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SUPREME COURT OF QUEENSLAND

Deputy Commissioner of Taxation v Guthridge

[2003] QSC 120

Mullins J

14 May 2003 - Brisbane

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Mullins J.    The Deputy Commissioner of Taxation (the applicant) who is the plaintiff in this proceeding applies for summary judgment under r 292 of the Uniform Civil Procedure Rules 1999 (Qld). The application was filed on 24 December 2002 and was heard immediately following the application for summary judgment by the applicant in proceeding S8502 of 2001 against Mr S A Coco.

  2  The claim made by the applicant against Mr William John Guthridge (the respondent) who is the defendant in this proceeding is similar to that made by the applicant against Mr Coco in proceeding S8502 of 2001. The only difference between the claims pleaded by the applicant against Mr Coco and the respondent is that Mr Coco was a director of Softex Industries Pty Ltd (the company) from the time the first of the subject PAYG withholdings was made in August 2000 and the respondent was not formally appointed a director of the company until 9 October 2000.

  3  The applicant alleges against the respondent that he was appointed director of the company on 9 October 2000 and as at 9 October 2000 and as at the end of 14 days from that date, s 222AOB of the Income Tax Assessment Act 1936 (Cth) (the ITAA 1936) had not been complied with in relation to the amounts of PAYG withheld by the company. The applicant claims that the unpaid amount of the company's liabilities for amounts withheld for the purposes of Div 12 in Sch 1 of the Taxation Administration Act 1953 (Cth) is $399,712. The applicant relies on s 222AOD of the ITAA 1936 to claim that the respondent is liable to pay to the Commissioner a penalty equal to the total of the amounts withheld of $399,712 and seeks to recover that sum as a debt.

  4  By the respondent's amended defence filed on 21 February 2003, the only issue raised in the proceeding is whether the respondent has a defence under s 222AOJ(3) of the ITAA 1936. The respondent relies on each of paras (a) and (b) of s 222AOJ(3).

  5  I set out the relevant legislative provisions and summarised the law relating to the defence under s 222AOJ(3) in my reasons for judgment published contemporaneously in DCT v Coco (2003) 52 ATR 700 (Coco) and rely on those aspects of those reasons for the purpose of this judgment.

Evidence relating to reasonable steps defence

  6  The period which is relevant to whether the respondent can raise a defence under s 222AOJ(3) is from 9 October 2000 to 5 October 2001 (which is the date when a voluntary administrator was appointed to the company).

  7  The following summary of facts is taken from the respondent's affidavit filed on 5 February 2003. As this application was heard after the summary judgment application made by the applicant in the proceeding against Mr Coco, it was apparent that there were differences in the evidence of Mr Coco given in relation to the application against him and the evidence of the respondent on this application in respect of the functions and involvement of each of Mr Coco and the respondent in the company's business during the relevant period. This application, however, has to proceed on the basis that the respondent's evidence on these matters was not controverted.

  8  The respondent commenced working for the company as a business consultant in October 1999 when Mr Coco was the managing director and majority shareholder of the company. The respondent reviewed the range of products of the company, found a sales manager and looked at the viability of restructuring the finances of the company, selling the company or otherwise refinancing it. The respondent raised the possibility of an initial public offering. In or about April 2000 the company obtained some short term funding from Business Management Ltd (BML) and BML required the company to appoint a new financial controller to take the company through to the stage of an initial public offering. That resulted in the appointment of Mr Ian McCall. BML also required Mr Brian Jones and Mr John Reid of BML, in addition to the respondent, to be appointed directors of the company which was done on 9 October 2000.

  9  The respondent states from the time of his appointment as a director of the company, he continued to be engaged by the company as a business consultant. The respondent states that he was not in control of the financial operations of the company at any time during the relevant period, as Mr Coco was the sole signatory of any cheque account and he tightly controlled the payment of all accounts by the company during that period. The respondent describes his role as one of guiding the company towards an initial public offering (which did not involve the running of its day to day business affairs) and it was that specific purpose for which he was appointed as a director.

  10  The respondent received the director penalty notice issued by the applicant against him on 12 May 2001. That was the first time the respondent became aware that the remittances which were the basis of that director penalty notice had not been made. The respondent states that he telephoned Mr Coco on the evening that he had received the notice, he asked what the notice was about and that Mr Coco responded that the notice could be discussed at the company's office on the following Monday, 15 May 2001. The respondent states that a directors' meeting was held in his office at the company's premises on 15 May 2001 at which Mr Coco, Mr Jones and he were present. He states that Mr Jones asked about what PAYG was in fact owed to the Australian Taxation Office (ATO) and whether there were any other amounts owing by the company to the ATO that he and Mr Reid did not know about. The respondent states that Mr Coco responded:

   

Don't worry about it. It is under control. The matter is in the hands of Khory McCormick of Minter Ellison [the Company's Solicitors]. I will contact Khory and get an answer to you as soon as possible. The withheld amounts, which are the subject of the [DPN] are part of a global settlement that Khory and I are negotiating with the ATO.

  11  The respondent telephoned Mr McCormick after that Board meeting and conveyed what Mr Coco had explained about Mr McCormick meeting with the ATO and negotiating a global settlement including the amounts the subject of the director penalty notice and Mr McCormick confirmed that he was trying to negotiate a global settlement with the ATO which incorporated the subject PAYG withholdings.

  12  The respondent also had a discussion that day with Mr McCall in which he instructed Mr McCall to make sure that an arrangement was put in place with the ATO for the payment of the withheld amounts. Mr McCall then confirmed to the respondent that he had called the ATO and had sent a letter of offer for payment which included the withheld amount. I infer that Mr McCall was referring to his letter dated 17 May 2001 sent on behalf of the company to the ATO by facsimile on 17 May 2001, a copy of which is exhibit MAB2 to the affidavit of M A Balkin filed on 19 February 2003.

  13  The respondent states that a directors' meeting took place on 24 May 2001 at the company's premises with Mr Jones, Mr Coco and himself being present. The respondent states that Mr Jones asked whether the PAYG tax had been paid and that Mr Coco responded:

   

Don't worry about it, Softex has now reached an agreement with the ATO, extending the time of the payment due to 6 July 2001.

 The respondent states that Mr Jones commented that last time that they had spoken about it, the company had made an offer only and that Mr Coco responded:

   

It is alright, Khory has contacted the ATO and Softex has agreed with the ATO that the amount will be paid by 6 July 2001.

  14  The respondent states that a further meeting took place at the company's offices on 25 May 2001 which was attended again by Mr Jones, Mr Coco and himself and that Mr Jones raised the need for written confirmation of the agreement with the ATO and, failing that, the options were to appoint an administrator, or for Mr Coco and the investors to inject sufficient cash into the company, to ensure it could pay the outstanding PAYG by the agreed date, or for Mr Coco to indemnify Mr Jones and the other directors in respect of any liability for the tax in the event that the company did not pay it by the agreed date. The respondent states that Mr Coco responded that the ATO had given them 6 weeks to pay.

  15  The respondent states another meeting was held on 6 June 2001 at the company's premises at which the same persons were present, when Mr Jones asked about what was happening with the PAYG tax debt and whether it had been paid yet and that Mr Coco responded:

   

It is under control, as I explained before, the ATO has agreed to allow us to pay this amount by the end of June 2001.

  16  The respondent refers to the fact that the company then received a statutory demand from the ATO, claiming an amount which included the withheld amounts. That statutory demand was served on 19 June 2001. The respondent states that a board meeting took place at the company's premises on 28 June 2001 at which Mr Jones, Mr Coco and the respondent were present and that Mr Jones inquired what the position was in relation to the PAYG tax debts in view of the statutory demand from the ATO. The respondent states that Mr Coco responded:

   

In relation to Softex's PAYG tax debts, I met with the ATO yesterday and we reached an agreement that allows us to pay these amounts by 7 July 2001. However, the amount has also been included in the Statutory Demand that we intend to challenge. The advice I have from Minter Ellison is that the Statutory Demand is incorrect and should be challenged and I have given instructions to Minter Ellison to do so.

  17  The respondent states that in or about July 2001 he and Mr Jones were advised by Mr McCormick that the withheld taxes that were the subject of the director penalty notices formed part of a global settlement of all outstanding taxes which was being negotiated with the ATO. The respondent states that during July 2001 he and Messrs Jones and Reid agreed that they would commence detailed discussions with the ATO with a view to resolving all outstanding taxation issues between the company and the ATO. The respondent states that he was informed by Mr Jones in July 2001 that Mr Jones had made contact with Mr Graeme Still of the ATO regarding a global settlement of all the company tax debt. I have set out a summary of the meeting, correspondence and telephone calls between the company and the ATO which took place between 5 September and 4 October 2001 in paras [70] and [71] of Coco. The letter dated 6 September 2001 was an extremely detailed submission on behalf of the company to support an offer which, if accepted, would have resulted in an agreement under s 222ALA which is one of the outcomes a director is obliged to seek under s 222AOB(1).

Whether there is a real prospect of defending the claim

  18  Mr Bickford of counsel on behalf of the applicant sought to glean from s 222AOD a positive obligation on a new director within 14 days of the appointment as a director to satisfy himself or herself that the particular company was meeting its responsibilities in respect of the remission to the Commissioner of PAYG instalments. All that s 222AOD does is to create the liability of a new director for a penalty equal in amount to the unpaid amount of the PAYG withholdings and specifies that the liability accrues at the end of 14 days after that person becomes a director. The submission made on behalf of the applicant appears to be an attempt to incorporate the requirements for a defence under s 222AOJ(3) into a duty under s 222AOD. That is not the correct approach to either provision.

  19  The effect of my conclusion in Coco that the defence under s 222AOJ(3)(a) must apply to the entire period during which the obligation under s 222AOB(1) existed for a particular director means in the case of a director appointed after the due date for payment of PAYG withholding that the relevant period commences on the date of appointment, as that is when the new director also becomes obliged to comply with s 222AOB(1). In the case of the respondent, the applicant must show that the respondent has no realistic prospect of succeeding in a defence under s 222AOJ(3) for any part of the entire period commencing from 9 October 2000 until 5 October 2001.

  20  The first period that has to be scrutinised for the possibility of a defence is between the appointment of the respondent as a director on 9 October 2000 and that point in time when he became aware or should have become aware of the failure of the company to remit the subject PAYG withholdings. It is a relevant factor that the respondent upon his appointment as a director did not make any inquiries as to whether the company was observing its obligation to remit PAYG withholdings to the Commissioner. The respondent's evidence raised the question of whether it was a reasonable step at the outset of his appointment as a director for him to leave the day to day responsibility of paying the company's creditors with Mr Coco who had, until then, been the exclusive controller of the company. This question must be determined having regard to the respondent's awareness that, prior to his appointment as a director, the company had appointed a new chief financial officer and the company was being prepared for an initial public offering which I infer required matters such as remittances of PAYG withholdings to be in order.

  21  It is not possible on an application of this nature to reject absolutely a defence under s 222AOJ(3) which requires the question of what was a reasonable step or steps for the respondent to have taken during this first period to be determined in the light of the respondent's involvement in the management of the company, his relationship with Mr Coco and all other relevant circumstances. There are many factual issues which require determination in the evaluation of this defence.

  22  The next period for considering the defence runs from when the respondent was or should have been aware that the subject PAYG withholdings had not been remitted (which was 15 May 2001 at the latest) until 5 October 2001. It was argued on behalf of the applicant that, before the period of 14 days had elapsed after service of the director penalty notice, it was obvious to the respondent that Mr Coco was lying to his co-directors. That makes an assumption about what effect the representations which the respondent alleges were made by Mr Coco did have or should have had on the steps the respondent took thereafter to ensure compliance with s 222AOB(1). Another relevant circumstance which could affect how the conduct of the respondent and the timing of that conduct is evaluated for the purpose of the defence is the service of the statutory demand on the company which incorporated the subject PAYG withholdings.

  23  It is arguable that the steps taken by the respondent to negotiate a global settlement with the ATO covering the subject PAYG withholdings which could have resulted in an agreement under s 222ALA in respect of the PAYG withholdings provides the respondent with a defence under s 222AOJ(3) in respect of the period from when he became aware that the subject PAYG withholdings had not been remitted until the voluntary administrator was appointed to the company on 5 October 2001.

  24  I am not satisfied that the prospects of a successful defence being raised by the respondent under s 222AOJ(3)(a) in respect of the entire period during which he was under an obligation under s 222AOB(1) are so fanciful as to justify denying the respondent a trial. It is therefore unnecessary to consider the defence raised under s 222AOJ(3)(b). The applicant's application for judgment should be dismissed.

Third party notice

  25  Leave was given to the respondent at the hearing of the summary judgment application to file an application seeking leave to issue third party proceedings against Mr Coco for damages or other compensatory orders equivalent to any amount for which the respondent may be found liable to the applicant in this proceeding.

  26  In view of the allegations made by the respondent against Mr Coco in defending the applicant's claim, it is appropriate that leave be given in this proceeding for the respondent to pursue his claim against Mr Coco as a third party proceeding. The respondent explained that he did not file the third party notice at a time when leave would not have been required, as at that stage he was still dealing with Mr Coco in endeavouring to reach an arrangement with creditors of the company to enable it to trade out of the voluntary administration.

Orders

  27  The orders which I make are:

 1.  Leave be granted to the respondent to file and serve a third party notice on Santo Antonio Coco in terms of Ex WJG1 to the affidavit of WJ Guthridge filed by leave on 25 February 2003.

 2.  The application filed on 24 December 2002 be dismissed.

  28  I will hear submissions from the parties on the question of costs and whether any directions should be made.