Taxes and duties - Administration of federal tax legislation - Collection and recovery of tax - Withholding tax - Payer's rights and obligations - Consequences of failure to withhold or pay amounts - Recovery from director where company failed to remit withholding amount - Director's penalty notice
The claimant, Mr Reissig, commenced two actions against the defendant, Mr Tubb. The actions, although involving different issues, are related and arise from the same background circumstances. In each action Mr Reissig seeks a contribution from Mr Tubb for money paid in discharge of debts arising from the business of the Inveresk Tavern. In one case the payment was to Australian Liquor Marketers Pty Ltd ("ALM"). In the other case the payment was made to the Australian Tax Office ("the ATO").
For the reasons which follow Mr Reissig's claim for a contribution for the ALM debt succeeds but the claim for contribution for the ATO debt fails.
[9]
Prior to 2006 Mr Tubb conducted business as an automotive mechanic through a company Dreem Mechanical Pty Ltd. Mr Reissig operated and still operates a building business through the company Chris Reissig Builders Pty Ltd. Mr Reissig and Mr Tubb, who had known one another for some time and become friends, commenced a business relationship. A solicitor, Melanie Kerrison of Rae and Partners, set up a unit trust called the C & T Unit Trust of which Mr Reissig and Mr Tubb were the trustees. Through the trust they engaged in the construction and sale of residential buildings. In 2006 they decided to buy a hotel together. They looked around for a suitable business and decided upon the Inveresk Tavern at 13-19 Dry Street Invermay in Tasmania. They sought advice from an accountant Mr Ronald Brown.
Rae and Partners acted as solicitors in the purchase. Mr Brown advised that a company should be incorporated to purchase the hotel business which consisted of a leasehold, plant and equipment and stock. Skyline Enterprises (Tas) Pty Ltd ("Skyline Enterprises") was incorporated on 9 November 2006. Mr Reissig and Mr Tubb were the directors. The shares were owned by the companies associated with each of them; in Mr Reissig's case Chris Reissig Builders Pty Ltd and in Mr Tubb's case Dreem Mechanical Pty Ltd. Company bank accounts were opened.
The purchase price for the business was about $160,000. A deposit of $10,000 was paid from the unit trust with the respective accounts of Mr Reissig and Mr Tubb each being debited by $5,000. To fund the balance and to provide working capital Skyline Enterprises obtained a business loan of $150,000 and an overdraft facility of $100,000 from the ANZ Bank. A letter of offer dated 20 November 2006 was submitted and formed the basis of the agreement with the bank. To further secure the indebtedness to the bank Mr Reissig and Mr Tubb entered into a guarantee and indemnity both in their personal capacity and as trustee for the C & T Unit Trust. Chris Reissig Builders Pty Ltd also entered into a guarantee and indemnity agreement in respect to the liability of Skyline Enterprises.
On 13 November 2006 Skyline Enterprises executed an application for a credit account with Australian Liquor Marketers Pty Ltd, a liquor supplier. The application was accepted by ALM which thereafter supplied liquor to the hotel. In part, the application provided:
[10]
"The Applicant agrees that if the Applicant is a private company, the directors of the Applicant will be bound as guarantors of the Applicant and shall execute and be bound by ALM's standard Credit Trading Terms"
[11]
The credit trading terms are attached to the application and are also dated 13 November 2006. Both the application and the terms are signed by Mr Tubb and Mr Reissig as directors of Skyline Enterprises and as guarantors. The trading terms relevantly provide for a joint and several guarantee of the liability of Skyline Enterprises to ALM in the following terms:
[12]
"30. In consideration of ALM at the request of the Guarantor entering into this Agreement with the Customer the Guarantor covenants and agrees with ALM that:
[13]
30.1 The Guarantor guarantees to ALM that he will be with the Customer jointly and severally liable for the due payment of all moneys to be paid under this agreement...
[14]
30.4 The liability of the Guarantor under this guarantee and indemnity shall not be affected by the granting of time or any other indulgence to the Customer...
[15]
30.9 Where there is more than one person...which together constitute the Guarantor to this Agreement the obligations and liabilities of each and every such person...shall be joint and several."
[16]
As between Mr Reissig and Mr Tubb an agreement was reached whereby Mr Tubb would be paid $1000 per week to manage the hotel. Mr Reissig's case, although now disputed by Mr Tubb, is that Mr Reissig's wife Emma was to be paid a wage of $25 per hour to manage and prepare the books of account. Mr Reissig was to, at the same time as continuing to operate his building business, provide some limited services such as preparation of staff rosters and ordering stock, but without remuneration.
The hotel commenced operation at the beginning of December 2006. The hotel business did not go well. It suffered substantial losses. Over the course of the next year tension developed between Mr Reissig and Mr Tubb both on a business and personal level. At some point during 2007 Mr Tubb ceased to manage the hotel and another member of staff was appointed to be manager. Mr and Mrs Reissig assumed greater responsibility for the business. The ANZ Bank was paid its debt and re-finance was obtained from the Bank of Queensland. Notwithstanding the falling out between the two men, Mr Reissig and Mr Tubb both remained as directors.
There is a dispute about Mr Tubb's level of involvement with the management of the hotel and access to business and company records after 1 July 2007 and the reasons for his reduced role. I will refer to that dispute later in these reasons. Findings about the disputed facts are required to enable determination of the issues in each claim.
Eventually the hotel was sold by contract dated 26 May 2009 which was completed on 30 June 2009. The sale price was $250,000 plus stock of $69, 039.29. The settlement statement prepared by Rae and Partners records that from the proceeds of sale moneys were paid including $104,344.20 to the Bank of Queensland and $69,039.29 (the stock payment) to ALM. The balance sale proceeds of $128,493.22 were paid into the company bank account with ANZ on 21 July 2009.
The sum deposited to the company bank account was used to pay creditors. The payments to creditors included payments to Chris Reissig Builders Pty Ltd and to Mr and Mrs Reissig personally.
After the hotel was sold Skyline Enterprises was wound up following appointment of Paul Cook as liquidator. There were insufficient funds to discharge all of the still outstanding liabilities of the company. Two such liabilities, the balance debt to ALM of $51,364.30 and a debt to the ATO of $81,994.48, form the basis of these actions.
[17]
Mr Tubb said that once the hotel opened he commenced work. After a short period he became licensee. He closed his main mechanical business and operated on a reduced scale, working in the mornings only from a different workshop. He devoted long hours to the hotel, working 7 days a week often into the early hours of the morning. He was paid $1000 per week. He agrees that Mr Reissig continued run his building business while doing a limited amount of hotel work, for example collecting stock, but did not receive payment.
According to Mr Tubb, there was no agreement that Mrs Reissig was to be paid for the work she did for the hotel and that he knew nothing of an arrangement whereby she would be paid $25 per hour. He asserted that the arrangement was that she would continue on the same basis as had applied when she did the paperwork for the building and mechanical repair businesses and the trust, without payment. He said that he did not learn that Mrs Reissig was being paid a salary until 2009.
Mr Tubb said that in March 2007 (after the business had been operating for about 4 months) "we were called to a meeting at Ronald Brown's office". He advised them that the business was not profitable and that changes to the business should be made. He said he was called to Mr Brown's office again in June 2007 "to discuss the financials". Mr Tubb said that he had an idea to go back to mechanical work and to recommend that the hotel be managed by one of the senior employees, but he and Mr Reissig argued. He asserted that Mr Reissig told him to "get out" and demanded immediate return of the keys.
Mr Tubb's evidence is that after the June 2007 meeting he had no further involvement in the operation of the hotel. He did not agree with the proposition put to him in cross examination that he had a limited continuing role until about October 2007. He remembered one occasion when he went to the hotel for a drink but was asked to leave. He also disputed the proposition that at a meeting in October 2007 it was agreed that, because he had fallen out with Mr Reissig, he would no longer go to the business. Mr Tubb asserts that after 30 June 2007 he was deliberately and completely excluded from the management of the hotel by Mr Reissig. Mr Tubb used the term "shut out". He said that from 1 July 2007 until the hotel was sold in June 2009 he was not given financial statements or any other financial or accounting information. He said he knew nothing of the accrual of the ATO and ALM debts during that period.
[18]
Although I am satisfied that Mr Tubb did not have a detailed involvement in the day to day operation of the hotel after June 2007, and that Mr and Mrs Reissig had primary responsibility for its management, Mr Tubb's contention that he was not provided with any information about the financial and accounting position of the business and the company is not supported by the evidence. By the end of 2007 both sides of the dispute were legally represented. By November 2007 Mr Tubb had engaged a senior accountant in Launceston to advise him. By arrangement through solicitors financial information was given to that accountant. Other documents were provided for inspection by Mr Tubb and his advisors in February 2008. By then one of the main topics of discussion was whether an agreement could be reached whereby Mr Reissig would purchase Mr Tubb's interest in the company and the trust. A draft agreement to that effect was prepared by Rae and Partners and sent to the advising accountant in November 2007. Offers were exchanged without a final agreement being reached.
A meeting attended by all parties and their advisors took place in March 2008.
I find that Mr Brown prepared financial statements and tax returns for the company and the trust for the financial years ended 30 June 2007 and 30 June 2008 and forwarded them to Mr Tubb. Mr Tubb gave evidence that he did not receive them but I am satisfied that he is mistaken about that. In evidence is a letter dated 11 February 2009 from Mr Brown's firm addressed to Mr Tubb's home address enclosing the 2008 financial statements. Mr Tubb gave evidence that he regarded Mr Brown as the accountant for Mr Reissig, and that in his approaches to Mr Brown he was treated in a way that did not encourage him to request more information. I do not accept that evidence and prefer Mr Brown's evidence that he provided whatever information he was asked for. For at least part of the time Mr Brown also prepared Mr Tubb's personal tax return.
During the relevant period Mr Tubb was consulted, albeit in a limited way, about some matters. He signed documents concerning the re-financing of the ANZ loans. The sale of the hotel and the asking price was discussed with him. By August 2009 at the latest Mr Tubb had engaged his own accountant, a Mr Palmer, to whom other financial information was sent by Mrs Reissig when it was requested.
[19]
On 16 September 2010 ALM commenced proceedings in the Magistrates Court of Victoria against Mr Reissig and Mr Tubb. The action claimed from them the sum of $51,364.30 and costs as guarantors of the liability of Skyline Enterprises for goods sold and delivered between December 2008 and June 2009. Mr Reissig sought advice about the proceedings. A default judgment was entered against him on 5 November 2010. He later entered into an agreement to pay the claimed sum and costs totalling $53,379.88. Mr Reissig, through an account operated by his building company, paid that amount in full by a payment of $26,689.94 made on 3 December 2010 and another payment of $26,689.94 made on 16 December 2010.
On 3 February 2011 Mr Tubb's solicitor signed a memorandum submitted by ALM's solicitor consenting to an order that the proceeding, so far as it concerned Mr Tubb, be discontinued. On 22 May 2011 the Victorian Magistrates' Court ordered, without the appearance of either party, that the claim against Mr Tubb be struck out.
Mr Reissig seeks a contribution from Mr Tubb of half of the total amount he paid.
[20]
Mr Reissig was served with a Director Penalty Notice dated 12 October 2009 issued by the ATO through the Deputy Commissioner of Taxation. The notice is addressed to Christopher Peter Reissig, 40 Pitcher Parade, Prospect Vale. I infer it was sent to that address although Mr Reissig could not recall receiving it. The notice related to liabilities of Skyline Enterprises for specified unpaid PAYG withholding liabilities. In part, the notice reads:
[21]
"I give you notice under section 222AOE of the Income Tax Assessment Act 1936 (ITAA 1936) that you, as a director of the company, are liable to pay the Commissioner by way of penalty an amount equal to the unpaid amount of each liability of SKYLINE ENTERPRISES (TAS) PTY LTD, ACN 122 591 299...pursuant to subsection 16-70(1) in Schedule 1 to the TAA 1953 in respect of the amounts withheld by the company for the purposes of Division 12 in Schedule 1 to the TAA 1953."
[22]
The notice went on to list six consecutive quarterly periods between 1 January 2008 and 30 June 2009 and liabilities for each quarter totalling $81,994.48.
[23]
Some time later Mr Reissig entered into a repayment agreement with the ATO. In discharge of his liability for the penalty he agreed to pay the sum of $71,583.28. That amount was paid to the Deputy Commissioner by instalments, the last of which was paid after commencement of this trial. He claims a contribution from Mr Tubb of half the amount paid, namely $35,791.64.
There is no evidence that Mr Tubb has at any time been served with a Director Penalty Notice.
[24]
If a guarantor who is directly liable to a creditor pays the principal debt he can claim contribution from his co-sureties because he has discharged their obligations to the creditor; Ellesmere Brewing Co. v Cooper[1986] 1 QB 75 at 79, McLean v Discount & Finance Ltd[1939] HCA 38; (1939) 64 CLR 312, Albion Insurance Co Ltd v Government Insurance Office (NSW) [1969] HCA 55; (1969) 121 CLR 342. See Phillips and O'Donovan, The Modern Contract of Guarantee 2nd Ed 1992 at 526. The doctrine of equitable contribution is based on fairness and justice and arises at common law and in equity; Burke v LFOT Pty Limited[2002] HCA 17 at [15] and [38][2002] HCA 17; , (2002) 209 CLR 282.
The principle has been regularly applied to co-sureties; Burke (supra) at [14]. As soon as a guarantor has paid more than his fair share to discharge a co-ordinate liability he is entitled to be recompensed by those who have not in proportion to the respective liabilities; McLean v Discount & Finance Ltd ibid at 328. In Mahoney v McManus[1981] HCA 54; (1994) 180 CLR 370 Gibbs C J said, at [14]
[25]
"A surety is entitled to contribution from his co-sureties so that the common burden is borne equally and so that no surety is required, as between himself and his co-sureties, to pay more than his due share. The right arises whether the sureties are bound jointly, jointly and severally, or severally, and whether by the same or different instruments, and whether or not the sureties knew of each other's existence, provided that they are liable in respect of the same debt. The right to contribution arises when a surety has paid or provided more than his proper share of the principal debt, but it may also be enforced by a surety who has not made payment; the circumstances in which a surety who has not made payment may enforce a claim to contribution have not been precisely defined, but it appears that he may at least do so as soon as the creditor has acquired a right to immediate payment from him."
[26]
Although a court may alter contribution, the starting point is that contribution should be equal. In Armstrong v Commr of Stamp Duties(1976) 69 SR (NSW) 38 Wallace P said, dealing with an equitable claim, at [43] "[T]he right and duty of contribution...are founded on doctrines of equity and on the maxim 'equality is equity'." See also Albion Insurance Co Ltd (supra) at 349-350 where Kitto J referred to sharing the burden "pro-rata".
It is unfair and unjust if the equality of burden is disturbed or defeated by the accident or chance that a creditor has selected or may select one or some rather than all for recovery. See Friend v Brooker(2009) 239 CLR 129, [2009] HCA 21 where at [38] the majority said that in such a circumstance:
[27]
"Were equity not to intervene, then it would remain within the power of the creditor so to act as to cause one debtor to be relieved of a responsibility shared with another".
[28]
However, the right to contribution is from those who are liable in respect of the same principal debt owed by the same principal debtor. The doctrine applies to contribution between parties sharing co-ordinate liabilities or a common obligation to make good the one loss, where the liabilities were of the same nature and to the same extent; Albion Insurance Co Ltd (supra) at 350, Friend v Brooker (supra). In Burke v LFOT Pty Ltd (supra) Gaudron ACJ and Hayne J said at [14]:
[29]
"In general terms, the principle of equitable contribution requires that those who are jointly or severally liable in respect of the same loss or damage should contribute to the compensation payable in respect of that loss or damage, either equally where they are liable in the same amount or proportionately, where the amount of their liability differs. The principle has regularly been applied between co-sureties, co-insurers, partners, co-owners, where payment is made by one in discharge of a common liability, and co-trustees who are in pari delicto.
[30]
The doctrine of equitable contribution applies both at common law and in equity. It is usually expressed in terms requiring contribution between parties who share 'co-ordinate liabilities' or a 'common obligation' to 'make good the one loss'. More recently, in BP Petroleum Development Ltd v Esso Petroleum Co Ltd, the right to contribution was said to depend on whether the liability was 'of the same nature and to the same extent'."
[31]
A statutory liability can give rise to a right of contribution at least in equity; Armstrong (supra). In Street v Retravision (NSW) Pty Ltd[1995] FCA 1197; (1995) 56 FCR 588; 135 ALR 168, Gummow J found that a liability imposed under s592 of the Corporations Law was not co-ordinate with the liability of guarantors of the corporation because there was no common interest and no common burden. However, in Hall & Ors v Poolman & Ors[2007] NSWSC 1330 Palmer J of the Supreme Court of NSW considered whether a claim for contribution could be brought against a co-director liable for insolvent trading under s588M(2) and (3) of the Corporations Act. The Court, after referring to Burke v LFOT Pty Ltd, supra and Spika Trading Pty Ltd v Harrison (1990) 19 NSWLR 211 found a right to contribution existed. At [467] - [468] his Honour said
[32]
"As was the case under s.556(1) of the Code, joint and several liability of co-directors for insolvent trading follows, as a matter of law, from the nature of the liability created by CA s.588M(2) and (3): each person who was a director during the period of insolvent trading, and who cannot make out a defence, is liable to compensate for the same loss by reason of contravention of the same statutory prohibition in s.588G(2). That is sufficient to attract the doctrine of equitable contribution.
I am unable to accept Mr Stoljar's next submission that Mr Martini could not be liable for contribution because he has not been sued directly by the Liquidators. Ex hypothesi, the doctrine of equitable contribution is applicable where the person from whom contribution is sought has not been sued although he or she could have been sued. The person claiming contribution must show that, had the co-obligor been sued, he or she would have been liable for the same loss, or a proportionate part of the same loss."
[33]
A statute can also provide for a right of contribution.
Contribution will not be available unless the payment was one which the person seeking contribution was legally bound to pay and which the co-surety could have been compelled to pay. If the guarantor has a valid procedural or substantive defence to the creditor's claim but nevertheless pays the principal debt he will not be entitled to contribution from his co-sureties; Phillips and O'Donovan at p536.
The claimant also pleaded reliance on the existence of a partnership. That claim was, properly, not pursued. There is no evidence of a partnership between Mr Reissig and Mr Tubb. The claimant also pleaded reliance on the Mercantile Law Act 1935, s13. That provision has no application to this case. It applies where a surety who has paid a debt wishes to have assigned to him the benefit of a "judgment, specialty, or other security" held by a co-surety. The provision does not assist the claimant.
[34]
On the face of it, the payment by Mr Reissig of the whole of the ALM debt gives rise, in the clearest terms, to a right of contribution for half of the debt from Mr Tubb. According to the terms of the guarantee they were jointly and severally liable for the same debt owed by the same principal debtor. Subject to the following comments about the defences specifically raised by the defendant there is no reason why the guarantee could not have been enforced against either or both of the guarantors. Payment of the full debt by one guarantor leads to a burden on that person, in this case Mr Reissig, which is unfair and unjust unless contribution is ordered.
[35]
Mr Tubb pleads that he should not have to pay because he was excluded from the hotel. In his defence to the ALM claim Mr Tubb pleads that on Mr Reissig's instruction, he was excluded from the Inveresk Tavern from 30 June 2007 and thereafter and not permitted to play any role in its management. He says that he was kept in the dark about the management and financial position of the hotel business. He submits that I should find that Mr Reissig deliberately allowed the ALM account to build up while keeping Mr Tubb out of management of the business. For reasons I have already explained I accept his version but to a limited degree. However, even if what he says is true, it does not follow that he may avoid his liability to contribute to the ALM debt. He remained a director - although it should be noted that his obligation as a guarantor did not depend on his status as a director. There is no evidence that he took any step to terminate his guarantee. It remained in force following liquidation of the company and I am satisfied that he would have been liable under the guarantee at the suit of ALM. There is no evidence that the ALM debt was not properly incurred in the sense that it was for the supply of liquor necessary for the operation of the hotel. It had to be paid at some stage. There is no suggestion that the ALM court proceedings were not properly settled. I satisfied that Mr Reissig's conduct is not such as to disentitle him on this basis to a contribution on any equitable ground.
Mr Tubb relies, as a defence, on the manner in which the ALM proceedings commenced in Victoria were terminated. The evidence discloses that ALM, through its solicitors and with the consent of Mr Tubb's solicitor, agreed to discontinue its claim against him in February 2011. On 22 May 2011 the Victorian court ordered the claim be "struck out". However this does not constitute a defence to Mr Reissig's claim to a contribution. By then he had paid the whole ALM debt. In those circumstances it is hardly surprising that ALM did not proceed against Mr Tubb. It already had its money. The discontinuance and court order did not amount to a determination on the merits. Reference is made by the defendant to what is referred to as an Anshun estoppel, a reference to Port of Melbourne Authority v Anshun Pty Ltd[1981] HCA 45; A "cause of action estoppel" or "res judicata" will prevent a further action or claim when the same claim has already been determined in an earlier proceeding; see supra at 597 where Gibbs CJ, Mason and Aickin JJ observed that the "rule as to res judicata comes into operation whenever a party attempts in a second proceeding to litigate a cause of action which has merged into judgment in a prior proceeding." See also the judgment of Dixon J in ; at 532.
[36]
In the course of the hearing Mr Tubb, through his counsel, cross examined at considerable length about issues in such a manner as to make clear that he was alleging fraudulent behaviour on the part of Mr Reissig and his wife. No such allegation was pleaded. It was put in argument that the issues were relevant because Mr Reissig relied on an equitable remedy and thus must "come to equity with clean hands". A person who has been guilty of fraud or sharp practice may be precluded from obtaining a contribution where it may be unjust or unfair to allow it; see Burke v LFOT Pty Ltd, supra, at [17] and Staples v Baker[1999] 1 Qd R 317 at 327-329. However allegations of fact asserting inequitable conduct, especially fraud, must be properly pleaded with adequate particulars. General allegations of fraud are not enough and fraud that is not alleged in the pleadings cannot be proved at the trial. Cross examination was permitted of the claimant's witnesses about facts relevant to this issue because, during the hearing, leave was granted on terms to the defendant to amend his defence. As the hearing progressed however the defendant did not take up the opportunity to amend afforded by the grant of leave.
Nevertheless I consider it appropriate to deal in a limited way with the factual assertions put by the defendant to make clear my conclusion that they are without merit.
The principal submission made by Mr Tubb's counsel is that Mr and Mrs Reissig fraudulently withdrew funds from the company account. He pointed to a series of withdrawals and transfers made in 2008 and 2009 by Mr and Mrs Reissig to their personal account or to the account of Chris Reissig Builders Pty Ltd. Put another way, the defendant claims that Mr Reissig committed fraud by unlawfully applying money belonging to Skyline Enterprises to his own benefit or to the benefit of Mrs Reissig or Chris Reissig Builders Pty Ltd.
Mrs Reissig made summaries of the account transactions which I am satisfied properly reflect the original documents, also in evidence. Her summaries disclose payments between April 2007 and December 2008 from the account of Skyline Enterprises to the account of Chris Reissig Builders Pty Ltd totalling $186,753.55 and between July 2008 and June 2009 payments from the account of Skyline Enterprises Pty Ltd to a joint account of Emma and Chris Reissig totalling $96,500.00.
[37]
For the foregoing reasons it is appropriate that Mr Tubb contribute half of the amount paid by Mr Reissig to discharge the company's obligation to ALM. Mr Reissig and Mr Tubb shared equally a co-ordinate liability or a common obligation for the debt. Neither Mr Reissig nor Mr Tubb had a defence to the ALM claim. None of the defences raised by Mr Tubb, whether pleaded or not, succeed. There is nothing in Mr Reissig's conduct, or in the conduct of those associated with him, that leads me to conclude that Mr Reissig should not recover the contribution he seeks.
[38]
Skyline Enterprises had an obligation as an employer to comply with Schedule 1 of the Taxation Administration Act 1953 ("the TAA 1953"). One of those obligations was to withhold, from payments of income to employees, pay as you go (PAYG) income tax; see Part 2-5 Division 12 Subdivisions 12A and B of the TAA 1953. The obligation of the company was then to pay withheld amounts to the Commissioner within the time limited by Subdivision 16-B. Skyline failed to comply with those obligations in respect to amounts withheld for the quarterly periods between 1 January 2008 and 30 June 2009 and failed to pay to the Commissioner the total sum of $81,994.48.
At the relevant time the Income Tax Assessment Act 1936 ("the ITAA 1936") was in operation. Division 9 provides for "Penalties for directors of non-remitting companies". On 1 July 2010 Division 9 was repealed and replaced with equivalent provisions by operation of the Tax Laws Amendment (Transfer of Provisions) Act 2010 (the "Tax Laws Amendment Act"). Transitional provisions are included in that Act but do not in my view affect the substance of the obligations and liabilities of the parties accrued prior to 1 July 2010; refer to the discussion of the provisions in Deputy Commissioner of Taxation v Di Florio [No 2][2012] WADC 70 at [84] and following. The rights and liabilities of the parties in this litigation were accrued while Division 9 continued in operation and so a consideration of its effect is required.
[39]
comply with its obligation to pay the withheld amount;
2. make an agreement with the Commissioner for repayment;
[40]
begin to be wound up.
3. If s222AOB is not complied with then, by s222AOC, any person who was a director of the company at the relevant time is liable to pay a penalty equal to the amount of the payments withheld. The Commissioner is not entitled to recover such a penalty until the end of 14 days from service of a notice that complies with s222AOE. Such a notice may be served personally or by leaving it or sending it by post to that person's residence or business; refer s222AOF. The notice must point out that the person is liable to the penalty but that the penalty will be remitted if within 14 days:
[41]
the liability is discharged;
2. an agreement with the Commissioner for repayment is made;
[42]
an administrator of the company has been appointed; or
[43]
S222AOI is entitled "Directors' rights of indemnity and contribution". It should be set out in full:
[44]
"A person who pays an amount under section 222AOC or 222AOD has the same rights:
[45]
(a) whether by way of indemnity, subrogation, contribution or otherwise; and
[46]
(c) of the liabilities referred to in section222AOC; and
[47]
(d) under which the person, and every other person who has paid, or from whom the Commissioner is entitled to recover, a penalty under this Subdivision, were jointly and severally liable as guarantors.
[48]
S222AOJ is entitled "Defences". It provides that it is a defence to a claim either in proceedings to recover a penalty or for a contribution under s222AOI if it is proved that:
(a) by s222AOJ(2) because of illness or for some other good reason, the person did not take part in the management of the company when the directors were under the obligation to comply with subsection 222AOB(1); or
(b) by s222AOJ(3) the person took all reasonable steps to ensure that the directors complied with subsection 222AOB(1) or there were no such steps that the person could have taken.
In determining what was "reasonable" the court may take into account when, and for how long, the person was a director and took part in the management of the company and all other relevant circumstances; refer s222AOJ(4).
[49]
Application of the taxation laws and the right to contribution
[50]
In their application to the circumstances of this case the effect of Division 9 of the ITAA 1936 is:
(a) Skyline Enterprises failed to pay or enter into a repayment agreement to pay the $81,994.48 withheld PAYG tax for the quarterly periods between 1 January 2008 and 30 June 2009 by the due dates. Because no administrator was appointed and no winding up was commenced before the due dates both Mr Reissig and Mr Tubb, as directors, became liable under s222AOC to a penalty equivalent to the unpaid amount of the total withholdings for those quarters;
(b) the Commissioner was not entitled to recover the penalty from a person, whether Mr Reissig or Mr Tubb, unless notice under s222AOE was served on that person;
(c) as a person who paid the penalty, Mr Reissig has a right under s222AOI to recover a contribution, as if the payment had been made under a joint and several guarantee of the liability to the Commissioner, from a person "from whom the Commissioner is entitled to recover" a penalty.
[51]
if a right to contribution arises, Mr Tubb has a defence if he proves that for good reason he did not take part in the management of the company when the obligation to pay the withheld tax to the Commissioner arose (s222AOJ(2)), or that there were no reasonable steps he could have taken to ensure the payment was made (s222AOJ(3)).
[52]
In the absence of evidence of service on Mr Tubb of a Director Penalty Notice concerning the amount for which contribution is sought by Mr Reissig I have concluded that the claim for contribution must fail. Mr Reissig's claim for contribution under s222AOI depends on establishing that Mr Tubb is a person from whom the Commissioner is entitled to recover a penalty. Although s222AOC imposes a liability on each director to pay a penalty, the Commissioner's right to recover the penalty depends on establishing service of the notice; Robertson v Deputy Commissioner of Taxation[2010] NSWCA 58, Soong v Deputy Commissioner of Taxation[2011] NSWCA 26, DCT v Di Florio (supra) at [31]. Without evidence of service no right of recovery arises. Thus the right to contribution does not arise, at least on the statutory basis.
For a related but different reason the claim for contribution, to the extent that it may exist independently of the statute and be based on general principle, must also fail. That is so because without evidence of service of a notice Mr Tubb does not share a co-ordinate liability or common obligation. He is not liable at the suit of the Commissioner. In my view this does not result in unfairness or injustice. Service of a notice on Mr Tubb would have allowed him the opportunity to achieve remission of the penalty by compliance with one of the steps set out in the notice. For example, the penalty would be remitted if within 14 days of service an administrator was appointed or the company was being would up. Given the short time frame it may well have been exceedingly difficult to achieve one of those measures, but that is not the point. Assuming, as I must, that he did not receive a notice, he was deprived of the opportunity to comply.
Having concluded that Mr Tubb has no liability to make contribution to the ATO debt it is strictly unnecessary for me to deal with the availability of the defences contained in s222AOJ. However in case I am wrong in the conclusion I have reached about the liability to contribute I will do so in any event.
[53]
For the foregoing reasons it seems to me that the following orders are appropriate. In claim 4484/2011, the ALM claim, there should be judgment for the claimant against the defendant in the sum of $26,689.94. As to claim 4482/2011, the ATO claim, there should be judgment for the defendant against the claimant.
However before making the orders I will hear the parties as to the precise terms and also as to any further or consequential orders.
Parties
Applicant/Plaintiff:
Reissig
Respondent/Defendant:
Tubb [2013] TASMC 25
Legislation Cited (4)
Administration Act 1953
Tax Assessment Act 1936
Law Act 1935
Laws Amendment (Transfer of Provisions) Act 2010
Cases Cited (10)
(2002) 209 CLR 282
(2009) 239 CLR 129
(1939) 64 CLR 312
(1969) 121 CLR 342
(1994) 180 CLR 370
(1995) 56 FCR 588
(1990) 19 NSWLR 211
(1981) 147 CLR 589
(1939) 62 CLR 464
(1924) 35 CLR 48
By the end of 2007 Mr Tubb had appointed a solicitor. He said that through his lawyer he sought information and asked to become a signatory to trust and company accounts. However he claimed that all that was forthcoming from Mr Reissig was cheques butts and computer till slips that meant little. He thought that he was "against a brick wall" and that Mr and Mrs Reissig had "open slather to do what they wanted with the funds of the hotel". Even when the hotel was sold he was not advised or consulted about what the proceeds were and how the funds were to be paid out. When asked in cross examination why did not resign as a director he answered that he did not think anyone had advised him that he should do so.
There has been no such determination here as to give rise to an estoppel, at least one binding Mr Reissig. Were the right of contribution lost as a consequence of the facts relied on by the defendant, it would be an example of the injustice or unfairness arising from a decision by the creditor, ALM in this case, to recover against Mr Reissig and not Mr Tubb.
Because reliance was placed on it by the defendant, reference should be made to Walker v Bowry[1924] HCA 28; (1924) 35 CLR 48 although the facts are somewhat different. The case does not assist the defendant. Walker and Bowry jointly and severally guaranteed the debt of a company to a bank. The bank sued Mr Walker alone and obtained a judgment for £2,865. Later, after his insolvency, he paid the bank £800 and was released from the judgment. He sought a contribution from Mr Bowry. The court pointed out that the judgment did not affect his right of contribution from co-sureties; see p58. And whilst the release of Mr Walker discharged Mr Bowry from the obligation to pay the whole of the debt to the bank it did not extinguish Mr Walker's right to a contribution but limited to a portion of the amount he actually paid.
Mr Tubb also pleads that his liability as guarantor of the ALM debt was terminated by the giving of time by ALM to Skyline Enterprises for performance of its obligations under the contract. There is no merit in that proposition. The submission is made by reference to the general rule referred to at p305 of Phillipsand O'Donovan (supra) that a binding agreement by a creditor to give time for performance by the principal of its obligations under the main contract releases the guarantor from liability. However the rule is subject to the express provisions of the contract; see for example Matthews Thompson & Co Ltd v Everson[1934] NSWStRp 11; (1934) 34 SR (NSW) 114; 51 WN (NSW) 39 (FC). In this case clause 30.4 of the guarantee expressly preserves the liability of the guarantors notwithstanding the giving of time. Moreover, the application of the rule depends on establishing a legally binding agreement between the creditor and the principal debtor. The failure of a creditor to sue for or strictly enforce a contract in the event of a default does not affect the enforceability of a guarantee; Phillipsand O'Donovan (supra) at 307-309. There is no evidence capable of establishing such an agreement here, even an implied agreement. At best the evidence establishes that ALM allowed the principal debt to accumulate beyond the trading terms without strict enforcement.
The defence in the ALM action also pleads that ALM supplied goods to Mr Reissig personally and not to the company. There is no evidence to justify that claim and the evidence is overwhelmingly to the contrary. Mr Tubb also pleads that he "did not order" goods from ALM or authorise the company to order from ALM. Neither fact has any legal consequence even if true. ALM supplied Skyline Enterprises. Mr Tubb's express authority for such orders was not necessary for a liability to be lawfully incurred.
Mr Tubb does not admit that Mr Reissig paid the ALM debt. The evidence discloses that the payments came from the account of Chris Reissig Builders Pty Ltd. This fact does not preclude Mr Reissig from relief. I am satisfied that he suffered a personal detriment by the payment. I accept Mrs Reissig's evidence that the amount of the payment was debited against Mr Reissig's personal drawings from that company. He suffered the loss and is able to recover it.
I am satisfied that the transactions are adequately explained by the evidence and do not constitute a fraud as is alleged.
Mr Brown, the accountant, gave evidence that from a relatively early stage Skyline Enterprises had difficulty meeting its accounts. He was aware that money was being paid into the Skyline Enterprises account by Mrs Reissig from the account of Chris Reissig Builders Pty Ltd to enable payment of accounts. Such payments were recorded on the internal MYOB accounting system. Mrs Reissig also gave evidence about these transactions and the reason for them. Later, similar transactions were made from her and her husband's joint personal account. Putting aside for a moment the prudence of such payments, the evidence establishes that money was paid into the Skyline account and then repaid as funds became available. Counsel for Mr Tubb focussed on the money paid from the company's account but little attention was paid to the money paid in. I find that the transfers do not amount to fraudulent conduct or, to use the words from the defendant's submissions, "sharp practice". Indeed the evidence suggests that more money was transferred in to the Skyline Enterprises account than was transferred out. The conduct is not such as to disentitle Mr Reissig to a contribution.
The defendant also made reference to payments from the Skyline Developments account to Mrs Reissig. I am satisfied that such payments are remuneration for her accounting services and that there is nothing improper about them. I accept the evidence of Mr Brown and Mr and Mrs Reissig that it was agreed at the start of the enterprise that Mrs Reissig would be paid at the rate of $25 per hour for her accounting and administrative work. I reject Mr Tubb's evidence that he knew of no such arrangement and did not agree to it. I find it inconceivable that Mr Tubb, at least in the early days of the business, did not become aware that Mrs Reissig was being paid. It was reflected in the accounts and records of the company. It accords with common sense also that there should have been such an arrangement given the level of work involved. Mrs Reissig gave plausible and persuasive evidence that she would not have been prepared to do the work unless paid for it.
The defence submission also referred to payments made in 2007 totalling $5,884.89 to an Examiner Newspaper account held in the name Chris Reissig Builders Pty Ltd. I accept the evidence of Mr and Mrs Reissig that the account was for advertising for the Inveresk Tavern billed to the Chris Reissig Builders account because of more favourable terms. This is not conduct that disentitles Mr Reissig to a contribution.
Submission was also made about 3 payments respectively made on 21, 22 and 27 July 2009 from the balance proceeds of sale of the hotel in July 2009 to Chris Reissig Builders Pty Ltd totalling $34,489.50. This was put by the defendant as "sharp practice" that disentitles Mr Reissig on equitable grounds from a contribution. Mr and Mrs Reissig both gave evidence that the payments were for services provided by Mr Reissig's company to the hotel. I have a little more hesitation about these payments. No agreement was produced evidencing an entitlement to payment. However it was not contended that Mr Reissig did not perform a substantial amount of work and time in operating and managing the hotel that he would ordinarily be remunerated for. If he had not done the work then others would have been paid to do it. When Mr Tubb did so he was paid. No issue was taken by the liquidator in respect to these or indeed any other payments made by the company. I do not regard these payments as disentitling Mr Reissig to contribution; even the facts relevant to those payments had been pleaded.
It was also submitted that there were sufficient moneys from the balance proceeds of sale to discharge both the ALM and ATO debts in full. I accept that $128,493.22 was paid into the Skyline Enterprises bank account in July 2009 after the hotel was sold. That was enough to cover both debts. However ALM and the ATO were not the only creditors of the company. There was nothing unlawful or unfair in using that money to pay other creditors, including Mrs Reissig and Chris Reissig Builders Pty Ltd, from the balance proceeds, to the exclusion of ALM and the ATO. That is so even if those payments were so allocated leaving only debts in respect to which a contribution may be sought from Mr Tubb. In other words, even if it were the case that the moneys were applied deliberately leaving debts, for example the ALM debt, guaranteed by Mr Tubb with a view to obtaining a contribution, that in my view is no grounds for refusing the claim for contribution. Again, I would point out that the liquidator has apparently taken no issue with the propriety of any of the payments made by the company following completion of the hotel sale and the liquidation.
S222AOA of the ITAA 1936 applies to companies which have withheld PAYG payments. S222AOB provides that directors of a company must, by a due date, cause the company to either:
The defences apply in proceedings for a penalty or to recover a contribution. To establish a defence Mr Tubb must prove either that:
(a) under s222AOJ(2), because of illness or for some other good reason, he did not take part in the management of the company when the directors were under the obligation to comply with subsection 222AOB(1); or
(b) under s222AOJ(3) he took all reasonable steps to ensure that the directors complied with subsection 222AOB(1) or there were no such steps that he could have taken.
It should first be pointed out that s222AOB(1) concerns the obligation of the directors to cause the company to remit the withheld tax or take some other step by the due date. It does not concern compliance with the director penalty notice. Thus, in this case, the relevant time for considering the application of the s222AOJ defences is between 1 January 2008 and 30 June 2009 with allowance for the respective due dates for remission of the withheld amounts limited by Subdivision 16-B.
No issue arises that during the relevant period Mr Tubb was ill. He claims that, nevertheless, there was a good reason (my emphasis) that he did not take part in the management of the company, even though he remained a director, because in June 2Mr and Mrs Reissig effectively excluded him from management. For the same reason he says that there were no reasonable steps he could have taken to cause the company to pay the withheld tax or to take one of the other steps contemplated by s222AOB. He does not assert he took any actual steps so as to invoke the operation of the first limb of s222AOJ(3). The taking of steps to ensure compliance requires that each of the options in s222AOB be addressed.
The defendant has made out neither defence.
Earlier in these reasons I made findings substantially rejecting Mr Tubb's claim that he was precluded from all financial information about that company. He had independent legal advice. He had a senior accountant advise him about his position. Mr Tubb gave further evidence that the accountant suggested that a full forensic accounting of the business would be expensive and so Mr Tubb did not proceed with it. Mr Tubb referred to his limited education. He said that he obtained legal advice but reached the conclusion that there was nothing else he could do to find out what was going on within the business.
I am left with the firm impression that Mr Tubb's principal focus was not on the management of the company, but on his attempts to negotiate a satisfactory agreement for Mr Reissig's purchase of his interest. When that did not succeed he did not really address the day to day management and payment of the liabilities of the business. He did not resign as a director. There is no evidence he took any step under the constitution of the company to call a formal meeting. He made no application to the court for oppressive conduct. He took no steps to appoint an administrator or wind the company up. Why he did not do so was not really explained. I infer that one possible explanation is that the expense involved in the appointment of an administrator or liquidator and the possible return on assets sold in such circumstances may have led to the belief that it was financially more prudent not to do so. I am not satisfied that the reason he advances for not taking part in the management of the company is a good reason within the meaning of s222AOJ(2).
The responsibility of directors was referred and discussed in Robertson (supra) at [106] and following. In this case there is no evidence, apart from the early request that he become a signatory to accounts, that Mr Tubb made any enquiry about payment of withheld tax. The existence of a liability for withholding tax, albeit at a lower level, was disclosed in the financial statements. Mr Tubb must, from his involvement in the business in the early days, have known that payment of the tax was required. In those circumstances I am not satisfied that there were no reasonable steps he could have taken to cause the company to pay the liability or appoint an administrator or start to wind the company up.