FITZGERALD v DFC of T

Judges:
French DCJ

Court:
District Court (WA)

Judgment date: Judgment handed down 8 September 1995

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French DCJ

This is an appeal against summary judgment in the plaintiff's favour for payment of penalty pursuant to the provisions of s. 222AOD of the Income Tax Assessment Act 1936.

In the notice of appeal filed 4 January 1995 the appellant's main ground of appeal was that the magistrate erred in ordering that judgment be entered for the respondent as the respondent was no longer a director of the company required to remit tax at the time the relevant notice was sent to him. Although no formal amendment to the grounds of appeal was filed it was argued that there was an additional or alternative ground namely that the appellant had a defence pursuant to the provisions of s. 222AOJ in that he did not take part in the management of the company and was therefore not in a position to take reasonable steps to ensure payment.

The legislation

Division 9 sub-division B of Part VI of the Income Tax Assessment Act 1936 (Commonwealth) ``the Act'' concerns penalties for directors of companies which failed to remit amounts to the Commissioner. The stated purpose of the penalty provisions is to ensure that a company either meets its obligations to remit amounts to the Commissioner or goes into voluntary liquidation or administration (Section 222ANA(1)). The affidavits filed by the respondent in support of its application for summary judgment indicate that a company called Nadine Holdings Pty Ltd (``the company'') failed to remit prescribed payment deductions under Division 3A Part VI of the Act for the period from 1 July 1993 to 31 December 1993. The amounts were due and payable to the Commissioner on or before 14 January 1994.

Section 222AOB requires a company to remit the amount due to the Commissioner or cause the company to go into voluntary liquidation or administration. Failure to comply with s. 222AOB results in each director who was a director of the company at any time during the relevant period to be personally liable for a penalty equal to the unpaid liability of the company. In addition s. 222AOD provides that a person who becomes a director after the due date in relation to a s. 222AOB duty which has not been complied with and if after 14 days after becoming a director the duty has still not been complied with that person becomes liable for the penalty namely the amount due by the company to the Commissioner. This section also applies to a person who having once been a director again becomes a director after the due date. The affidavit material filed by the respondent indicates that the appellant became a director of the company from 11 March 1994. It was conceded by the respondent that the appellant ceased to be a director on 28 March 1994.

Section 222AOE provides that before the Commissioner can seek recovery of a penalty from a director under the above provisions a penalty notice must be given to the director setting out the details of the unpaid amount of the liability that the person is required to pay that amount by way of penalty, and further that the liability will be remitted if at the end of 14 days after the penalty notice is given the liability has either been discharged or there is an agreement relating to the liability in force or that the company has gone into voluntary liquidation or administration.

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ATC 4589

It is not in dispute that the appellant was a director of the company only for a period of 17 days from 11 March 1994 to 28 March 1994. Nor is it in dispute that the provisions of s. 222AOB had still not been complied with during that period, namely that the amount had not been remitted to the Commissioner nor had the company entered into an arrangement or gone into voluntary liquidation or administration. The notice pursuant to the provisions of s. 222AOE was dated 10 June 1994 and was served on the appellant by sending it by pre-paid post to his address indicated in the ASC records. In its application for summary judgment the respondent argued that the appellant's liability for payment of a penalty arose 14 days after he became a director of the company (25th March 1994) as at that date the provisions of s. 222AOB had still not been complied with. It is submitted that it is irrelevant that the appellant was no longer a director by 10 June 1994 as that is a prerequisite to the Commissioner taking steps to recover the penalty but does not give rise to the liability to pay the penalty itself.

The appellant submits that as he was no longer a director at the time the notice was sent to him he was not in a position to take any steps to ensure compliance with the provisions of s. 222AOB namely remittance of the amount due to the Commissioner by the company or that the company go into voluntary liquidation or administration. It was argued that the provisions of s. 222AOE indicate that the person on whom a notice is served by the Commissioner must be in a position to either ensure the company meets its obligations or causes the company to enter into an arrangement to meet the liability or take steps to go into voluntary liquidation or administration. It was pointed out in affidavits from the appellant that although he ceased to be a director of the company on 28 March 1994 the ASC records continued to reflect that he was a director until after the notice was sent out on 10 June 1994. It was submitted that if the ASC records had been correct the Commissioner would not have been in a position to issue the s. 222AOE notice to the appellant. It was further argued that as the purpose of Division 9 of the Act is to ensure that a company meets its obligations and if it is unable to do so that the directors become liable then that purpose is frustrated if the director the subject of the penalty is not in a position to ensure that the company takes the necessary steps or remits the tax.

Although the appellant's arguments have some force in as much as it seems a harsh result to require payment of a penalty for unpaid tax to be made by a person who is no longer a director of the company and was only a director for a period of 17 days the legislation does appear to be clear. The liability of a new director arises after the expiration of 14 days after his appointment pursuant to the provisions of s. 222AOD. Although the Commissioner must give a 14 days notice before recovering that penalty there is nothing in the legislation that suggests that the liability arises as a result of the notice. There is nothing in the provisions of s. 222AOE that indicates that the person to whom a notice is sent must currently to be a director of the company. Although that section states that the amount of the penalty to be recovered will be remitted if the liability has been discharged or the company is under administration or liquidation there is nothing to indicate that these steps have to be taken by the person to whom the notice is sent.

The appellant raised a fresh ground of appeal when this matter came on for hearing namely that the appellant may have a defence pursuant to the provisions of s. 222AOJ. It was submitted that as the appellant was only a director for a period of 17 days and did not take part in the management of the company and was unaware of the tax liability at the time he was a director then he may have a defence pursuant to the provisions of sub-section (3)(b).

Section 222AOJ sets out two defences for a director in recovery proceedings. It will be a defence if it can be proved that:

• ``(a) because of illness or some other good reason the director did not take part in the management of the company at the relevant time, and
• (b) the director took all reasonable steps (or that there were no reasonable steps that could have been taken) to ensure that the relevant provisions were complied with.''

The word ``reasonable'' means reasonable having regard to the length of time the person was a director and took part in the management of the company and all other relevant circumstances. The affidavit of the appellant sworn 9 December 1994 deposes to the fact that the appellant was only a director of the

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ATC 4590

company for 17 days and was not aware at the time he bought into the company of its poor financial position. He also states that it was not until May 1994 after he had resigned as a director that he became aware that there was a debt owing to the Taxation Department and this was by way of a list of creditors dated 24 May 1994. He stated that he has never seen any documentation supporting the moneys now being claimed by the respondent. The fact that he was not aware of the existence of the debt does not therefore suggest that there were no reasonable steps that could have been taken to ensure compliance with the relevant provisions.

Although it is clear that the appellant was not aware of the company's failure to comply with the provisions of s. 222AOB there is nothing in the affidavit material before me that would suggest that he may have a defence to the respondent's claim. Although he was only a director for a period of 17 days there is nothing to suggest that he did not take part in the management of the company. Although he was not aware of the company's financial position or the moneys due to the respondent this is not sufficient to provide a defence. The provisions providing for penalties for directors pursuant to Division 9 have been in force since July 1993 so that it is the responsibility of a new director at or prior to taking up his appointment to make inquiries of the relevant officers of the company as to whether there were any moneys owing by the company to the respondent. If there was evidence to suggest that upon such enquiry a director was not given correct information then it may be that he would be able to establish a defence to the respondent's claim for penalty. However there is nothing in the affidavit material before me that suggests that this has occurred in this case.

Although it is clear that an application for summary judgment would only be granted in cases where there is no possibility of a defence I consider that this is such a case. The appeal is dismissed.