APPEALED FROM: Reissig v Tubb [2013] TASMC 25

Equity - General principles - Equitable doctrines and presumptions - Contribution - Generally - Equitable contribution - Scope and availability - Co-ordinate liability - Whether liability under ss222AOC and 22AOE of the Income Tax Assessment Act 1936 was a common or co-ordinate liability where only one director was served with a Director Penalty Notice.

Income Tax Assessment Act 1936 (Cth), ss222AOC, 222AOE, 222AOI, 222AOG.

Burke v LFOT Pty Ltd [2002] HCA 17; (2002) 209 CLR 282, considered.

Judgment Number: [2013] TASSC 77

1 The appellant (Christopher Peter Reissig) appeals against a decision of Magistrate Pearce (as he then was) of 6 March 2013, whereby his Honour entered judgment against the appellant in his action against the respondent (Timothy James Tubb) for a contribution from the respondent of half of the amount of $71,583.28 paid by the appellant to the Australian Tax Office (ATO) pursuant to a "Director Penalty Notice" issued by the ATO to the appellant under s222AOE of the Income Tax Assessment Act 1936 (Cth) (the ITA Act).

2 The circumstances of the appellant's debt to the ATO were set out by the learned magistrate at pars[25] - [27] of his reasons for decision in Reissig v Tubb [2013] TASMC 25 as follows:

25 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 [Pty Ltd] for specified unpaid PAYG withholding liabilities. In part, the notice reads:

'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.'

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.

26 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.

27 There is no evidence that Mr Tubb has at any time been served with a Director Penalty Notice."

3 The learned magistrate set out the operation of the legislation to the circumstances of the case at pars[56] - [62] of his reasons for decision as follows:

56 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 12 A 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.

57 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.

58 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:

a) comply with its obligation to pay the withheld amount;

b) make an agreement with the Commissioner for repayment;

59 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:

b) an agreement with the Commissioner for repayment is made;

c) an administrator of the company has been appointed; or

60 S222AOI is entitled 'Directors' rights of indemnity and contribution'. It should be set out in full:

'A person who pays an amount under section 222AOC or 222AOD has the same rights:

(a) whether by way of indemnity, subrogation, contribution or otherwise; and

(c) of the liabilities referred to in section222AOC; and

(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.'

61 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.

62 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)."

4 The learned magistrate considered the relevant legislative provisions in the context of the facts before him, and concluded that a statutory right in the appellant to contribution from the respondent did not arise. His reasons were set out as follows at pars[63] - [65] of his reasons for decision:

"Application of the taxation laws and the right to contribution

63 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.

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)).

64 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.

65 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."

5 The appellant appealed on three grounds, each of which asserted an error of law on the part of the learned magistrate in construing the nature and extent of the appellant's right to contribution under s222AOI of the ITA Act and independently of it.

6 The first ground asserted an error in the learned magistrate's finding that the appellant's right to contribution from the respondent under the ITA Act, s222AOI, was dependent on the service of a "Director Penalty Notice" on the respondent. That ground was abandoned by the appellant in his written outline of facts and contentions filed prior to the hearing of the appeal.

7 The second ground asserts an error in the learned magistrate's finding that the appellant's right to contribution from the respondent independently of the ITA Act must fail, absent evidence of service of a "Director Penalty Notice" on the respondent.

8 The third ground asserts error in the learned magistrate's finding that the parties did not share a co-ordinate liability, or a common obligation to the ATO, "in relation to the monies the subject of the action".

9 Counsel for the appellant, Mr Stanton, in arguing the second and third grounds of appeal as one, made the following written submissions with respect to the right to contribution independently of s222AOI of the ITA Act:

"20 In this case the co-ordinate liability or common obligation is created by s222AOC of the ITAA which states that in the circumstances of this case:

'each person who was a director of the company ... is liable to pay to the Commissioner, by way of penalty, an amount equal to the unpaid amount of the company's liability.'

21 That liability has the following characteristics:

(a) The nature and extent of the penalty is identical in respect of each director.

(b) As a matter of substance there is a common burden requiring payment or steps be taken to place the company into administration or liquidation.

(c) The liability of the parties has a common factual and legal origin, namely the liability of the company to the ATO for the ATO debt and the failure to take the steps required by s222AOB of the ITAA which leads to the liability created by s222AOC.

(d) The liability of the parties exists and continues in the absence of compliance with the requirements of s222AOB.

(e) The liability to the penalty is imposed on each director independent of whether the Commissioner takes any steps to recover the penalty.

(f) The service of a DPN is simply a step in enforcement of the pre-existing liability and does not impact the question of whether there is a common existing liability.

(i) A DPN is a precondition to the Commissioner recovering the penalty. It is simply a last chance warning in respect of an existing liability.

(ii) The failure to take a step which is a precondition to recovering a liability is no different to failing to commence proceedings or selecting one or other of the parties liable to proceed against and does not defeat the right of contribution.

(iii) Conversely payment prior to service of a DPN or within 14 days of service is effective to discharge the liability created by s222AOC whether or not a DPN has been served; the penalty is remitted if the obligations which created the penalty are discharged (by one or other or both directors) even though the Commissioner has not taken any recovery action.

22 If the right to obtain contribution required service of a DPN the non-paying party's obligation to contribute depends solely on whether they received a DPN which is entirely outside the control of the paying party. That is contrary to the fairness and equality upon which the right of contribution is based.

23 The equitable right to contribution exists independently of the statutory contribution rights in s222AOI of the ITAA.

(a) To interpret s222AOI as a code in respect of rights of contribution would be to read it as extinguishing existing common law and equitable rights. Such an interpretation should not be made unless it is clearly expressed or necessarily to be implied.

(b) Such an intention is not evinced where a statute is made in the affirmative without any negative. This is such a case.

(c) There is no express suggestion that the statutory right of contribution in the ITAA was intended to extinguish any equitable right of contribution. S222AOI is facultative rather than limiting.

(d) The purpose of the scheme in ss222AOA and following is to enable recovery from directors and extends the ability of the collector of Commonwealth tax revenue to recover from those controlling a company; to go behind the corporate veil. There is nothing in that purpose which requires the express right of contribution to be read as covering the field."

10 Although this ground was abandoned prior to the hearing of the appeal, some consideration of its subject matter, and in particular the relevant legislation, remains necessary, as counsel for the appellant submits on grounds 2 and 3 that the learned magistrate erred in that he "should have held that the absence of proof of [service of a Director Penalty Notice] did not mean that there was no co-ordinate liability or common obligation".

11 Counsel submits that the reasoning which led to that error was that, because no "Director Penalty Notice" was served on the respondent, he was not liable at the suit of the Commissioner and therefore did not share a co-ordinate liability or a common obligation.

12 Counsel submits that such reasoning by the learned magistrate is incorrect because it is not a precondition to the entitlement to equitable contribution that the respondent be liable at the suit of the Commissioner, or that the precondition to recovery of service of a "Director Penalty Notice" be fulfilled for there to be a co-ordinate liability or a common obligation.

13 I turn therefore turn to the relevant legislative provisions, before considering the second and third grounds of appeal.

14 To my mind, it is clear that the words of the ITA Act, s222AOI(d), "every other person ... from whom the Commissioner is entitled to recover" do not extend to persons from whom the Commissioner might be able to recover the amount of a penalty if the Commissioner served that person with the relevant notice and the person failed to comply with its terms within 14 days thereafter.

15 Such a person could be said to be a person who is liable to pay the Commissioner the amount of the penalty which could be recovered if the notice was issued and served and, critically, if the person upon whom it was served failed within 14 days to secure the discharge of the liability by the company, or to reach an agreement with the Commissioner for repayment by the company, or alternatively, to secure the appointment of an administrator of the company, or commence the winding-up of the company. In each of those four circumstances the amount of the penalty is remitted: ITA Act, s222AOG.

16 Be that as it may, such a person could not be said to be a person "from whom the Commissioner is entitled to recover", absent service of a notice and a failure by the person to take any of the steps allowed by s222AOG as resulting in remission of the penalty.

17 Nor can it be said that a contingent liability to pay is sufficient, as s222AOI(d) gives rise to a right to contribution only against a person "from whom the Commissioner is entitled to recover", and the ITA Act clearly distinguishes between the "liability" to pay the Commissioner provided for by s222AOC, and an "entitlement" on the part of the Commissioner "to recover" provided by s222AOE.

"222AOC Penalty for directors in office on or before due date

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 way of penalty, an amount equal to the unpaid amount of the company's liability under a remittance provision in respect of deductions or amounts withheld:

that the company has deducted for the purposes of Division 1AAA, 3B or 4 of this Act, or withheld for the purposes of Division 12 in Schedule 1 to the Taxation Administration Act 1953 (as the case requires); and

19 Whilst however that section speaks of a "liability" to a penalty, s222AOE on the other hand makes it clear beyond argument that such a liability is not the same thing as an "entitlement" in the Commissioner to recover:

"222AOE Commissioner must give 14 days' notice before recovering penalty

The Commissioner is not entitled to recover from a person a penalty payable under this Subdivision until the end of 14 days after the Commissioner gives to the person a notice that:

sets out details of the unpaid amount of the liability referred to in subsection 222AOC(1) or (2) (whichever relates to the penalty); and

states that the person is liable to pay to the Commissioner, by way of penalty, an amount equal to that unpaid amount, but that the penalty will be remitted if, at the end of 14 days after the notice is given:

an agreement relating to the liability is in force under section 222ALA; or

the company is under administration within the meaning of the Corporations Act 2001; or

20 No right of contribution in the appellant arose in the present case given that the Commissioner was not "entitled to recover" a penalty against the respondent. That the respondent had a contingent liability to pay a penalty arising by force of s222AOC of the ITA Act is insufficient to engage s222AOI(d).

21 To the extent that this ground raises any question that is not raised by the third ground of appeal, and to the extent that the learned magistrate's relevant observations actually formed part of his decision, I can find no error on his Honour's part.

22 There being no statutory right to contribution in respect of the amount of the penalty paid by the appellant to the Commissioner, and there being no relevant contract of guarantee, any entitlement in the appellant to receive any amount from the respondent could only arise by the application of the doctrine of equitable contribution. Although no entitlement, so arising, was claimed by the appellant in his amended statement of claim, I will nonetheless deal with this ground and the third ground of appeal for the sake of completeness.

23 As was explained by Gaudron A-CJ and Hayne J in Burke v LFOT Pty Ltd [2002] HCA 17; (2002) 209 CLR 282 at 292, [14], citing Dering v Earl of Wichelsea (1787) 1 Cox 318 at 322 [29 ER 1184 at 1185 - 1186], "[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 ...". In the present case, however, it cannot be said that the respondent was either jointly or severally liable for the amount of the penalty the Commissioner was entitled to recover from the appellant.

24 Had the respondent been served with a notice by the Commissioner, and had he failed within 14 days to take any of the steps that would have resulted in the remission of the penalty, then it might have been said that the appellant and the respondent were jointly and severally liable for the amount of the penalty able to be recovered from either of them, particularly given that, in truth, although not in law, that amount represented the amount of the PAYG payments withheld by Skyline Enterprises (Tas) Pty Ltd, a company of which the appellant and the respondent were both directors.

25 In the absence of a notice served on the respondent and a failure to comply with its terms, the respondent was, as has already been explained, nothing more than a person who was "liable" to pay the Commissioner by way of penalty, an amount equal to the company's liability to the Commissioner in respect of the deductions withheld by the company. That liability was contingent only, and on the evidence, did not ever crystallize.

26 I should add for completeness, that obviously, the fact that the appellant and the respondent were both directors of Skyline Enterprises (Tas) Pty Ltd of itself does not make them jointly or severally liable for the payment of the PAYG deductions withheld by the company and due to be paid to the Commissioner.

27 I do not accept the appellant's submission that the service of a "Director Penalty Notice" "is simply a step in the enforcement of the pre-existing liability and does not impact on the question of whether there is a common existing liability".

28 If the "common existing liability" is said to be the amount of the penalty in the "Director Penalty Notice" served on the appellant, then the liability to pay that amount itself cannot be said to be co-ordinate or common, because the penalty was recoverable only against the appellant, and because the payment of the amount of the penalty could have been avoided by the taking of other steps set out in the notice, resulting in the remission of the penalty. The respondent, on the other hand, not having been served with a notice, had no opportunity to take those steps. That the respondent was eligible to be served himself with a notice by the Commissioner adds nothing to the legal or equitable rights of the parties in my view.

29 Even were it appropriate to regard the "amount equal to the unpaid amount of the company's liability" specified as the relevant penalty under s222AOC(1) of the ITA Act, as the actual remittance debt due by Skyline Developments (Tas) Pty Ltd to the Commissioner, it could still not be said to amount to a "common existing liability". Such an amount was the unpaid amount of the company's statutory remittance obligation and was not itself a liability of the appellant or the respondent as directors of the company.

30 Moreover, once again, the payment of the amount by the appellant could have been avoided had the appellant taken other steps resulting in the remission of the penalty, including discharge of the liability by the company itself. Such steps would, as has been noted already, also have been open to the respondent, had he been served with a notice. As a result, I respectfully agree with the learned magistrate's assessment at par[65] of his reasons for decision that there is no unfairness or injustice to the appellant in the result in this case.

31 In reaching this view, I do not regard s222AOI of the ITA Act as a code, or in any way extinguishing existing common law and equitable rights to contribution in this area. Rather, in my view, the nature and extent of the liability created by the provisions of ss222AOC and 222AOE are not such as to allow that liability to be characterised as common or co-ordinate in circumstances where only one director is served with a "Director Penalty Notice", and as a result other directors have no opportunity to comply with the notice in a way that results in a remission of the penalty and not in a personal payment to the Commissioner.

32 As there was no co-ordinate liability or common obligation as between the appellant and the respondent in respect of the amount of the penalty paid by the appellant, the second ground of appeal fails.

33 I reject the appellant's submissions set out at par21(a) - (e) of his written outline of facts and contentions, and set out above at par[9] of these reasons for judgment.

34 In Burke v LFOT Pty Ltd (above) Gaudron A-CJ and Hayne J observed at [15] - [17]:

"15 The doctrine of equitable contribution applies both at common law and in equity[18]. 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,[ [1987] SLT 345 at 348 per Lord Ross referring to Caledonian Railway Co v Colt (1860) 3 Macq 833 at 844 per Lord Chelmsford], the right to contribution was said to depend on whether the liability was 'of the same nature and to the same extent'.

16 The notion of 'co-ordinate liability' is one that depends on common interest and common burden. Perhaps because, at common law, there was no general right of contribution between tort-feasors, the notion of 'co-ordinate liability' has not traditionally been expressed in terms requiring equal or comparable culpability or a requirement that the acts or omissions of the persons in question be of equal or comparable causal significance to the loss in respect of which contribution is sought. However, the requirement that liability be 'of the same nature and to the same extent', as stated in BP Petroleum, is apt to include notions of equal or comparable culpability and equal or comparable causal significance.

17 Culpability, as a factor bearing on the right to equitable contribution, clearly explains the requirement that for there to be contribution between co-trustees, the co-trustees must be in pari delicto. So, too, it explains the rule that a person who has been guilty of fraud, illegality, wilful misconduct or gross negligence is not entitled to contribution from his partners."

35 I find myself in respectful agreement with the learned magistrate. Not only, as just noted, was there no joint or several liability in respect of any relevant amount, but also there is no liability which, even in substance, as opposed to form, could possibly be identified as involving a "common obligation" or a "co-ordinate liability". Counsel for the appellant correctly submits that "the right to contribution exists between those who are liable for the same principal debt". In the present case however, the difficulty for the appellant is that there is no "same principal debt" for which he and the respondent can be said to be liable.

36 The appellant's liability pursuant to s222AOE to pay a penalty recoverable against him by the Commissioner as a result of the appellant's failure to take steps to have the company pay or arrange to pay its liability to the ATO, or to take steps to appoint an administrator, or commence winding-up the company, cannot be said to be a liability "of the same nature and extent" as the respondent's liability under s222AOC.

37 It is correct to say, as was submitted by counsel for the appellant, that each director has the same liability under s222AOC whether or not the Commissioner takes any steps to recover the penalty under s222AOE, and that the penalty is remitted if the obligations that gave rise to the penalty are discharged before a "Director Penalty Notice" is given. In the present case however, the respondent's relevant liability was a potentiality only and at best was a contingent liability under s222AOC that did not materialise.

38 On the other hand, the appellant's obligation to pay the Commissioner the amount of the penalty which became recoverable against him after a "Director Penalty Notice" was served on him, and the penalty was not remitted, was a perfected liability under s222AOE into which his liability under s222AOC had merged.

39 Once again, the fact that the penalty paid by the appellant represented in truth, if not at law, the PAYG payments withheld by Skyline Enterprises (Tas) Pty Ltd does not give rise to a "common obligation" or a liability "of the same nature and extent" as between them as directors.

40 The appellant's exposure to recovery was his alone, and moreover, as to notions of "equal and comparable culpability and equal or comparable causal significance", it was solely the appellant's failure to comply with the notice in one of the ways available to him, other than by payment of the penalty himself, that resulted in him assuming personal responsibility in respect of what was a liability of Skyline Enterprises (Tas) Pty Ltd.

41 This is not a case of allowing the equality of a burden shared by exposure to a common obligation to be defeated by a creditor selecting one debtor, rather than all, against whom to recover. Such might be the case had both the appellant and the respondent been served with a "Director Penalty Notice", and had both allowed 14 days to elapse without securing the remittance of the penalty. However, as already explained, the nature and extent of the liability created by the provisions of ss222AOC and 222AOE are not such as to allow that liability to be characterised as common or co-ordinate in circumstances where only one director is served with a "Director Penalty Notice", and as a result other directors have no opportunity to comply with the notice in a way that results in a remission of the penalty other than by payment.

43 Grounds 2 and 3 of the notice of appeal having failed, the appeal is dismissed.