australia and the provision of a bank guarantee.

68 Also at about this time, the directors were advised that they were no longer covered by a Directors' and Officers' Liability Insurance Policy, the worldwide insurance effected by the Glasgow Rangers having expired. Mr Gelonesi suggested to the defendant that he obtain a new policy, but the brokers advised in November that no insurer was prepared to accept the risk. The defendant raised this issue with Mr Gelonesi who told him, "Don't worry, I'll indemnify you".

69 In his part-time capacity the defendant had no involvement in the preparation of financial statements or information. The accounting staff always prepared the appropriate documents and reports, which were sent direct to Mr Gelonesi. Mrs Millard used to brief the defendant on the relevant issues prior to board meetings at which he would present the information prepared by the accounting staff.

70 After the appointment of Mr Dicembre in early January 2003, Mr Dicembre took responsibility for all the Club's financial affairs. Thereafter Mrs Millard reported directly to Mr Dicembre.

71 From the time of Mr Dicembre's appointment, the defendant played no further active role in the Club's financial affairs, and his activities were confined substantially to football matters. The Northern Spirit financial position 72 The evidence makes it clear that from about the time that the Glasgow Rangers started to withdraw, the Club was experiencing severe ongoing financial difficulties. Not only did it not pay its PAYG deductions to the Commissioner, but it was also often late with player payments and other creditors.

73 The position was exacerbated by an ongoing dispute between Mr Gelonesi and the Glasgow Rangers as to the level of shareholder contributions required to meet the budget. Mr Gelonesi was often late with payments and the Glasgow Rangers refused to release their share of the money until Mr Gelonesi had met his obligations.

74 Whilst in his role as the interim General Manager, the defendant was constantly faced with cash flow difficulties and the inability to pay creditors, player salaries and outstanding tax liabilities. He was forced to ask repeatedly for funds from the shareholders. He raised these issues in correspondence and in emails.

75 For example, in an email dated 18 September 2002 (Exhibit C), the defendant wrote to his fellow directors:

" Gentlemen, I have to inform you that we are having difficulties meeting our financial commitment ...An overdraft limit of $300,000 has been set by RFC for the new shareholding, this is just not sufficient for the club to operate on until we get the full shareholding amounts which we will not get until November. We can't operate under this restrictive control and I am faxing you forecasts on our cash flow, revised budgets and bank reconciliation showing all outstanding amounts requiring payment.

We need to have an urgent Board Meeting or conference call to deal with this dire position…"

76 In an email dated 25 October 2002 (Exhibit F), the defendant wrote to Mr Gelonesi:

" I am sending this email to tell you of my problems which we need to do something about

1. We are overdrawn at Bankwest and desperately need the $70,000 balance due on the 14th. Colin Mitchell will not release the RFC money until 4A's money is in the Bank and the $250,000 Bank guarantee has been released back to RFC.
2. We have some $300,000 of invoices to pay and we are fast getting a reputation of being poor payers.
3. Bankwest are not going to sponsor us this year (last year $5000)"

77 In an email dated 6 November 2002 (Exhibit J), the defendant wrote to Mr Mitchell, and copied to his fellow directors:

" I was disappointed to find that no funds had been released by RFC overnight. We are being harassed by our suppliers etc for monies and it is very stressful when we know that there are funds lying at Bankwest waiting to be released…

We now have a new predicament…Hortons are threatening to lock us out at the end of next week if the arrears are not paid.

I could go with chapter and verse on all our problems but something has to happen soon as we can't continue in this manner much longer…"

78 The defendant relied on the contractual commitment that the shareholders, Mr Gelonesi and the Glasgow Rangers, had made to provide funds. He said he believed that Mr Gelonesi was a wealthy man who was able to meet the contractual commitments of the Club. This belief was reinforced by the knowledge that Soccer Australia had investigated Mr Gelonesi and found him suitable to be the Chairman and majority shareholder of the Club.

79 Until he ceased to be the interim General Manager in January 2003, the necessary funds to meet the Club's obligations had always been forthcoming, eventually, and the Club continued to survive.

The ATO Notices 80 When the defendant received the first of the Commissioner's notices under s 222AOE, issued on 23 November 2002, he contacted Mr Gelonesi and told him. Mr Gelonesi said to the defendant, "Don't worry about it, leave it to me, I have a lot of dealings with the ATO". The defendant replied, "I'm concerned, will it affect me?" Mr Gelonesi replied, "No, I'll indemnify you."

81 Subsequently, the defendant was contacted by an officer from the ATO, Mr Neil Wood, who told him nothing had been received by the ATO in response to the Commissioner's notice. On 6 December 2002 the defendant sent an email to Mr Gelonesi (Annexure 'GD1' at page 18):

" We have just had an enquiry from Neil Wood regarding the letters of demand sent on the 23/11/02. He claims nothing has been received and the 14 days are up tomorrow. Please advise that you have made the necessary arrangements."

82 The defendant received a telephone call from Mr Gelonesi that day or the next, and was told:

" I will deal with the Tax Office. Leave it to me."

83 Notices had also been served by the Commissioner on other directors (Annexure 'GD1' at page 13.

84 The defendant had no further contact from the ATO and assumed that Mr Gelonesi had resolved the position with the Commissioner as he had promised.

85 Then, in late January the defendant received the second of the Commissioner's notices under s 222AOE, issued on 23 January 2003. He was very upset when he read this document, and it was the first he knew that Mr Gelonesi had not resolved the position with the Commissioner as promised.

86 He then met with Mr Gelonesi on 28 January 2003. The minutes of the meeting record (Annexure 'GD1' at page 22):

" GD reported that he had received a second letter from the ATO on non payment of Tax due and expressed concern…AG re confirmed that GD would be indemnified against any claims."

87 On 29 January 2003 the defendant received an email from Mr Gelonesi (Annexure 'GD1' at page 23):

" If you happen to receive a letter from the ATO dated the 23rd of January 2003 the following is for your record…the ATO received part payment today, the outstanding balance will be paid by the 31st of March 2003 under an ATO approved plan…the above satisfies the legal nature of the original letter."

88 The defendant assumed that Mr Gelonesi had reached agreement with the Commissioner on an approved plan and had made the part payment out of his own personal funds.

89 The defendant ceased his involvement with the Club when he resigned as a director on 14 March 2003, and was no longer a director at the time the third of the Commissioner's notices under s 222AOE (the Penalty Notice Demand), issued on 8 July 2003.

The defence under s 222AOJ(2) of the Income Tax Assessment Act 1936 90 Section 222AOJ(2) of the Income Tax Assessment Act 1936 ("the ITAA36") provides as follows:

" It is a defence if it is proved that, because of illness or for some other good reason, the person did not take part in the management of the company at any time when: (a) the person was a director; and (b) the directors were under the obligation to comply with subsection 222AOB(1) or 222AOBAA(1)"

91 The defendant contended that he ceased to take part in the management of Northern Spirit from 6 January 2003, on which date a new financial controller, Mr Dicembre, was appointed. The defendant then resigned as a director of Northern Spirit on 14 March 2003. Although a director in the period from 6 January 2003 to 14 March 2003, and ready willing and able to take part in the management, he in fact took no part in the management because Mr Gelonesi, the majority owner of shares in the company, excluded him from doing so.

92 Accordingly, it was submitted, the defendant is not liable for a penalty in respect of PAYG deductions for the months of January, February and March of 2003: s 222AOJ(2) of the ITAA36.

93 The defendant submitted that the correct formulation for the concept of "management" was stated by Ormiston J in Commissioner for Corporate Affairs v Bracht [1989] VR 821, applied in ASIC v Vines (2005) 55 ACSR 617 at [1051] - [1055]:

" …the concept of "management"…comprehends activities which involve policy and decision-making, related to the business affairs of a corporation, affecting the corporation as a whole or a substantial part of that corporation, to the extent that the consequences of the formation of those policies or the making of those decisions have some significant bearing on the financial standing of the corporation or the conduct of its affairs."

94 It was contended that the evidence of the defendant's activities fell well short of him making decisions or directing policy in the sense required. No discretion was vested in him, and Mr Gelonesi was the sole repository of all policy and decision-making.

95 After the appointment of Mr Dicembre on 6 January 2006, the defendant had no involvement at all in the financial side of the Club or its management. Staff no longer reported to him, and his role was thereafter limited to football organisation and administration. Board meetings were no longer held and the defendant did not know he was entitled to insist on board meetings. He did not receive any financial information and was not aware that he was entitled to financial information as to the Club's affairs. Any correspondence or enquiries as to financial or management affairs were passed on for action to Mr Gelonesi or Mr Dicembre. His role was nothing more than as a delegate to an outside body, a liaison role.

96 It was further submitted for the defendant that he did not take part in management from 6 January 2003 "for good reason".

97 Choosing not to take part in management can constitute a "good reason": Deputy Commissioner of Taxation v Clarke [2003] NSWCA 91. Whilst non-participation per se is not "good reason": [133], the phrase is not limited to unavoidable matters: [125]. The test, ultimately, is one of reasonableness, the standard being largely objective: [174]. If the non-participation was not a breach of the director's duty to exercise reasonable care and diligence, it will have the character of being for "good reason": [175].

98 In the present case, Mr Gelonesi was the only source of money. He had complete control. He determined who would be paid, when they would be paid and how they would be paid. Although ready, willing and able to take part in the management of the company, the defendant was excluded entirely by the majority owner, who made all the decisions.

99 The defendant, it was argued, did not believe he had any role to play in management following the arrival of Mr Dicembre. This was not a passive abandonment of his management role; rather it was an active exclusion.

Whether the defendant did not, for good reason, take part in management 100 The relevant withholding periods were December 2002, January, February and March 2003.

101 The directors of Northern Spirit, having failed to comply with s 222AOB(1) in respect of each of those periods, the defendant became liable for the respective penalties because he was a director during the relevant compliance period: s 222AOC(1). The duty of compliance is a continuing duty: s 222AOB(3). The defendant was still a director on 13 March 2003, a date within the period for compliance for the last of the relevant withholding periods, which began before 13 March 2003. The defendant did not cease to be a director until 14 March 2003.

102 A defence under s 222AOB(1) is not available to the defendant for the December 2002 withholding period. That defence is only raised in respect of the penalties for the January 2003, February 2003 and March 2003 withholding periods.

103 It is irrelevant that the defendant resigned and was no longer a director at the time the third of the Commissioner's notices under s 222AOE (the Penalty Notice Demand), issued on 8 July 2003: Canty v Deputy Commissioner of Taxation 59 ATR 408 at [28] - [30].

104 The remaining issues for determination in respect of the defence raised as to the penalties for those three periods are: (a) whether the defendant did not take part in the management of the company between 6 January 2003 and 14 April 2004; (b) if he did not, whether that was for good reason.

105 It is not disputed that the defendant took part in the management of the company prior to 6 January 2003. The question is whether he ceased to do so after the arrival of Mr Dicembre. In my view the defendant did not prove that he did not take part in management of the company in the period between 6 January 2003 and 14 April 2004.

106 Taking part in the management of a company is not limited to the financial aspects of its operations, but includes activities and decisions which may have some significant bearing on other aspects of its affairs: Forge v ASIC (2004) 213 ALR 574 at [183] - [195]. In my view it is artificial to segregate the activities the defendant was primarily engaged in by categorising them as being limited to football organisation and administration. Such activities were, in my view, management activities.

107 The degree of participation required must be real and direct, but not necessarily in a role in which ultimate control is exercised: Commissioner for Corporate Affairs v Bracht [1989] VR 821 at 823.

108 In any event, in my view the evidence establishes that the defendant was also actively participating in the financial aspects of the company's affairs. There are numerous examples, including Exhibits N, O, P and Q.

109 Even if the defendant's activities at the Club were not to be characterised as taking part in management, it could not in my view be said that he failed to do so for "good reason".

110 A failure to take part in management, to attract the operation of the defence under s 222AOJ(2), must necessarily be temporary in nature: Deputy Commissioner of Taxation v Clarke [2003] NSWCA 91. Non-participation per se is not "good reason". It is a director's responsibility to inform himself about the company's financial position. It is also to be assumed that a director understands the responsibilities that office carries with it.

111 The defendant was clearly aware not just that the company was in a parlous financial position, but also that it was failing to meet its tax obligations. He failed to make any independent investigation or enquiry, choosing at each turn not to ensure compliance with the notices issued by the Commissioner and instead to rely on the cursory assurances of Mr Gelonesi that the situation would be rectified. That was not conduct that satisfied the duty to exercise reasonable care and diligence. A director in the position of the defendant was not entitled to rely on ignorance, but should have ensured that there was in place a system to ensure compliance: Deputy Commissioner of Taxation v Saunig 55 NSWLR 722 at 730 - 735.

112 As the plaintiff succinctly submitted (Paragraph 44):

" Mr Dick in full knowledge of the declining financial position of Northern Spirit sat on his hands at his peril."

113 I find that the defendant has not made out a defence under s 222AOJ(2).

The defence under s 1318 of the Corporations Act 114 Section 1318(1) of the Corporations Act 1936 provides as follows:

" If, in any civil proceeding against a person to whom this section applies for negligence, default, breach of trust or breach of duty in a capacity as such a person, it appears to the court before which the proceedings are taken that the person is or may be liable in respect of negligence, default or breach but that person has acted honestly, and that having regard to all the circumstances of the case, including those connected with the person's appointment, the person ought fairly to be excused for the negligence, default or breach, the court may relieve the person either wholly or partly from liability on such terms as the court thinks fit…"

The section applies to a director of a corporation: s 1318(4) and (5).

115 The defendant contended that having acted honestly, and having regard to all the circumstances of the case, he ought fairly to be excused for any default or breach of duty alleged, and relieved of any liability for a penalty in respect of PAYG deductions for the month of December 2002 and the months of January, February and March 2003: s 1318(1) of the Corporations Act1936.

116 The relevant circumstances include, in particular, the exclusion of the defendant from the management of Northern Spirit from 6 January 2003 to 14 March 2003 by Mr Gelonesi, the majority owner of shares in the company.

117 The defendant also raises various other "circumstances" relevant to the exercise of the discretion, to which I shall come.

118 There is a preliminary issue to be determined before coming to consider whether the defendant ought fairly to be excused for any default or breach of duty alleged, and relieved of any liability, under s 1318.

119 The preliminary issue is whether that section can have any application to the present claim against the defendant. The plaintiff contends that s 1318 is not available to excuse the defendant's failure to comply with the requirements of s 222AOB(1) of the ITAA36.

120 It was not submitted that the defendant acted dishonestly. In any event I am satisfied that his failure to exercise reasonable care and diligence as a director did not amount to dishonest conduct carrying with it the degree of moral turpitude that would be required to oust the application of s 1318.

122 The issues for determination in respect of the application of s 1318 to the present claim are, therefore:

(a) whether the liability is for negligence, default, breach of trust or breach of duty; (b) whether s 1318 is available to excuse a liability for a penalty for breach of statutory provisions outside of the Corporations Act 2001; (c) whether the operation of s 1318 is precluded because: (1) the relevant part of the tax legislation constitutes an exhaustive code, or (2) the principle generalia specialibus non derogant precludes its operation.

123 The Commissioner submitted that there was no relevant negligence, default, breach of trust or breach of duty, only a failure to comply with an obligation imposed by statute.

124 In my view, however, the defendant's liability arose by reason of a default. A failure to comply with a statutory obligation is a breach of duty, or default: Neath Rural District Council v Williams [1951] 1 KB 115 at 123.

125 The Commissioner pointed out that there is "not a single occasion" where s 1318 has been applied outside of the Corporations Act 2001. He relied on a passage in a decision by Justice McDougall in Deputy Commissioner v Keck [2006] NSWSC 677 for the proposition that s 1318 has no application in the context of the ITAA36, because there is a separate defence provided in that Act.

126 As the defendant pointed out, the comments of McDougall J were obiter and had not been the subject of any consideration or argument by the parties in that case.

127 The Commissioner submitted that the legislative scheme in Divisions 8 and 9 of Part VI of the ITAA36 should be regarded as a code, so that there is no scope for additional defences not provided for within s 222AOJ of the ITAA36:

" The aim of a code in a particular branch of the law is to provide a systematic coherent exposition of the relevant definitions and principles of that law…The provisions in Division 8 and 9 as such cover the field, and there is no scope for a director to invoke an exoneration provision from legislation extraneous to the purpose and subject matter of those Divisions."

128 The Commissioner, in similar vein, submitted that where there is a conflict between two provisions, one being specific and the other being general, the specific provision prevails. "It cannot have been the intention of Parliament that a general relief provision in another statute could at the end of the day relieve a penalty that arose automatically by the operation of the ITAA36…"

129 Finally, the Commissioner submitted that s 1318 needs to be read down to apply only to relief from liability resulting from a legitimate business decision, honestly made, and the defendant's liability in this case arises not from any business decision, but from the failure to comply with s 222AOB: Daniels v Anderson (1995) 37 NSWLR 438 at 525.

130 I am of the view, however, that s 1318 may be called upon in appropriate circumstances to excuse a director's failure to comply with the requirements of s 222AOB(1) of the ITAA36.

131 I do not consider that there is any inconsistency between s 1318 and the relevant provisions of the ITAA36 or that those provisions constitute a code that leaves no scope for the operation of s 1318. Nor do I consider that s 1318 should be given the restrictive interpretation the plaintiff, contends for. In my view it is not a provision relating solely to liability arising from legitimate business decisions.

132 In this regard I agree with the defendant's submissions that s 1318 is a remedial provision, beneficial to directors acting honestly, and is to be liberally interpreted having regard to that intention: Edwards v Attorney-General (2004) 60 NSWLR 667 at 681. The section operates to empower the court to ameliorate the harshness of otherwise absolute directorial liability, in appropriate circumstances.

133 The discretionary nature of s 1318 is such that it removes any inconsistency or conflict with the provisions of the ITAA36. This provision was passed later in time and the usual principles of statutory construction lead to the assumption that in the absence of an express provision to the contrary, the legislature intended it to be available to excuse a director from a liability imposed by the ITAA36, in appropriate circumstances.

134 The defence provided for under s 222AOJ(2) of the ITAA36 is a limited one, directed at particular circumstances. It permits of no discretion having regard to other broader exculpatory circumstances. The broader provision for discretionary relief in s 1318 sits behind as a safety net, available to excuse a director either completely or partially, if there are other broader considerations which the court considers should properly be taken into account.

135 One such consideration is expressly envisaged in the section, namely the circumstances "connected with the person's appointment". This contemplates, or example that an innocent, honest director, appointed as a director in circumstances where ignorance of the circumstances giving rise to the liability ought fairly be excused. I can see no reason in principle why this should not apply to a tax related liability.

Ought the defendant fairly to be excused, and relieved from liability? 136 The Commissioner submitted that the availability of a provision such as s 1318 must be tempered having regard to the serious responsibilities imposed by s 222AOB. It quoted the passage from the judgment of Heydon J in Deputy Commissioner for Taxation v Saunig 55 NSWLR 722, where he referred to:

" …the evils of taxpayers deducting taxation payments from employees' wages and not passing them on to the authorities…The evils are not limited to the tax avoided: they extend to the use made of the money, namely theft or use as working capital, thereby permitting companies to continue to trade which in truth are not capable of continuing to trade lawfully."

137 Further, the fact that the defendant was misled or duped by his fellow director, Mr Gelonesi is unlikely to assist his position. Ignorance is no excuse: Saunig at [25]. Simple enquiries on the defendant's part would have revealed the true position: Commonwealth Bank v Friedrich (1991) 5 ACSR 115 at 119.

138 The plaintiff also submits that the failure by the defendant to call either Mr Dicembre or Mr Gelonesi to shed light on the position of the company in the period from 6 January 2003 to 14 March 2003 gives rise to an inference that their evidence would not have assisted the defendant: Jones v Dunkel (1959) 101 CLR 298.

139 The discretion under s 1318 is absolute. Nevertheless it is to be exercised judicially, according to reason and justice, and not according to considerations of sympathy or benevolence: Williams v Lever (1974) 2 NSWLR 91 at 95. On the other hand, there is no limitation on the type of circumstances to which the court may have regard, and in my view these are at large.

140 The starting point for any discussion on whether the defendant ought fairly to be excused the penalties, either wholly or partly, is the fact that his liability for them arose by reason of his failure to exercise the degree of reasonable care and diligence required of a director.

141 Nevertheless, there are many mitigating circumstances.

142 The submissions refer to the circumstances surrounding the appointment of the defendant. In my view, it is relevant this was the only directorship ever held by the defendant. He was clearly appointed for his knowledge, experience and contacts in the world of soccer, not for his business acumen or financial expertise.

143 Other circumstances which the courts have taken into account have included: the seriousness of the contravention; any harm caused to others; the presence or absence of personal gain; whether the director was paid for his services; whether the defendant was acting in a professional capacity, such as a lawyer or accountant; the nature of any community service or benefit to society arising from the director's service; the director's personal financial circumstances; and the effect on the director personally and on his family. I regard each of these circumstances as relevant to this defendant, together with his age, and I will come to some of them in more detail shortly.

144 Before I do so, there are three other general ameliorating circumstances I have taken into account.

145 The first of these general circumstances is the relative innocence of this defendant. This was described by others as his ingenuousness, or what Neville Wran characterised as his being a "bit of a plodder, not particularly versed in corporate affairs". The evidence clearly supports the inference that the defendant was "conned" by Mr Gelonesi. In my view the defendant was entitled to believe, as he did, that this man was reputable and honourable, and of some considerable means. He did, after all, work in a senior position at Deloittes, a high profile international accounting firm. Tragically, the reality was that Mr Gelonesi was a man of straw who went bankrupt, owing his creditors some $23 million! (Exhibit 14).

146 The second of these circumstances arises because of the date of issue of the third Penalty Notice Demand, namely 8 July 2003. By this time the defendant had resigned as a director, and although not relevant to the defence under s 222AOJ(2) of the ITAA36, it is in my view relevant to the exercise of the discretion under s 1318. The unlikelihood of any ability, in a real and practical sense, to bring about any of the four matters required under s 222AOB(1), must be a relevant factor.

147 And third, from a causative standpoint, there is no evidence that even if the defendant had complied with s 222AOB(1), in respect of the withholding periods specified in the third Penalty Notice Demand, that this would have altered the ultimate outcome, and produced for the Commissioner any money in reduction of the company's primary liability to remit the PAYG deductions for those withholding periods. In other words, would the Commissioner's loss have otherwise been lessened or avoided?

148 I turn now, briefly, to expand upon some of the other particular circumstances I regard as relevant, which I have also taken into account.

149 The defendant received no further remuneration from the Club either as a director or in his management roles, from the time Mr Gelonesi became the majority shareholder. The fact that he did so reflects his generosity and community spirit.

150 From January 2003, after Mr Gelonesi had installed his brother-in -law as the financial controller, the defendant took no further active role in the Club's financial affairs from a management perspective, concentrating on football matters where his strengths, skills and experience lay.

151 The defendant did not completely ignore the Commissioner's notices. On each occasion he took positive steps to attempt to deal with the issue of outstanding PAYG payments by raising them promptly with Mr Gelonesi. It is true that the steps he took fell short of what in my view his duty as a director required, nevertheless those steps led on each occasion to a genuine belief that the problem had been resolved. Unfortunately for him, the deceit of Mr Gelonesi belied the true situation.

152 Mr Dick is a man who has by any measure made an outstanding, selfless contribution to the community through his services to soccer. He has been recognised by the awarding of the Order of Australia. To ignore such service would be curmudgeonly in the extreme.

153 The evidence establishes that the defendant has no prospect of recovery from anyone else by way of indemnity or contribution, including the company itself. He is literally the last man standing in the financial debacle that was the Northern Spirit Soccer Club.

154 Each of these circumstances, although individually significant, might in isolation be insufficient, but cumulatively they are a powerful, and make it fair that the defendant be excused for his default, and wholly relieved of his liability for the penalties.

155 It occurs to me that there may be terms that the Commissioner, in light of this outcome, might reasonably demand. I am prepared to entertain an application of that nature.

156 In the meantime, I find that having regard to all the circumstances of the case, including those connected with the defendant's appointment as a director, he ought fairly to be excused for his default and wholly relieved from his liability for the penalties claimed by the Commissioner of $141,295.19.

Disposition 157 For these reasons I find in favour of the defendant.

158 I enter a verdict for the defendant and give judgment accordingly.

160 I dismiss the defendant's cross-claim, and make no order as to costs in respect of that cross-claim.

161 I give the plaintiff leave to apply as to any terms under s 1318.

162 I order that the exhibits remain in court for 28 days, after which they may be released.

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