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[2011] FCA 561
Federal Court of Australia
2011-05-30
Mr P, North J
Original judgment source is linked above.
REASONS FOR JUDGMENT 1 On 23 February 2011, on the application of the plaintiff, the Court ordered that the defendant be wound up in insolvency. 2 The Court also gave leave to the plaintiff to file a notice of motion seeking costs against a non party, Peter Norman James. 3 On 9 March 2011, the plaintiff filed a notice of motion seeking, inter alia, an order that Mr James pay the costs of the winding up application. That is the application presently before the Court.
The facts 4 The defendant conducted a real estate and property development business. The plaintiff was employed as the real estate licensee. 5 Between April 2007 and May 2008 (the relevant period) the plaintiff, Mr James, and Mr James' now deceased brother, were directors of the defendant. 6 In the relevant period, the defendant withheld amounts for the purposes of Division 12 in Schedule 1 of the Taxation Administration Act 1953 (Cth) of tax payable to the Australian Tax Office (ATO) amounting to $118,173.88. The directors from time to time were obliged to cause the company to pay that amount to the ATO, to make an agreement with the Commissioner of Taxation (the Commissioner) in relation to the company's liability, to appoint an administrator, or to begin winding up proceedings (s 222AOB of the Income Tax Assessment Act 1936 (Cth) (ITAA)). 7 The directors did not comply with the requirements of s 222AOB. As a result each person who was a director in the relevant period became liable to pay a penalty to the Commissioner equal to the amount of the company's liability (s 222AOC of the ITAA). 8 The Commissioner was not permitted to recover the penalty until 14 days after service of a notice under s 222AOE of the ITAA. If s 222AOB was complied with within the notice period, for instance, by the commencement of winding up proceedings, the penalty was remitted by automatic operation of s 222AOG of the ITAA. 9 These provisions reflect the policy that if a company is unable to pay its tax liabilities the directors have an obligation to act promptly to place the company into liquidation or to take the other specified steps to address the inability to pay. 10 On 30 August 2010, the Commissioner issued a writ against the plaintiff to recover the $118,173.88. 11 On or about 13 September 2010, the plaintiff phoned Mr James and told him that he was being sued by the ATO for the company's debt because he was a director, and he wanted to know what the defendant was doing about the debt. Mr James said that the company was no longer trading and that he had no problem putting it into liquidation but that he was attempting to reach a settlement with the ATO without needing to appoint a liquidator. 12 On 23 September 2010, the plaintiff filed the originating process seeking a winding up order on the just and equitable ground (s 461(k) Corporations Act 2001 (Cth) (the Corporations Act)). 13 Shortly afterwards, Mr James received a further originating process this time from the ATO seeking to wind up the defendant on grounds of insolvency under s 459P of the Corporations Act, and also a District Court writ in relation to a director's penalty notice. The ATO later withdrew their winding up application because of the pending proceedings in this Court. 14 Mr James states in an affidavit sworn on 1 April 2011 in opposition to the application for costs that from around October 2010 he worked with the ATO to attempt to settle the company debt. 15 On 26 October 2010, the originating process instituted by the plaintiff was listed before Registrar Jan and adjourned to 9 November 2010 because the defendant did not appear. On 9 November 2010 Registrar Jan allowed an amendment to the originating process to include insolvency as a basis for the winding up order. The amended originating process was served on the defendant and on Mr James, then the sole director of the defendant. The originating process was referred for hearing by a judge to be conducted on 10 December 2010. 16 On 10 December 2010, neither the defendant nor Mr James appeared at the hearing. The material before the Court was not sufficient to establish insolvency. In order to address this deficiency, the plaintiff obtained leave to serve a subpoena on Mr James to produce documents and give evidence. On 21 December 2010, Mr James attended Court on the return of the subpoena. Insofar as the subpoena related to the production of documents, the return was adjourned to 1 February 2011 before a registrar. Insofar as the subpoena required the attendance of Mr James to give evidence, it was adjourned to 23 February 2011. These adjournments were granted because Mr James said that he had not had adequate time to gather the documents required by the subpoena, and further, that he was negotiating with the ATO concerning the debt owed by the defendant to the ATO. Mr James agreed, and it was ordered, that he pay by 21 January 2011, the costs of the adjournment fixed at $1,712. 17 Several appearances before the registrar followed at which the plaintiff received documents forwarded by Mr James to the Court in response to the subpoena. Mr James did not appear on these occasions. 18 Before the adjourned hearing of the originating process on 23 February 2011, the settlement negotiations between Mr James and the ATO broke down. Consequently, on 23 February 2011, Mr James caused the defendant to consent to the winding up order. Neither he nor the defendant appeared on that day.
THE SUBMISSIONS OF THE PLAINTIFF 19 It was common ground that the Court has power to order costs against a non party in this case: Knight v SP Special Assets Ltd (1992) 174 CLR 178; MG Corrosion Consultants Pty Ltd v Vinciguerra (No 2) [2011] FCAFC 48. The discretion is a broad one, but it must be exercised judicially so as to serve the interests of justice. The categories of case in which such orders may be made are not closed. But the requirements of justice should not be expanded so the exceptions to the rule undermine the rule itself: FPM Constructions Pty Ltd v Council of the City of Blue Mountains [2005] NSWCA 340. 20 The plaintiff relied on certain features of the case which have in past cases, it was argued, justified the making of such orders, namely, where: 1. the non party is the effective litigant standing behind the actual party; 2. a party to the litigation is insolvent and the non party has played an active part in the litigation and has an interest in the subject matter of the litigation: Macquarie International Heath Clinic Pty Ltd v Sydney South West Arena Health Service (No 3) [2010] NSWSC 1139; or 3. the actions of the non party in the litigation were unreasonable or improper. 21 The plaintiff placed most emphasis on the third consideration. He said that Mr James' conduct was unreasonable and improper because Mr James failed to comply with Court orders or with the subpoena served on him. The plaintiff relied upon Mr James' non attendance at the hearing of the originating process until 21 December 2010 when Mr James appeared to answer the subpoena, and Mr James' failure to produce documents on the return of the subpoena before the registrar on several occasions. 22 The plaintiff also argued that the originating proceeding was necessary because Mr James failed to comply with his obligation as a director under s 222AOB of the ITAA to cause the company to be wound up at the time the tax liabilities became due. That the plaintiff was forced by Mr James' inaction to apply for a winding up order.
CONSIDERATION 23 The argument that Mr James' conduct has been unreasonable and improper should not be accepted. Mr James was obliged to attend in response to the subpoena and he did so. His failure to produce documents on 21 December 2010 caused an adjournment for which he accepted responsibility by agreeing to pay the costs. Whilst these costs were not paid within the time limited by the order, they have since been paid. Mr James was not obliged to attend Court on the other occasions. 24 There was insufficient evidence before me of the adequacy or otherwise of the extent of the production by Mr James of documents in answer to the subpoena before the registrar. Consequently, it is not open to find that Mr James acted unreasonably or improperly in this regard. 25 The contention of the plaintiff that Mr James was the real litigant or that he played an active part in the litigation and hence should bear the costs is inconsistent with the previous argument just considered that Mr James acted unreasonably and improperly by failing to take part in the proceedings. This submission provides no basis for the Court to make an order for costs against Mr James. 26 The plaintiff's submission that Mr James had an interest in the winding up for which he should bear the costs of the proceedings is also not made out. The winding up order does not advance Mr James' interests. In this respect his situation contrasts with the circumstances of the plaintiff. 27 It will be remembered that the director's penalty is remitted if the company is placed into liquidation before the expiry of the notice served under s 222AOE of the ITAA. The reason why the plaintiff instituted the winding up process was frankly explained to the Court by his solicitor. The plaintiff claims that he was not served with the s 222AOE notice. Consequently, he contends that no personal liability as a director arose against him. He intends to defend the District Court writ issued by the ATO against him on this basis. If he is successful it is in his interest that the defendant is in liquidation because, if so, the Commissioner will be unable to serve another notice under s 222AOE which would result in the plaintiff's personal liability. Thus, the evidence establishes that the plaintiff had an interest in the winding up order being made. There is no evidence that Mr James had such an interest. 28 Finally, the argument that the originating proceeding was necessary because of Mr James' failure to comply with his obligations under s 222AOB of the ITAA is not useful to the plaintiff because he was under the same obligation to cause the company to be wound up at the time he was a director of the defendant and failed to do so. 29 The interests of justice would thus not be served by making an order against Mr James that he bear the costs of the winding up. The plaintiff's application to that effect must be refused. This result does not affect the order for costs already made against Mr James and the payment of costs which have been made thereunder. The plaintiff must pay Mr James' costs of this motion. I certify that the preceding twenty-nine (29) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice North.
Weaver
Valspan Pty Ltd