DFC of T v FLANAGAN

Members:
Patten AJ

Tribunal:
New South Wales Supreme Court

MEDIA NEUTRAL CITATION: [2007] NSWSC 304

Decision date: 10 April 2007

Patten AJ

1. The Plaintiff claims that the Defendant is liable to penalties as a director of Halion Pty Ltd (the Company) in respect of its unpaid taxation liabilities. At the hearing, Mr R Quinn of counsel, appeared for the Plaintiff. The Defendant represented himself.

2. Two separate amounts are claimed viz $516,945 (the first claim) being alleged penalties for tax liabilities incurred by the Company in the period 1 September 2000 to 30 November 2001 and $103,641 (the second claim) for penalties representing tax liabilities incurred by the Company in the period 1 December 2001 to 28 February 2002.

3. The first claim is made on an alternative basis. Primarily, it is alleged that the sum is due by virtue of the Company's default in complying with an agreement entered into pursuant to s 222ALA of the Income Tax Assessment Act (the Tax Act). The alternative basis relied upon, and the basis for the second claim, is the Defendant's alleged failure to comply with the requirements stipulated in notices served under s 222 AOE of the Tax Act.

4. A number of statutory provisions are relevant to the case. The obligations of the company to deduct tax from its employees' salary and wages and to pay the amount of such deductions to the Plaintiff are contained respectively in Divisions 12 and 16 of Part 2-5 of Schedule 1 to the Taxation Administration Act (the Administration Act). The relevant sections are:

"12-35 Payment to employee

An entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity)"

"16-30 Failure to withhold civil penalty for entity other than exempt Australian government agency.

(1) An entity (except an "exempt Australian government agency) that:

(a) fails to withhold an amount as required by Division 12; or

(b) fails to pay an amount to the commissioner as required by Division 13 or 14;

is liable to pay to the Commissioner a penalty (the penalty amount) equal to that amount.

2. The penalty amount is due at the time when the entity would have had to pay to the Commissioner the amount referred to in subsection (1)."

"16.70 Entity to pay amounts to Commissioner

(1) An entity that withholds an amount under Division 12 must pay the amount to the Commissioner in accordance with this subdivision.

(2) An entity required to pay an amount to the Commissioner under Division 13 or 14 must pay that amount to the Commissioner in accordance with this Subdivision (except section s 16-75 and 16-80)"

5. In relation to the liability of the Defendant, Divisions 8 and 9 of the Tax Act apply. Sections 222ALA, 222ANA, 222AOA, 222AOB, 222AOC, 222AOD, 222AOE, 222AOF, 222AOJ, 222AQA, 222AQD particularly bear upon this matter, the relevant provisions being as follows:

"222ALA Commissioner may make agreement

(1) The Commissioner may make with a person a written agreement under which the person is to pay specified amounts, on specified days, for the purpose of discharging one or more specified liabilities of the person, each of which is:

(a) a liability under a remittance provision; or

(b) a liability to pay an estimate.

(2) An agreement may contain other provisions.

(3) An agreement may also provide that, if the person contravenes specified provisions of it, so much of the total of the specified amounts as remains unpaid

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becomes due and payable on the day of the contravention. If an agreement so provides, the specified provisions are called special conditions.

(4) The amounts specified in an agreement are due and payable on the specified days.

(5) However, if:

(a) a specified amount is not paid on or before the specified day; or

(b) the person contravenes a special condition;

so much of the total of the specified amounts as remains unpaid:

(c) becomes due and payable on that day, or on the day of the contravention, as the case may be; and

(d) is called the balance payable under the agreement.

222ANA Object and outline

(1) The purpose of this Division is to ensure that a company either meets its obligations under Division 8 of this Act, or under Subdivision 16-B in Schedule 1 to the Taxation Administration Act 1953, or goes promptly into voluntary administration under Part 5.3A of the Corporations Act 2001 or into liquidation.

(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.

(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.

222AOA Application

(1) This Subdivision applies if a company incorporated under the Corporations Act 2001 has:

(a) made one or more deductions having a particular due date, for the purposes of Division 1AA, 2, 3A, 3B or 4; or

(b) withheld one or more amounts having a particular due date, for the purposes of Division 12 in Schedule 1 to the Taxation Administration Act 1953; or

222AOB Directors to cause company to remit or to go into voluntary administration or liquidation--deductions and amounts withheld

(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 its obligations in relation to deductions (if any) and amounts withheld (if any) 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 (if any) and amounts withheld (if any);

(c) appoint an administrator of the company under section 436A of the Corporations Act 2001;

(d) begin to be wound up within the meaning of that Act.

(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 Act 2001; or

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(d) the company begins to be wound up within the meaning of that Act;

whichever first happens, even if the directors did not cause the event to happen.

(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.

222AOC Penalty for directors in office on or before due date

(1) 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 or amounts withheld:

(a) that the company has deducted for the purposes of Division 1AAA, 3B or 4 of this Act, or withheld for the purposes of Division 12 in Schedule 1 to the Taxation Administration Act 1953 (as the case requires); and

(b) whose due date is the same as the due date.

222AOD Penalty for new directors

(1) If:

(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 subsection 222AOC(1).

222AOE Commissioner must give 14 days' notice before recovering penalty

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 subsection 222AOC(1), (1A) or (2) (whichever relates to the penalty); 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 Act 2001; or

(iv) the company is being wound up.

22AOF How notice may be given

(1) If it appears from ASIC documents that a person is, or has been within the last 7 days, a director of the company, the Commissioner may give the person a notice under section 222AOE by leaving it at, or sending it by post to, an address that appears from such documents to be, or to have been within the last 7 days, the person's place of residence or business.

(2) In this section:

'ASIC document' means a return:

(a) lodged with the Australian Securities and Investments Commission under section 205B or 345 of the Corporations Act 2001; or

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(b) lodged with a person under a law that, for the purposes of the Corporations Act 2001, is a previous law corresponding to section 205B or 345 of that Act.

222AOJ Defences

(1) This section has effect for the purposes of:

(a) proceedings to recover from a person a penalty payable under this Subdivision; or

(b) proceedings under section 222AOI against a person of the kind referred to in paragraph 222AOI(d).

(2) It is a defence if it is proved that, because of illness or for some other good reason, the person did not take part in the management of the company at any time when:

(a) the person was a director; and

(b) the directors were under the obligation to comply with subsection 222AOB(1) or 222AOBAA(1).

(3) 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), 222AOBAA(1) or 222AOBA(1) (whichever is relevant); or

(b) there were no such steps that the person could have taken.

(4) In subsection (3):

'reasonable' means reasonable having regard to:

(a) when, and for how long, the person was a director and took part in the management of the company; and

(b) all other relevant circumstances.

SECT 222AQA

Directors to ensure that company complies with payment agreement

(1) If a company incorporated under the Corporations Act 2001 makes an agreement with the Commissioner under section 222ALA of this Act, the persons who are directors of the company from time to time must cause the company to comply with the agreement.

(2) If the company contravenes the agreement by failing to pay a specified amount on or before the specified day, or by contravening a special condition, each person who was a director of the company at any time during the period beginning on the day when the agreement was made and ending on the day of the contravention is liable to pay to the Commissioner, by way of penalty, an amount equal to the balance payable under the agreement.

222AQD Defences

(1) This section has effect for the purposes of:

(a) proceedings to recover from a person a penalty payable under section 222AQA; or

(b) proceedings under section 222AQC against a person of the kind referred to in paragraph 222AQC(d).

(2) It is a defence if it is proved that, because of illness or for some other good reason, the person did not take part in the management of the company at any time, during the period referred to in subsection 222AQA(2), when the person was a director.

(3) It is also a defence if it is proved that:

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(a) the person took all reasonable steps to `ensure that the company complied with the agreement or

(b) there were no such steps that the person could have taken.

(4) In subsection (3):

'reasonable' means reasonable having regard to:

(a) when, and for how long, the person was a director and took part in the management of the company; and

(b) all other relevant circumstances.

(5) If the person was a director of the company at the time when the agreement was made, he or she is not entitled to rely on a defence under subsection (2) or (3) unless it is also proved that, at that time, the person had reasonable grounds to expect, and did expect, that the company would comply with the agreement."

6. The Plaintiff's Further Amended Statement of Claim to which for convenience I will hereafter simply refer as the Statement of Claim alleged, inter alia:

• the right of the Plaintiff to sue;
• the incorporation of the company;
• the withholding of amounts by the company under Division 12 of the Administration Act;
• details of the company's liabilities in respect of amounts withheld, including, in respect of each deduction, the period of deduction, which encompassed the first deduction day, the Due Date for each deduction and the amount thereof;
• failure to comply with s 222AOB of the Tax Act in respect of any of the amounts deducted or with held;
• that the defendant was a Director of the company continuously from 14 December 2001 to 7 March 2002;
• that by force of s 222 AOC of the Tax Act, the Defendant is liable to pay to the Plaintiff the total sum of $617,669.39;
• that the Plaintiff issued notices to the Defendant pursuant to s 222 AOE of the Tax Act, on 10 January 2002 and 22 May 2002, respectively specifying a penalty of $516,945 in respect of the period 1 September 2000 to 30 November 2001, and a penalty of $103,641 in respect of the period 1 December 2001 to 28 February 2002.
• that the Defendant remains liable to the Plaintiff for the penalties by reason of the fact that, at the end of 14 days after service of the notices, none of the conditions specified in s 222AOE had been satisfied.
• Alternative, to the claim in respect of the notice served on 10 January 2002:
• that an agreement under s 222ALA was entered into between the Company and the Plaintiff;
• that the company contravened the agreement by failing to pay any of the instalments or amounts stipulated on the due dates for payment;
• that as a consequence the unpaid amount of $516,945 became payable by the company;
• that the Defendant was a director of the Company during the whole of the period from the date when the agreement was made to the date of contravention.
• that the Defendant by force of s 222AQA is liable to a penalty equal to the balance payable under the agreement.

7. The Defendant's defence admitted the incorporation of the Company, admitted that he "received a Director's Notice dated 22 May 2002"; admitted "that an agreement under s 222ALA was in force at the end of fourteen days after Director's Penalty Notice dated 10 January 2002 was allegedly sent"; and that he was a director of the company between 14 December 2001 and "the morning of 25 January 2002". Otherwise he put in issue or denied the matters alleged against him.

8. As to his directorship of the company, the Defendant also pleaded:

"In further response to paragraph 6 of the claim, the Defendant states that he was only a director of the company for the period 14 December 2001 to 25 January 2002, at which time he resigned as director of the

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company. In further answer to paragraph 6 to the claim, the Defendant will say that following his resignation as director of the company on 25 January 2002, he took no further part in the management of the company."

9. As to the second penalty notice sent to him the Defendant said in his defence:-

"In respect of the Director's Penalty Notice sent by the Plaintiff to the Defendant dated 22 May 2002:-

i. in respect of the payment the due date of which was 21 December 2001, the Defendant took all reasonable steps to ensure that the directors complied with subsection 222AOB (1), alternatively there were no such steps that the Defendant could have taken;

ii. the due dates of 28 February 2002 and 21 February 2002 both occurred after the Defendant's resignation as a director of the company and there were no steps that the Defendant could have taken to ensure that the directors complied with subsection 222AOB(1) in respect of those payments; and

iii the Defendant was no longer a director of the company at the time he received the said Director's Penalty Notice."

10. Regarding the Plaintiff's claim that the Defendant is liable to it under s 222AQA of the Tax Act following default by the company in complying with the provisions of the agreement entered into under s 222ALA, the Defendant pleaded:-

"In further response to paragraph 18 of the claim, the Defendant states that:

a. he was not a director of the company at the time the agreement was made;

b. he did not take part in the management of the company from the time that he resigned as a director of it; and

c. there were no steps he could have taken to ensure that the company complied with the agreement."

11. In support of its case, the plaintiff relied upon admissions by the Defendant in his pleading, upon an evidentiary certificate by a Deputy Commissioner of Taxation under s 255-45 of the Tax Act; upon the evidentiary force given to averments in the Statement of Claim by s 255-50; and upon affidavit and oral evidence.

12. As to admissions on the pleadings, the Defendant contended that his admission of receipt of a Director's Penalty Notice dated 22 May 2002 was not tantamount, as I understand his submission, to an admission that he received the notice on or about 22 May 2002 as opposed, for instance, to some much later time. I reject this contention. In the context, in my opinion, he admitted by his defence, receipt in the ordinary course of the mail of a Director's Penalty Notice dated 22 may 2002 and posted about that time.

13. The certificate under s255-45 by a Deputy Commission of Taxation states:

"In accordance with section 255-45 Schedule 1 Taxation Administration Act 1953, I certify:

1. That Kean Henry Flanagan has a tax related liability, namely penalties under Division 9 of Part V1 of the Income Tax Assessment Act 1936

2. That notices required to be served on Kean Henry Flanagan under section 222AOE of the Income Tax Assessment Act 1936 in relation to those tax related liabilities were served on Kean Henry Flanagan under a taxation law.

3. That as at 2 March 2007, the sum of $564,153.86 is a debt due and payable to the Commonwealth by the said Kean Henry Flanagan in relation to the tax related liabilities referred to in this certificate."

14. The affidavit of Michelle Altaris (formerly Bennetts) an officer of the Australian Taxation Office (ATO) deposed to these matters:

• On 22 May 2002 she prepared a Notice to the Defendant under s 222AOE of the Tax Act, in relation to amounts withheld by the company under the Administration Act, which remained unpaid. The notice stipulated that the Company had unpaid taxation liabilities totalling $103,641 for the period 1 December 2001 to 28 February 2002.

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• She also prepared a letter to the Defendant enclosing the notice and explaining the significance of it to him.
• She placed the notice and the letter in an envelope addressed to the Defendant at 3 Wanganella Street Balgowlah NSW 2093, sealed the envelope, affixed a postage stamp, and on 22 May 2002 posted it in an Australia Post box at the corner of Mitchell and McLachlan Streets Darwin.
• The address 3 Wanganella Street Balgowlah NSW 2093 was the address shown for the Defendant as a previous director of the Company in an extract prepared by the Australian Securities and Investments Commission (ASIC)on 22 May 2002.
• The extract stated that the Defendant was a previous director of the company from 15 February 1999 to 1 June 2001 and again from 14 December 2001 to 7 March 2002.
• That, according to the records of the ATO the envelope was not returned unclaimed.

15. Ms Altaris was cross-examined about a somewhat incomprehensible letter dated 12 June 2002 apparently written by her to the Defendant. The letter was tendered by the Defendant as exhibit 1 but I do not regard it as having any significance in this case. Very possibly it was not intended to be addressed to the Defendant at all. Otherwise her evidence seemed to be unchallenged.

16. Ms Lee Baker, another ATO officer, gave evidence that on 10 January 2002 she prepared and placed in a stamped envelope and posted in Upper Mount Gravatt, Queensland, a notice addressed to the Defendant at 3 Wanganella Street Balgowlah NSW 2093. The notice specified $516,945 as the total of outstanding amounts withheld by the Company. She testified that the address 3 Wanganella Street Balgowlah NSW 2003 appeared as the Defendant's place of residence on an extract in relation to the company, obtained from the ASIC on 9 January 2002. In that extract the Defendant was shown as a current director of the Company having been appointed on 14 December 2001. Ms Baker deposed to the fact that according to the records of the ATO, the envelope sent on 10 January 2002 was not returned to it. Her evidence was not challenged by the Defendant.

17. Two affidavits of ATO officer, Mr Peter McIntosh, were relied upon by the Plaintiff and he gave oral evidence. He testified to a familiarity with the computer accounting system employed by the ATO from which he stated that the Company, during the period 1 September 2000 to 28 February 2002, withheld amounts under Division 12 of Schedule 1 to the Administration Act totalling $620,586 and as to the due date for payment to the Plaintiff of each amount withheld. The first due date was 21 October 2000 and the last 21 March 2002. He said that none of the amounts withheld was paid to the Plaintiff on the due date. He testified that the company became entitled to credits viz $1134.16 on 6 August 2002, $1782.45 on 25 March 2004, and $53,515.53 on 15 August 2006, the total of which, $56,432.14 was applied against the liability of the Company to the Plaintiff in respect of the first and second amounts withheld.

18. Mr McIntosh identified a letter dated 25 January 2002 written to the Plaintiff by the Company over the hand of Mr Neil Green, company secretary, marked for the attention of Ms Baker which omitting formal parts read:-

"I refer to our telephone conversation this morning and the documents I have provided you by post and email over the past couple of weeks in support of a request to enter into an arrangement in relation to a debt owing to the tax office.

As explained to you, the company has now secured its formal offer of an equity injection and a debt facility such that it will be able to achieve its objectives, including the acquisition of the businesses detailed to you, fund the future operations and eliminate certain secured debts. The resultant business is strong and viable, as indicated to you.

Accompanying this letter is the Subscription Agreement, for a total of $2.5m, payable as to $1.5m. by no later than 15 February and $1.0m by 31 March, and the Bank West offer of a total facility of $4.5m. One of the preconditions to the debt facility was a private equity injection of at least $1.5m, which will have been satisfied by the equity under the Subscription Agreement. In addition, all of the forecasts and cash flows have been based on an equity investment of

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only $1.5m. The additional $1.0m has been negotiated to ensure that there is extra funding available to implement some extra initiatives, and to cover for the fact that there has been some slippage due to funds not being available earlier, which has had the effect of delaying some initiatives.

Based on extra funding, and taking some of your comments in relation to your own guidelines into account, I would like to propose that the arrangement I had requested initially be varied such that Halion will make monthly reductions of the tax debts of $75,000, commencing 15 February, 2002, until the debt is fully extinguished. The cash flows and forecasts you have already seen together with the additional equity would ensure that this escalated payment programme could be achieved, and would have the benefit of eliminating the balance within 12 months, and reducing the GIC ultimately payable by the company. Future remittances in relation to current amounts would be paid by their respective due dates.

In view of the issue of the DPN's, I would appreciate it if you could advise acceptance of the formal agreement as soon as possible."

19. Ms Baker responded with a facsimile transmission dated 25 January 2002:

"222ALA agreement for you to sign original sent by mail this afternoon."

20. In turn, Mr Green replied in a facsimile transmission dated 25 January 2002:-

"As agreed I have had the Payment Agreement signed and now returned. Could you please have it signed and returned to us.

I will then await the original document in the mail, which will also be re-executed in original, and returned to you."

21. The document which accompanied Mr Green's facsimile of 25 January 2002 was signed on behalf of the Company by 2 directors. Later, as it appears the document was signed by a Deputy Commissioner of Taxation and dated 30 January 2002.

22. Under the agreement the company acknowledged its taxation liability totalling $516,945 and agreed to pay that liability by specified instalments, ending on 15 August 2002.

23. According to the unchallenged evidence of Mr McIntosh, none of the instalments was paid. Such a default was contemplated by clause 4 of the agreement:

"If the specified amount is not paid to the Commissioner on or before the specified day in accordance with the provisions of Clause 2, so much of the total of the specified amounts in Column 4 of the Schedule that remains unpaid under this Agreement on that specified day, becomes due and payable on that day as the balance payable under this agreement.

24. In my opinion, the facsimile sent by Ms Baker to Mr Green on 25 January 2002 constituted an offer on behalf of the Plaintiff to enter into an agreement with the Company in accordance with the form of agreement submitted. That offer was accepted on 25 January 2002 by the Company on that date, signing the form of agreement without alteration and returning it to Ms Baker. Under ordinary principles of contract law the agreement was concluded on 25 January 2002 and the fact that it was not signed by the Deputy Commissioner and dated until a few days later has no bearing on the legal relationship created on 25 January 2002.

25. I am also of the opinion that the agreement constituted an agreement under s 222ALA of the Tax Act, as it purports to be. It provides for the payment of specified amounts on specified days for the purpose of discharging specified liabilities, each of which was a liability under a "remittance provision" as that expression was defined.

26. By force of the agreement itself, coupled with the provisions of s 222ALA(5), the company's default in paying the agreed instalments resulted in the balance due under the agreement becoming payable. This default also enlivened the potential liability of directors by virtue of s 222AQA.

27. As I have already indicated ASIC records in relation to the Company show that the Defendant was a director from 14 December 2001 to 7 March 2002. He was thus, according to that record, a director on 25 January 2002 when, as I have found, the s 222ALA

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agreement was entered into or even on 30 January 2002 when it is dated. On that basis he was a director within s 222AQA, "at any time during the period beginning on the day when the agreement was made".

28. However, as I have said, the Defendant pleaded that he ceased to be a director on 25 January 2002 and thereafter took no further part in the management of the Company. He also pleaded that he was not a director of the company at the time the agreement was made and there were no steps he could have taken to ensure that the Company complied with the agreement. This last mentioned assertion and the assertion that he took no part in the management of the Company after 25 January 2002 will require further consideration.

29. At this stage, however, it can be said that the finding that an agreement under s 222ALA was entered into on 25 January 2002 obviates the need to consider further the claim by the Plaintiff based upon service of a notice on 10 January 2002. The company within the stipulated time complied with the notice by entering into an agreement under s 222ALA and thereby discharged any liability of the Defendant arising under it (s 222AOG). If necessary, I would find that a notice complying with s 222AOE was duly served on the Defendant on or about 10 January 2002.

30. The Defendant, in my opinion carries the onus of establishing the defences provided for by s 222 AOJ and s 222 AQD as a matter of statutory construction, if not because of the evidentiary provisions of s 255-45 and s 255-50. He did not give testimony himself and adduced no evidence except exhibit 1, about which I have already made comment.

31. Nonetheless, the Plaintiff tendered documents which became exhibits E, F, G, H and J and which, to my mind, demonstrate that the Defendant undertook the primary or, at least, a leading role in the management of the Company well into February 2002. For instance, exhibit J comprises an email dated 20 February 2002 sent by the Defendant to members of the staff of the Company. The email omitting formal parts states:-

"Dear All,

There are a number of issues floating around at the moment that are wasting an enormous amount of our time, effort and money. The purpose of me sending this out to you is to address certain of the issues and to invite your response on any issue that I haven't covered, or is worrying you. Please feel free to send to me, via return email, any question or query you have and I will do my best to answer you quickly, confidentially.

The current situation is as follows:

• I am the Managing Director of this company. I also happen to be by far its largest shareholder (owner).

• Ever since I bought this company there have been several unsubstantiated and stupid rumours floating around. Most of these rumours have been of a malicious nature and have been instigated by people (fuckwits) who would like to see Halion fail. Some of these idiots have their own agendas and self-interests at heart.

• Despite all these major distractions Halion is at a point where:

Funding: as you are all acutely aware, funding has been a major issue. The company has attempted to raise money in various forms over the past two years. A number of our attempts have been thwarted by events totally out of our control. We had the 11 Sept issue, we had ASIC bring in a new law in the middle of our previous prospectus which meant we had to withdraw it and we have had a few dickheads who would prefer to see Halion fail.

As of now, Halion has a written undertaking, which is enforceable at Law, that an Investment group will invest into Halion a few million dollars.

We also have written offers from two banks (conditions that we are meeting apply) to fund Halion to the tune of several million dollars.

These two lines of funding are imminent.

With regards other issues.

• Yes we are in the process of buying CARS. Once completed, Andy Bell will take over as the "Head of Security". For those of you that are concerned about titles, it has not been decided as yet.

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• We are also in the process of completing the acquisition of Fogl Knight. The combination of the CARS and Fogl Knight businesses will create a significant manpower company, with the ability to offer a range of complementary services to the group's client base.

• Finally, we are also in the process of completing the acquisition of CSS. This acquisition is very important to Halion as it adds a new dimension to the Halion "offering". It is my opinion that Steve and his guys will give Halion a totally new angle to come at the traditional market, that is not so say that we will not continue to trade in the traditional market in the Halion integrated way (offering guarding response and monitoring) what I mean to say is that Steve and his guys have the potential to offer Halion's clients an edge over our rivals.

• I would like to apologise for the late payment of some of your salaries last month and hope that by paying you slightly early this month we have restored some of your faith.

I hope this clarifies some of the issues that are floating around. I would like to think that you can get back to work and make Halion the type of company that we can all be proud of working for. It is clearly in every member of this company's interest to work as a TEAM going forward.

Once again I extend the offer to make any other issues, problems or just plain questions known to me via return mail and I will address them quickly and confidentially."

32. In the absence of any evidence to the contrary, I accept, in accordance with the records of ASIC, that the Defendant was a director of the Company until 7 March 2002. Upon the evidence, I infer that he continued as Managing Director until that date and thus continued to be involved in the management of the Company. He has therefore, up to 7 March 2002 at least, failed to make out the statutory defences provided for by sections 222AOJ and 222AQD to the extent that they put in issue his directorship of the Company beyond 25 January 2002. Of course, in respect of the s 222AQD defence, there is the additional hurdle contained in ss (5) as to which there was no evidence except perhaps inferentially from exhibits E, F, G and H. They referred to negotiations for a company Amco Consortium Company Pty Ltd to subscribe further capital to the Company.

"In the absence of other evidence, these exhibits do not persuade me to find affirmatively that the Defendant, as at 25 January 2002, had reasonable grounds to expect, and did expect, that the Company would comply with the agreement."

33. I am satisfied that the Company had liabilities to the Plaintiff as set forth in the s 222ALA agreement and that the company defaulted in its obligations under that agreement. The consequent liability of the Defendant for the balance due under the agreement depended only upon him being a director when the agreement was entered into viz 25 January 2002and upon him failing to establish the defences provided for by s 222AQD.

34. In my opinion, the evidence overwhelmingly establishes the liability of the Defendant for the sum payable under the s 222ALA agreement against which he is entitled to a credit for the total of the sums identified by Mr McIntosh, namely $56,432.14. The liability of the Defendant in respect of the breach of the s 222ALA agreement is thus $460,512.86.

35. As to that part of the Plaintiff's claim which relies on service of the notice dated 22 May 2002 under s 222AOE, I am satisfied that as at that date there was an underlying indebtedness of the Company to the Plaintiff as set forth in the notice and that such indebtedness related to money withheld within s 222AOA.

36. The notice to the Defendant was posted on 22 May 2002. Ms Altaris (Bennetts) based her actions on s 222AOF but, in my opinion, that section was not available to her as the ASIC document she relied on, although itself dated 22 May 2002, showed that the Defendant ceased to be a director on 7 March 2002. In my opinion, the opening words of s222AOF require the extract to show that the relevant person remained a director or had been a director within the last 7 days. In other words, the focus is on the currency of the directorship rather than the recency of the extract, although obviously the extract would also need to be recent.

37.

ATC 4481

I cannot conceive that parliament would have intended that reliance could be placed upon an ASIC extract in relation to the residential address of a person who may have ceased to be a director months, or even years previously, and had neither the obligation nor the means to update the record.

38. However, reliance on s 222AOF is not the exclusive method of service upon a director or former director. The notice could have been served in accordance with s28A of the Acts Interpretation Act by sending it by prepaid post to "the address of the place of residence …..….last known (to the Plaintiff)". If necessary, I would be willing to infer that 3 Wanganella Street, Balgowlah, NSW 2093 was the last residential address of the Defendant known to the Plaintiff. Such an inference may, I think, be more readily drawn in the absence of any evidence upon the subject from the Defendant, himself.

39. However, in any event, in my opinion, the Plaintiff is entitled to rely upon the Defendant's admission on the pleadings. I am satisfied, as indicated earlier, that the Defendant admitted receipt of the notice dated 22 May 2002 in the ordinary course of the mail, shortly after 22 May 2002.

40. It seems to be common ground that the notice of 22 May 2002 was not complied with and, accordingly, unless he proves one of the defences afforded by s 222AOJ, the Defendant is liable for the amount claimed if he were a director of the Company at a time after the first deduction day. Deductions were made in the period from 1 December 2001 to 28 February 2002. For most of that period namely, the whole of it, from 14 December 2001, the Defendant was a director of the Company. The fact that he was not a director for the whole of the period or even at the time of service of the notice is irrelevant, (see
Canty v Deputy Commissioner of Taxation 59 ATR 408). As there was no evidence to support the defences provided for by s 222 AOJ, I hold him liable for the sum claimed in the notice dated 22 May 2002, namely $103,641

41. In the result, the Plaintiff is entitled to a verdict for $564,153.86. As to interest, I will provisionally allow interest in the sum of $151,239.96 as sought in Mr Quinn's submissions. That figure, which was not the subject of argument, may well require revision and I will give the parties liberty to apply for that purpose. Costs should follow the event.

42. I make the following orders:

1. Verdict for the Plaintiff in the sum of $564,153.86.
2. Interest provisionally allowed at $151,239.96.
3. Direct judgment for the Plaintiff in the sum of $715,393.82 inclusive of interest unless within 14 days either party applies for revision of the sum allowed for interest.
4. Defendant to pay Plaintiff's costs.
5. Exhibits may be returned.

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