Bryson J

Supreme Court of New South Wales

Judgment date: 27 October 1997

Bryson J

Hartland & Hyde Pty Limited is in liquidation and the plaintiff Mr McDonald is its liquidator. The Federal Court of Australia appointed him Provisional Liquidator on 24 September 1992 and appointed him Official Liquidator on 3 December 1993 when it made an order winding-up the company. The present proceedings were brought to resolve doubts on whether the company (referred to as Hartland & Hyde) is liable for group tax for moneys which it deducted or should have deducted from salary and wages payable to employees and remitted to the Australian Taxation Office. The Deputy Commissioner of Taxation is the first defendant. The way in which the affairs of Hartland & Hyde and related companies, significantly Hartland & Hyde Activities Pty Limited (referred to as Activities) were conducted means that it is quite obscure whether the persons employed were employed by Hartland & Hyde or by Activities.

The second defendant (referred to as Bridge Wholesale) is the largest creditor in the liquidation, secured to some extent under equipment-leasing and similar finance arrangements but largely unsecured, and has been appointed a representative defendant for all the creditors of Hartland & Hyde apart from the Deputy Commissioner of Taxation.

The evidence available includes the evidence of both the directors of Hartland & Hyde, Mr Ernest Hyde and Mr Michael Hyde, relating to their understanding and intentions about which company was the employer, and also evidence based on inspection and analysis of huge volumes of business records which are available and might be thought to have some relevance. In some cases the records themselves or copies of them are in evidence, but the volume of potentially relevant material is huge and it was in my view appropriate that the parties brought forward evidence of what much of it would show by analysis and not by tender of the documents themselves.

The true source on which a decision would best be based is the terms of each contract of employment with each staff member. In the nature of things that is not available, and the inquiry retreats to what those terms probably were in a context where the evidence available could only generalise a great many particular arrangements which were probably made orally when staff were engaged. If there were no express terms establishing the identity of the employer, that identity would have to be established by looking at the authority vested in the person who represented the employer in making the contract of employment, and where as here there is no certain basis for that information and authority may have been given by either company, the inquiry again retreats to the intention of those who were the directing minds of the companies and who conferred the authority. Then a yet further retreat must be taken to impute to the directing minds the intention which they would have had if they adverted to the subject. The decision on the facts must be made at that indirect level in the absence of any clear or consistent body of records of board decisions or management decisions. I regard the beliefs and understandings of directors as quite important for making that imputation.

Although very considerable endeavour has been expended on identifying and analysing relevant material in documents the true position about the identity of the employer (or employers) remains obscure and must be resolved by a finding on the civil standard of proof on the balance of probabilities, without certainty and in recognition that certainty is not available. It is possible that the way in which affairs were conducted meant that both Hartland & Hyde and Activities became parties to all or some contracts of employment with employees. It also seems possible that the miasma of inconsistency was created by shuffling identities in some deliberate course of concealment or in pursuit of some improper advantage in dealings with public authorities and others outside the business. It is also possible and more likely that the inconsistencies were the result of lack of competence, lack of advertence to the significance of correct identification and a general lack of appropriate ability on the part of the persons who had the direction of affairs.

Group tax is regulated by Pt. VI Div. 2 of the Income Tax Assessment Act 1936. The Deputy Commissioner's claim for group tax relates to money which was or should have been

ATC 5116

deducted from employees' salaries and wages in 17 months from April 1991 to August 1992, inclusive of both, falling in three different financial years. The total claim is $1,663,251.07; and penalties are also claimed. The Deputy Commissioner is entitled to priority for the group tax (not the penalties) in the liquidation under subss. 221P(2) and (3) of the Income Tax Assessment Act 1936, now repealed but in force at the relevant times; that is to say priority over all other debts except costs charges or expenses of administration and winding-up. The amount of the Commissioner's claim greatly exceeds the amount available in Mr McDonald's hands, so that if Hartland & Hyde is the company liable for group tax, Bridge Wholesale and the other creditors which it represents will not receive any payment in the liquidation.

There is room for disputes about priority among creditors other than the Deputy Commissioner, but this litigation will contribute nothing to their resolution. For employees there is the paradox in that to achieve a priority position they would have to establish that they were employees of Hartland & Hyde yet that fact would postpone them to the Deputy Commissioner. The implications can be left unexplored.

Activities was not placed in liquidation or provisional liquidation or otherwise under Mr McDonald's control. On his appointment as Provisional Liquidator Mr McDonald achieved control of the business and enterprise including relations with the employees, and Activities did not carry on the business, deal with the employees, or in any way offer practical rivalry to Mr McDonald. It was struck off the register under s. 574 of the Law on 6 July 1994. At that time it had not filed Annual Returns for the financial years to 30 June 1992 and 1993 (or 1994). To all appearances it is defunct and there is no reason to think that any liability justly payable by it will be met.

In view of the definition of ``employer'' in s. 221A, the obligations to make deductions and pay the amounts deducted to the Commissioner imposed by subs. 221F(5) and s. 221P(1) may fall on a person who is not the employer in the general sense of being party to a contract of employment. The definition begins: ```Employer' means a person who pays or is liable to pay any salary or wages,...''. Within this definition it is quite possible that one of a number of related companies might be the contractual employer and that another may in fact pay the wages; both would fall within this definition. To establish that Activities was the employer in the general sense would not necessarily be to exclude the liability which the Deputy Commissioner has claimed that Hartland & Hyde has incurred.

It is possible in the application of the definition of ``employer'' in s. 221A for two distinct persons both to be liable to remit amounts for the Commissioner -
Re S & N (Nominees) Pty Ltd (in Liq.) 84 ATC 4253 at 4259. Within groups of companies arrangements are common for one company to hold funds on account of related companies and pay their obligations, with ledger entries to bring home expenses to the company which should bear them in ways which do not affect the bank account. When such a regime existed as it obviously did here, the identity of the company out of the bank account of which an obligation was paid is only a slight indication of the identity of the company which incurred the obligation to pay it. This is particularly so where as here Hartland & Hyde had no bank account when the period began, and any liability whatever which it paid must have been paid by the agency of Activities.

Counsel for Bridge Wholesale contended that S & N Nominees is authority for the proposition that a non-employee payer is liable for deductions but that otherwise the decision does not expand the group of those liable. In my view the possibility that more than one company might incur liability is clear on the terms of the definition. If Hartland & Hyde were the employer but Activities paid the wages both would incur the liability. If Hartland & Hyde paid the wages through the agency of Activities, Hartland & Hyde would incur the liability irrespective of whether it was party to the employment agreements. Hartland & Hyde's dealings with the Australian Taxation Office with respect to Group Tax are feasibly explicable on that basis, and it is hardly possible to understand them on any other basis. This alone is a basis for inferring that Activities had agency authority conferred by Hartland & Hyde to pay the wages.

The printing business carried on by one or other of these companies was said by Mr Michael Hyde to have been established in 1902. Hartland & Hyde was formed in 1937, and thus

ATC 5117

was in existence when the PAYE system was established, while Activities was formed on 16 May 1951. An employer is required by s. 221A(2) to register with the Commissioner of Taxation as a group employer. Hartland & Hyde must have registered at some time, although the records relating to its registration cannot be found; Activities did not. Registration may relate to a person acting on behalf of two or more employers; see subs. 221F(3). It may well be that where a person acting on behalf of several employers is registered as a group employer, that person incurs an obligation to make payments under subs. 221F(5). The records of the Australian Taxation Office show the name of the group employer as ``Hartland & Hyde Pty Ltd & associated companies''; the names of the associated companies are not specified in the Department's record. This is irregular, and is a large part of the cause of trouble. Communications with the Department of Taxation relating to Group Tax were in the name of Hartland & Hyde in the period from April 1991 to August 1992 and at all other times until the provisional liquidation. The Commissioner's records show this, but they show signs that doubts were raised after the provisional liquidation began because in October 1992 a demand for sums including the sums now claimed was made to Activities by the Commissioner. On the evidence, the practice of dealing with the Australian Taxation Office on the basis that Hartland & Hyde was the group employer was of many years standing and uniform at the time the deductions were made. Hartland & Hyde presented to the Australian Taxation Office an unqualified picture of its being responsible for payment of group tax for itself and associated companies, and Activities was not registered and did not communicate with the Office or purport to be a group employer in any way.

The need to identify the particular company to which carrying on the printing business should be attributed brings into consideration the activities and intentions of the individuals who directed and conducted the business and the authority which had been conferred on them. At the material times in 1991 and 1992 both Hartland & Hyde and Activities had two directors, Mr Ernest Hyde who was then about 80 years of age and had been concerned in the business for about 60 years, and his son Mr Michael Hyde, who held the position of Managing Director of Hartland & Hyde but did not exercise the general control over affairs which that title usually implies. Mr Ernest Hyde spoke of himself as Chairman and he exercised general control. Mr Michael Hyde had professional training and experience as a Production Engineer, and he controlled production, marketing and sales, with a general responsibility for technology, but had no financial responsibility.

Mr Phillip Abra was Financial Controller. At one time he had been a director of Activities but by 1991 he no longer was. Mr Abra functioned as Financial Controller for all companies within the group and he made sole decisions on a large number of matters. Mr Abra did not give evidence and evidence about attempts to obtain information from him suggests that his behaviour was evasive. I do not think that his absence as a witness should be reckoned against any party in particular for the purposes of reasoning such as that used in Jones v. Dunkell. His association with financial records which themselves are extremely confused has left me with the impression that it is unlikely that he could give useful evidence in support of any case. Mr Ernest Hyde said ``On most matters he kept me informed but a large proportion were completed without reference. I always got answers to questions I asked of him. The arrangement worked well.''

Management functioned in a highly informal way without records of significant decisions; there were no regular board meetings or management committee meetings, nor were decisions expressed in written form so that it is not to be expected after the lapse of some years and the break-up of the organisation that the purposes for which action was taken could be understood. Both Mr Ernest Hyde (who has died since making his affidavit) and Mr Michael Hyde, who was cross-examined on his affidavit but was in very poor position to give any detailed account of events of the relevant time, gave evidence to the effect that in their intention and understanding the business was the business of Hartland & Hyde, and the employees were employed by Hartland & Hyde.

Understanding of their intentions can be taken further than their assertions in evidence, as there are some striking instances of conduct on their part which bear this out. A very significant example is that on 28 September

ATC 5118

1992, the day before the company went into provisional liquidation on its own application, they as directors made an agreement on behalf of Hartland & Hyde with a newly formed company H & H Services Pty Limited for the sale of the business. Basal to the sale was the assumption that Hartland & Hyde owned the business and the significant assets being goodwill, trade names, equipment, materials and work in progress, and there were provisions for transfer of services of significant employees. The whole arrangement was posited on Hartland & Hyde being the company which conducted the business, owned the assets and employed the staff. The provisional liquidator declined to ratify this agreement and the directors did not take the position that Activities, which they still controlled, owned any of the assets or undertaking.

The Report as to Affairs which the directors gave to the provisional liquidator dated 6 November 1992 in an unqualified way treated Hartland & Hyde as the owner of the business and all significant assets and the employer of staff. Mr Michael Hyde continued to work in the business until the provisional liquidator sold it off in several sales of different parts in December 1992. Mr Michael Hyde when explaining the arrangement of affairs to officers of Australian Taxation Office said to the effect that Hartland & Hyde was the employer.

It is clear that, in the period including April 1991 to August 1992 payments of salary and wages to staff were made out of the bank account conducted by Activities with Westpac. Until 1991, for an unstated period but plainly for many years, Hartland & Hyde had not had a bank account and all funds used in its affairs had been drawn from the bank account conducted by Activities with Westpac. Hartland & Hyde opened a bank account with National Australia Bank about 24 October 1991. This account was closed on 9 July 1992 and a Barclays Bank account was opened at about that time. When Hartland & Hyde did have successive bank accounts Hartland & Hyde usually paid to Activities a cheque for the amount of salaries and wages paid by Activities to staff at about the time they were paid.

Counsel for Bridge Wholesale contended that Harland & Hyde did not pay any of the wages from which group tax deductions should have been made. This is literally correct, but the circumstances mean that identifying the bank account out of which the money was drawn to pay wages has little weight. Further the legislation clearly makes it possible for more than one company to incur liability.

Financial records relating to the conduct of the business do not present any clear picture; at many places they are consistent with Activities being the true employer, and there is no consistent pattern of expenditure relating to employment costs being charged on to Hartland & Hyde, although it seems that that probably happened on some occasions. The records available, although voluminous, are not methodical or complete.

The financial accounts show no uniform picture or internal consistency with respect to identifying which of the two companies incurred significant liabilities or owned significant assets.

Income Tax Returns for Hartland & Hyde for the years of income ending 30 June 1990 and 30 June 1991 appear to show that expenses for operating the business were treated as expenses of Hartland & Hyde, while the corresponding returns of Activities do not show expenses.

It does not appear how salaries and wages were accounted for, or whether or not there was any adjustment between the companies, apart from the faint indication furnished by the series of cheques from Hartland & Hyde to Activities for amounts corresponding with the wages.

Dealings by the companies with other organisations as they appear from the records available to the liquidator have been analysed by Mr McNeil, a consultant to the liquidator's firm and formerly a chartered accountant; he has many years' experience. Mr McNeil's analysis shows a chaotic lack of pattern of use of company names in dealings with others, including employees; and written records relating to employees often indicate that Activities was the employer. Records relating to Fringe Benefits Tax analysed by Mr McNeil were in the name of Hartland & Hyde. Records relating to payroll tax payable to the State of New South Wales were in the name of Activities, with occasional exceptions years before the relevant period, the later exception being in June 1987. Records relating to employees analysed by Mr McNeil include many computer print-outs of monthly payroll details and bundles of group certificates which refer to the employer as Activities. The files relating to the Workers Compensation

ATC 5119

Insurance refer consistently to the employer and the insured as Activities. Files relating to superannuation present a confused picture, it sometimes being difficult to identify the employer referred to, but predominantly where the employer referred to can be identified it is Activities. In dealings with employees, the greater number of references identifying the name of the employer is to Activities, but there is no uniformity.

The records bearing directly on employment show a very confused picture. No pattern is discernible to me, and my conclusion is that these records were maintained with indifference to their accuracy in this respect. They have no weight for determining which company or companies was in a relationship of employment with the staff. (Of course the possibilities include that both were employers jointly, and that different staff members had different employment relationships.)

On the whole of the material before me it appears that persons in control of the affairs of the companies namely Mr Ernest Hyde, Mr Michael Hyde and Mr Phillip Abra did not attribute appropriate importance to identifying, even in their own minds, the company which engaged in particular transactions and relationships. If there had been competent and conscientious discharge by the directors and the financial controller of their functions the answer would be clear. The obscurity of identifying which company was concerned in the employment relationship and which company incurred liability to remit deductions is deeper than obscurity of means of proof; it is an obscurity of the subject matter itself. The views of the directors on the subject of which company they represented in the matters of employment and of incurring liability for group tax are the most significant basis for a finding. Their views can be understood not only from their own evidence about their intentions but from their behaviour in the most striking instances relating to their attempt to sell the business in the name of Hartland & Hyde and their attribution of the business to Hartland & Hyde in their Report as to Affairs. In my judgment the probabilities favour the finding that Hartland & Hyde was the true employer, in the general sense and also in the defined sense that it incurred liability to pay wages and remit deductions. With an element of artificiality which is not uncommon when conduct has to be attributed to one of several related companies, it must be supposed that in some notional sense the payment of wages and the many other significant acts which Activities performed in the character of an employer were undertaken under agency authority conferred by Hartland & Hyde.

My conclusion in the presence of a large body of evidence on which no certain conclusion could be based is that the probabilities are that Hartland & Hyde incurred liability for Group Tax deductions. The elements which have had the greatest influence are the manner in which Hartland & Hyde dealt with the Australian Taxation Office on the subject of liability for Group Tax deductions, and the beliefs and understandings of Mr Ernest Hyde and Mr Michael Hyde the directors. There is no certainty in this conclusion but the probabilities favour it.

On the basis of this finding I am of the view that a declaration should be made establishing the first defendants' entitlement. The appropriate form of relief is in accordance with claims 2, 3 and 4 in the Summons, establishing the position by a declaration of right, and the alternative forms of orders relating to directions to the liquidator and to the effectiveness of the proof of debt need not be made.

I make orders in accordance with claims 2, 3 and 4 in the Summons.

This information is provided by CCH Australia Limited Link opens in new window. View the disclaimer and notice of copyright.