SIMPSON & ORS v DFC OF TJudges:
Supreme Court of South Australia
This appeal is against a finding by a magistrate that the appellants are liable by reason of their position as directors of a company to pay to the Commissioner of Taxation a penalty following upon the failure of the company to remit to the Commissioner deductions of tax instalments made as a group employer.
Section 222AOB(1) of the Income Tax Assessment Act 1936 (the Act) requires directors to cause the company to remit deductions or to reach an agreement in relation to payments or to cause it to go into voluntary administration or liquidation. A penalty is imposed on a director of an amount equal to the unpaid amount if there is failure to take such action on or before the date on which the remittance is due. In the present case it is not in dispute that the company of which the appellants were directors failed to remit certain deductions and that the appellants did not cause the company to take any of the prescribed actions. However it was argued on appeal that the learned magistrate erred in holding that the appellants had not brought themselves within the defence created by s 222AOJ(3) which provides:
``It is also a defence if it is proved that:
- (a) the person took all reasonable steps to ensure that the directors complied with subsection 222AOB(1); or
- (b) there were no such steps that the person could have taken.''
At all relevant times the appellants were directors of United Hardware (SA) Pty Ltd (the company), a wholly owned subsidiary of Eudunda Farmers Limited (Eudunda). On 15th November 1993 the company granted a mortgage debenture to Eudunda to secure past and future loans. On 2nd June 1994 Eudunda made a demand on the company for repayment of $1,000,000.00 under the loan agreement. The demand was not met and, on the same day, Eudunda appointed a receiver and manager pursuant to the terms of the mortgage debenture. Attempts to find a purchaser for the business of the company were unsuccessful and on 13th July 1994 on the initiative of the directors an application for the winding-up of the company was filed in court. A winding-up order was made on 6th September 1994.
The deductions of tax instalments which are relevant to these proceedings took place in May 1994 when $24,540.85 was deducted and 1st and 2nd June 1994 when $2,218.35 was deducted. The due date for payment of the May
ATC 4663deductions was 7th June 1994 and the due date for the June deductions was 7th July. As I have stated, the payments were not made to the Commissioner.
The present scheme for the collection of tax instalments was introduced by way of amendments to the Act contained in the Insolvency (Tax Priorities) Legislation Amendment Act 1993. Prior to the enactment of this legislation the Commissioner was given priority over other creditors in the event of insolvency. The amendments had the effect of removing that priority but, at the same time, introducing new provisions in relation to the duties and liabilities of directors.
Set out hereunder are some of the sections relevant to the present case.
``Division 9 - Penalties for directors of non-remitting companies
Subdivision A - Object and interpretation
Object and outline
222ANA(1) The purpose of this Division is to ensure that a company either meets its obligations under Division 2, 3A, 3B, 4 or 8, or goes promptly into voluntary administration under Part 5.3A of the Corporations Law or into liquidation.
222ANA(2) The Division imposes a duty on the directors to cause the company to do so. The duty is enforced by penalties. However, a penalty can be recovered only if the Commissioner gives written notice to the person concerned. The penalty is automatically remitted if the company meets its obligations, or goes into voluntary administration or liquidation, within 14 days after the notice is given.
222ANA(3) A penalty recovered under this Division is applied towards meeting the company's obligations under the relevant Division. Conversely, amounts paid by the company reduce the amount of a penalty.
222ANA(4) Sections 221R, 221YHN, 221YHZJ and 221YR provide for the recovery of amounts payable under this Division.
222ANB(1) Except so far as the contrary intention appears, an expression has the same meaning in this Division as in Division 8.
222ANB(2) A deduction purporting to be made for the purposes of a Division is taken to be made for the purposes of that Division.
Subdivision B - Company failing to remit under Division 2, 3A, 3B or 4
222AOA(1) This Subdivision applies if a company incorporated under the Corporations Law of a State or Territory has made, for the purposes of Division 2, 3A, 3B or 4, one or more deductions having a particular due date.
222AOA(2) The earliest day on which the company made for the purposes of that Division a deduction that has that due date is called the first deduction day .
222AOA(3) That due date is called the due date .
Directors to cause company to remit or to go into voluntary administration or liquidation
222AOB(1) The persons who are directors of the company from time to time on or after the first deduction day must cause the company to do at least one of the following on or before the due date:
- (a) comply with Division 2, 3A, 3B or 4, as the case may be, in relation to each deduction:
- (i) that the company has made for the purposes of that Division; and
- (ii) whose due date is the same as the due date;
- (b) make an agreement with the Commissioner under section 222ALA in relation to the company's liability under a remittance provision in respect of such deductions;
- (c) appoint an administrator of the company under section 436A of the Corporations Law;
- (d) begin to be wound up within the meaning of that Law.
222AOB(2) This section is complied with when:
- (a) the company complies as mentioned in paragraph (1)(a); or
- (b) the company makes an agreement as mentioned in paragraph (1)(b); or
- (c) an administrator of the company is appointed under section 436A, 436B or 436C of the Corporations Law; or
- (d) the company begins to be wound up within the meaning of that Law;
whichever first happens, even if the directors did not cause the event to happen.
222AOB(3) If this section is not complied with on or before the due date, the persons who are directors of the company from time to time after the due date continue to be under the obligation imposed by subsection (1) until this section is complied with.
Penalty for directors in office on or before due date
222AOC 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:
- (a) that the company has made for the purposes of Division 2, 3A, 3B or 4, as the case may be; and
- (b) whose due date is the same as the due date.
Penalty for new directors
- (a) after the due date, a person becomes, or again becomes, a director of the company at a time when section 222AOB has not yet been complied with; and
- (b) at the end of 14 days after the person becomes a director, that section has still not been complied with;
the person is liable to pay to the Commissioner, by way of penalty, an amount equal to the unpaid amount of the liability referred to in section 222AOC.
Commissioner must give 14 days' notice before recovering penalty
222AOE 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:
- (a) sets out details of the unpaid amount of the liability referred to in section 222AOC; and
- (b) 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:
- (i) the liability has been discharged; or
- (ii) an agreement relating to the liability is in force under section 222ALA; or
- (iii) the company is under administration within the meaning of the Corporations Law; or
- (iv) the company is being wound up.''
It is apparent from these sections that they are designed to facilitate prompt action to recover amounts due to the Commissioner. To this end s 222AOB places a duty on the directors to take at least one of the courses of action required by sub-section (1). For the present appeal it is important to note that any such course of action must be taken ``on or before the due date''. As I have pointed out the due dates relevant to the present case were the 2nd June and 7th July, 1994 respectively. The directors did not cause the company to do any of the prescribed acts before these dates. In particular the winding-up order was not made until 6th September 1994. According to the argument advanced on behalf of the Commissioner, the directors thus became liable to pay to the Commissioner a penalty equivalent in amount to the unpaid amount of the company's liability.
The argument presented on behalf of the appellants by Mr Wilkinson focused upon the period after each of the directors was given the notice prescribed by s 222AOE. As required by the section the notice stated that the director was liable by way of penalty to pay the amounts set out therein, but that the penalty would be remitted if at the end of 14 days after the giving of the notice-
- ``(a) the company's liability in respect of that unpaid amount has been discharged; or
- (b) an agreement relating to that unpaid amount is in force under Section 222ALA of the Act, or
- (c) the company is under administration within the meaning of the Corporations Law; or
- (d) the company is being wound up.''
It was argued that by the time of the giving of the notices on the 17th of August 1994 the directors were unable to cause the company to pay the amount due as the receiver had taken possession of the assets. Mr Wilkinson also pointed out that the application for the winding- up of the company had been made on 13th July 1994 and the application had been adjourned on 16th August 1994, the first return date, on the instructions of the receiver. He argued that the directors could not cause the company to be placed in administration because no-one would agree to become administrator if there was no prospect of control over the assets. Mr Wilkinson also argued that ``it is the time at which the notice is given that one needs to look at what they could reasonably do'' and in the light of the directors' predicament at that time, they were entitled to rely upon the defence provided for in s 222AOJ(3).
Whatever might be said as to the situation the directors found themselves in at the time of the serving of the notice, the fallacy in this argument is the premise that the relevant time for considering whether the defence is proved is the time at which the notice is given. It is true that at this stage the directors are given an opportunity to take action so as to lead to the penalties being remitted, but their liability does not arise for the first time at this point; nor does their obligation to cause the company to do at least one of the things prescribed by s 222AOB commence at this stage.
Section 222AOB(1) places the primary obligation on the directors and it requires that at least one of the prescribed events is to take place ``on or before the due date''. The defence under s 222AOJ(3) is concerned with steps which might or might not have been taken to ensure compliance with s 222AOB(1). It is clear, therefore, that the appellants could not ignore the period before the due date when setting out to prove the defence. If this were not so then the object of the legislation in compensating the loss of the Commissioner's priority by ensuring that the company either meets its obligations under the Act or goes promptly into voluntary administration or into liquidation (s 222ANA) would be rendered nugatory in many instances.
The requirement that attention be given to the courses of action under s 222AOB(1) on or before the due date answers Mr Wilkinson's alternative argument that there was insufficient time as at the respective due dates to cause the company to go into liquidation.
A similar argument based upon the notice provisions was rejected by Cooper J in
Re Scobie & Anor; ex parte DFC of T 95 ATC 4525; (1995) 31 ATR 195 where his Honour said (at ATC 4530-4531; ATR 201):
``The respondents' submission that the phrase `begin to be wound up' means, and is satisfied by, the filing of an application seeking an order for winding up, and the alternative argument that the directors in this case took all reasonable steps within the terms of s 222AOJ(3), rely upon the contention that the directors' obligation was only referrable to the contents of the notice given by the Commissioner as required by s 222AOE....
In my view the approach of the respondents is misconceived. They seek to equate the giving of a necessary notice as a condition precedent to recovery proceedings for a penalty with the point in time at which a duty of compliance by the directors arises. They also seek to set the requirements of compliance as the doing or causing to be done of one act specified in the notice within the period specified in the notice. It is only because the respondents seek to impose a 14 day time limit on the occurrence of all factual circumstances described in the notice that the submission can be made that `the option of winding up the company [would be] illusory' if the time for compliance was fixed when the process of winding up commenced, in fact, or by the operation of s 513A of the Corporations Law. As I set out earlier in these reasons, the obligation imposed on directors arises from the first deduction day and continues until compliance by the occurrence of one of the events specified in s 222AOB(2). The submissions of the respondents totally ignores the obligation cast upon the directors in the period prior to receiving the notice.
The obvious purpose of Division 9 of Part VI of the ITAA is to force directors to address the issue of compliance before the due date and to take whatever action is appropriate to bring about compliance. The duty is enforced by penalty which arises if there is non-compliance on the due date. There is nothing in the scheme of the division which necessitates a construction of the compliance requirements in s 222AOB(2) which enables each of the four circumstances to occur on or before the due date without the imposition of a penalty. This is particularly so where the Division provides for the remission of any penalty by operation of the statute at any time prior to the expiration of fourteen days after the giving of a notice as provided for in s 222AOE upon compliance within the terms of s 222AOB. It is entirely contrary to the purpose of the division to construe the requirements of compliance on the basis that directors are free to ignore the continuing statutory obligation imposed upon them by s 222AOB(1) until receipt of the notice.''
The affidavits relied upon by the appellants at first instance do not establish that the appellants took all reasonable steps to ensure compliance with s 222AOB(1). There is no suggestion that they took any steps at all in obedience to the section at any time on or before the due date. Nor do they establish that no steps could have been taken during that period. The affidavits are silent on the question as to when the appellants became aware of the company's financial difficulties. It was pointed out that the receiver was appointed on 2nd June 1994 after the demand by Eudunda had not been met, but nothing else was said as to the circumstances of his appointment and counsel for the respondent has drawn attention to the fact that the appellants were also directors of Eudunda.
Counsel for the appellants criticised the assertion by the learned magistrate in his reasons that the amounts deducted by the company were held in trust for the Commissioner. Whether or not this statement is accurate it was not essential to his reasoning. For the reasons which I have given he was correct in holding that the appellants' obligations had not been met and that they had not brought themselves within the defence provisions.
The appeal will be dismissed.