Deputy Commissioner of Taxation v George [2002] NSWCA 336 | Case summary

222AOB. (1) The persons who are directors of the company from time to time on or after the first deduction day must cause the company to do at least one of the following on or before the due date: (a) comply with Division 1AAA, 3B or 4, as the case may be, in relation to each deduction: (i) that the company has made for the purposes of Division 1AAA, 3B or 4; and (ii) whose due date is the same as the due date; (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; (c) appoint an administrator of the company under section 436A of the Corporations Law; (d) begin to be wound up within the meaning of that Law. (2) This section is complied with when: (a) the company complies as mentioned in paragraph (1)(a); or (b) the company makes an agreement as mentioned in paragraph (1)(b); or (c) an administrator of the company is appointed under section 436A, 436B or 436C of the Corporations Law; or (d) the company begins to be wound up within the meaning of that Law; whichever first happens, even if the directors did not cause the event to happen. (3) If this section is not complied with on or before the due date, the persons who are directors of the company from time to time after the due date continue to be under the obligation imposed by subsection (1) until this section is complied with. Penalty for directors in office on or before due date 222AOC. (1) If section 222AOB is not complied with on or before the due date, each person who was a director of the company at any time during the period beginning on the first deduction day and ending on the due date is liable to pay to the Commissioner, by was of penalty, an amount equal to the unpaid amount of the company's liability under a remittance provision in respect of deductions: (a) that the company had made for the purposes of Division 1AAA, 3B or 4, as the case may be; and (b) whose due date is the same as the due date." 7 Section 222AOB(1) applied where a company made one or more deductions under the Divisions mentioned having a particular due date. Netcom made PAYE deductions under Division 1AAA having due dates from 3 September 1998 to 21 February 2000. The earliest day on which a company made a deduction for the purposes of Division 1AAA that had a due date was called the first deduction day (s 222AOA(2)). The first deduction days in question fell within the period from 26 August 1998 to 31 January 2000. 8 Netcom did not before any of the due dates in question comply with Division 1AAA, make an arrangement with the Commissioner under s 222ALA, appoint an administrator under the Corporations Law (Cth), s 436A or begin to be wound up. 9 The respondent was a director of Netcom from 26 June 1995 until 15 March 2000. He was appointed an acting District Court judge on 18 September 1996, a position to which he was reappointed in subsequent years until he returned to practice at the New South Wales bar on 30 June 1999. 10 In about March 1999, the respondent received a letter from the appellant advising him that Netcom was in arrears of remittances of PAYE deductions. At the instance of a co-director, he thereafter attended a conference with the appellant. The trial judge found that the respondent's attendance at this conference did not constitute participation in the management of Netcom. 11 Section 222AOE provided that the Commissioner was not entitled to recover a penalty until the end of 14 days after the Commissioner had given the person a notice setting out details of the unpaid amount of the liability under s 222AOC and stating that the person was liable to pay to the Commissioner by way of penalty an amount equal to that unpaid amount but that the penalty would be remitted if at the end of the 14 days the liability had been discharged, or an agreement was in force under s 222ALA, or the company was under administration or being wound up. The respondent received s 222AOE notice on 6 March 2000. 12 The legislation contained specific defences with respect to a director's liability under Division 9 as follows: " Defences 222AOJ. (1) This section has effect for the purposes of : (a) proceedings to recover from a person a penalty payable under this Subdivision; or (b) proceedings under section 222AOI against a person of the kind referred to in paragraph 222AOI(d). (2) 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) (3) It is also a defence if it is proved that: (a) the person took all reasonable steps to ensure that the directors complied with subsection 222AOB(1); or (b) there were no such steps that the person could have taken. (4) In subsection (3): "reasonable" means reasonable having regard to: (a) when, and for how long, the person was a director and took part in the management of the company; and (b) all other relevant circumstances." 13 The respondent did not resign as a director of Netcom upon his appointment as an acting District Court judge. The trial judge found, however, that the respondent did not participate in the management of Netcom during the time he was an acting judge as a direct consequence of his perception of the role required of him as a judge. The trial judge concluded that that perception constituted a good reason and, for the period up to 30 June 1999, the respondent had made out a defence under s 222AOJ(2). 14 Once he ceased to be an acting judge, however, the trial judge found that no good reason for non-participation in the management of Netcom had been established and the respondent was liable to a penalty under s 222AOC for the remainder of the period. On 1 February 2002 the trial judge published his reasons for judgment which included the statement that the appellant was entitled to a verdict in the sum $104,338 and the respondent should pay the appellant's costs. Having heard further argument, the trial judge published further reasons on 5 April 2002 in which he stated there would be a verdict for the appellant against the respondent in the sum of $104,338, the respondent should pay the appellant's costs to be agreed or assessed up to 19 October 2001, thereafter each party should pay his own costs and judgment should be entered accordingly. 15 The appellant appeals to this court on the grounds that the trial judge erred: (1) in finding that an appointment as an acting District Court judge obliged the respondent to cease taking part in the management of Netcom; (2) in finding that acting as a District Court judge constituted a good reason for not taking part in the management of Netcom for the purposes of s 222AOJ(2); (3) in finding that the respondent's belief that he could not, as an acting District Court judge, take part in the management of Netcom constituted a good reason for not taking part in its management for the purposes of s 222AOJ(2); (4) in finding that the respondent did not take part in the management of Netcom especially in the early 1999 period; (5) in failing to find that after 30 June 1999, by virtue of s 222AOB(3), the respondent continued to be under the obligation imposed on him by s 222AOB(1) in relation to all PAYE deductions not by then remitted to the appellant and by reason of that continuing obligation to comply with s 222AOB(1), the respondent was unable to establish the defence required under s 222AOJ(2); (6) in hearing any further argument after he gave judgment on 1 February 2002, his Honour having become functus officio on that date; and (7) in failing to order the respondent to pay the appellant's costs of the trial in addition to the other costs ordered to be paid by the respondent. 16 Because of the view I take with respect to the fifth ground of appeal, it is unnecessary to consider the other grounds. Whether or not a judge is excluded from taking part in the management of a company and whether or not the perception that this is so, constitutes a good reason for non-participation in the management of a company for the purposes of s 222AOJ(2) are important questions but unnecessary of resolution in these proceedings. Whatever the outcome of those arguments, the respondent ceased to be a judge when none of the courses of action referred to in s 222AOB(1) had been taken such that, at first sight, s 220AOB(3) would appear to have resulted in the respondent continuing to be under the obligation in s 222AOB(1) and the failure of Netcom to take one of the four alternative courses of action rendered him liable to penalty under s 222AOC. 17 There is some infelicity of language in s 222AOB(3) because it related to a period after the due date yet provided that directors continued to be under an obligation under s 222AOB(1). That obligation was to cause one of the alternative events to happen on or before the due date. Nevertheless, I think the structure of the legislation was plain. 18 Section 222AOB(1) cast an obligation upon existing directors to achieve one of the four results by the due date. If that did not happen, s 222AOB(3) continued the obligation both in respect of existing directors and in respect of new directors. The obligation imposed by s 222AOB(1) to which s 222AOB(3) referred, was the obligation to cause the company to take one or other of the four steps. The obligation was not defined as the achievement of this result by the due date. That would have made a nonsense of s 222AOB(3) which continued the obligation under s 222AOB(1) after the due date. 19 The sanction for the failure of a director in office on the due date to cause a company to achieve one of the four results was the penalty prescribed in s 222AOC. The sanction for the failure of a new director to cause a company to take one of the four steps was the penalty prescribed in s 222AOD. It was in the following terms: "Penalty for new directors 222AOD. If: (a) after the due date, a person becomes, or again becomes, a director of the company at a time when section 222AOB has not yet been complied with; and (b) at the end of 14 days after the person becomes a director, that section has still not been complied with; the person is liable to pay to the Commissioner, by way of penalty, an amount equal to the unpaid amount of the liability referred to in section 222AOC." 20 If, after a s 222AOC or a s 222AOD penalty arose, compliance with one of the four courses of action in s 222AOB(1) was achieved by no later than 14 days after service of a s 222AOE notice, the penalty was remitted under s 222AOG. That section was as follows: " Remission of penalty if section 222AOB complied with before notice period ends

222AOG . If: (a) a penalty is payable by a person under this subdivision; and (b) section 222AOB is complied with at a time when the Commissioner has not yet given the person a notice under section 222 AOE, or within 14 days after the Commissioner gives the person such a notice: the penalty is remitted because of this section." 21 It follows from this construction that a defence under s 222AOJ(2) was effective only if the director established a good reason for a failure to take part in the management of a company for the entirety of the period of the directorship during which the obligation under s 222AOB(1) existed. Since any good reason the respondent may have had for not taking part in the management of Netcom ceased while he remained a director and when the obligation under s 222AOB(1) continued to apply to him by operation of s 222AOB(3) there was, after that cessation, no defence under s 222AOJ to the penalty to which he was subjected by s 222AOC. 22 In seeking to resist this conclusion, the principal submission on behalf of the respondent was that s 222AOB(3) created a separate obligation from s 222AOB(1) which only arose if there was a failure to comply with the obligation under s 222AOB(1). It was submitted that the obligation under s 222AOB(1) was temporally limited and ceased to apply when the due date was reached. The obligation under s 222AOB(3) arose after the due date with like content to the obligation under s 222AOB(1) but only if there was non-compliance with the s 222AOB(1) obligation and, so the argument ran, there was no non-compliance in circumstances in which a defence was established under s 222AOJ. Since the respondent had shown good reason for his failure to take part in the management of Netcom up to and including the due date of 7 June 1999, an obligation under s 222AOB(3) only arose in him in respect of the due dates from 7 July 1999 to 21 February 2000, the period for which the trial judge held him liable. 23 Attention was drawn to the language of s 222AOJ(2) which spoke in terms of non-participation in the management of a company "at any time" when a person was a director and an obligation under s 222AOB(1) existed. It was submitted that if the legislature had intended that the good reason should be established for the whole of the period during which a person was a director and under an obligation under s 222AOB(1), it would have said so. Further, it was submitted that the legislature could not have intended to nullify the effect of a defence when a director ceased to have good reason for non-participation in the management of a company. It was argued that once the defence was established, it enured forever. Since s 222AOJ(2) and s 222AOJ(3) referred only to s 222AOB(1), it was argued that this indicated that there were separate and distinct obligations the one under s 222AOB(1) which was subject to s 222AOJ(2) and s 222AOJ(3) defences and the other under s 222AOB(3) which was not. 24 If this last submission is correct, s 220AOJ(2) and s 222AOJ(3) defences were not available to a new director or a person who again became a director whose obligation stemmed from s 222AOB(3). Nor were the defences available to a continuing director whose s 222AOB(1) obligation, on the respondent's argument, was spent on the due date and replaced with a s 222AOB(3) obligation. Either s 222AOD and s 222AOC, respectively, were the sanctions for breach of the s 222AOB(3) obligations and there were no defences under s 222AOJ(2) or s 222AOJ(3), or there was no sanction at all for a breach of a s 222AOB(3) obligation. 25 Since these results are so unlikely to have been intended, the construction set forth earlier in these reasons is to be preferred and the above construction is to be rejected. Under the construction set forth earlier, s 222AOB(3) imposed a s 222AOB(1) obligation upon a new director or a person who again became a director, the sanction for non-compliance with which was a penalty under s 222AOD. Since the new director or the returning director was subjected to a s 222AOB(1) obligation, the defences in s 222AOJ(2) and 222AOJ(3) were available. Likewise, the director continuing in office after the due date continued to be subject to a s 222AOB(1) obligation if none of the four steps had been achieved, by operation of s 222AOB(3) and, again, since that was a s 222AOB(1) obligation, the s 222AOJ defences were available to the director to relieve from the sanction under s 222AOC. That provision applied because the director in question had been a director on the due date. 26 With respect to the nullification of the effect of a defence argument, the purpose of Division 9 was stated in s 222ANA(1) to be to ensure that a company either met its obligations or went promptly into voluntary administration or into liquidation. Section 222ANA(2) provided that Division 9 imposed a duty on the directors to cause the company to do so. That might lead to harsh consequences, particularly if the appellant delays in taking action so that the amount of the penalty escalates, but it is consistent with that objective, that a defence which was not available for the entire period of a directorship when a s 222AOB(1) obligation existed, would not avoid a penalty under s 222AOC or s 222AOD. It is to be remembered, after all, that a director in such a position had allowed a company, in the management of which the director was engaged, to withhold moneys from its employees but to fail to pay them over to the Commissioner. 27 The words "at any time" in s 222AOJ(2) related to the period when a person was a director and the directors were under an obligation to comply with s 222AOB(1). That means, in my view, that the director had to establish good reason for non-participation in the management of the company throughout the period the person was a director and the directors were under a s 222AOB(1) obligation. The defence was not enlivened if merely because on one or more discrete occasions during that entire period the director had good reason not to participate in the management of the company. The requirement was that a director did not take part in management at any time. That requirement was not satisfied if there was participation on one or more occasions. No participation at any time meant non-participation at all times. The submission of the respondent does not give weight to the negative requirement. In my view, a director who established that at some time during the directorship when under a s 222AOB(1) obligation, there was good reason for non-participation in the management of the company, did not gain a defence to a penalty under s 222AOC or s 222AOD based on an obligation continued by s 222AOB(3) at a time when there was no continuing defence. 28 The respondent's argument is that a s 222AOJ defence placed a director in the position that there had been compliance with s 222AOB(1). Section 222AOB(3) operated only if there was non-compliance with s 222AOB(1). The respondent argued that s 222AOB(3) did not operate merely because there was non-compliance with a s 222AOB(1) obligation. He argued that what was also required was that the non-compliance was not "nullified", to use the expression of counsel for the respondent, by a s 222AOJ defence. 29 A s 222AOJ defence did not nullify a s 222AOB(1) obligation. It was an answer to the sanction imposed by s 222AOC or s 222AOD for non-compliance with s 222AOB(1). The defence presupposed non-compliance and excused the consequence. Thus, whether or not a s 222AOJ defence was available to a director, s 222AOB(3) was invoked when there was a failure to comply by the due date with the s 222AOB(1) obligation. There was no other requirement for its operation. 30 I reject the construction for which the respondent contends. It creates incongruities, which could not have been intended, in failing to provide defences to sanctions for breaches of s 222AOB(3) or, alternatively, in failing to provide any sanction at all for such breaches. And it treats compliance with s 222AOB(1) as including non-compliance the subject of a s 222AOJ defence when such a defence does not lead to compliance but, rather, relieves from the sanctions for non-compliance, and presupposes such non-compliance. 31 The respondent made a secondary submission that s 222AOB(3) only applied to a new director or a person who again became a director because it was limited to persons who were directors of a company from time to time after the due date. I reject this submission. In its ordinary meaning, the provision applied to persons who from time to time after the due date were the directors of a company. Persons who were directors prior to the due date and continued in office answered that description as did persons newly appointed as directors or persons who again became directors after the due date. 32 Section 221P gave the Commissioner priority in bankruptcy and in a winding up for PAYE deductions which had not been remitted to him or used to buy tax stamps. Division 9 was introduced as a substitute for that priority by the Insolvency (Tax Priorities) Legislation Amendment Bill 1993. In introducing the bill to the Parliament, the then Minister for the Arts and Administrative Services, Senator McMullan said in his second reading speech (Senate Weekly Hansard No 3, 1993 p 880): "The Bill will also make company directors liable for deductions made by their company and not remitted to the Commissioner. Currently, directors can be convicted in relation to their company's non payment of amounts deducted and can be ordered by a court to pay reparation equal to the deductions not remitted. This new measure will achieve this result more efficiently. Consistent with the theme of the recent amendments to the Corporations Law, this measure will ensure solvency problems are confronted earlier and the escalation of debts will be prevented…" 33 It is incumbent upon the Commissioner to exercise his powers under Division 9 expeditiously for otherwise their exercise after the escalation of debts can have Draconian consequences. An early sign of problems in a company is its living on the false reserves of non-remitted PAYG withholdings. The Commissioner is in the position that he will have notice of a failure to remit. He should act then, when PAYG withholdings are relatively low and the directors' liabilities are correspondingly so. 34 I would allow the appeal. I would set aside the judgment of the trial judge and order that judgment be entered for the appellant in the sum of $327,007.01 with effect from 1 February 2002. I would order the respondent to pay the appellant's costs of the appeal and the costs of the proceedings in the District Court. The respondent is to have a certificate under the Suitors' Fund Act 1951.

Deputy Commissioner of Taxation v George

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