DFC of T v DICK

Judges:
Spigelman CJ
Santow JA
Basten JA

Court:
New South Wales Court of Appeal

MEDIA NEUTRAL CITATION: [2007] NSWCA 190

Judgment date: 28 June 2007

Spigelman CJ

1. I have had the benefit of reading the judgment of Santow JA in draft. His Honour sets out the background facts, the relevant legislative provisions and identifies the issues before the Court.

2. Section 1318 of the Corporations Act 2001 empowers the Court to make orders relieving a person from liability with respect to actual or prospective claims made in civil proceedings in respect of " negligence, default, breach of trust or breach of duty " . In the present case the relevant words are either " default " or " breach of duty " .

3. His Honour Johnstone DCJ, found that each of these two elements was satisfied by the relevant provisions of Divs 8 and 9 of the Income Tax Assessment Act 1936 ( " ITAA " ), which provisions are set out in full by Santow JA.

The ITAA regime

4. The first directly operative provision, relevant for the determination of the issue before the Court, is s 222AOB of the ITAA which imposes an obligation on all persons who are directors of a company at a time when, relevantly, a PAYG deduction was made by the company. Each director " must cause the company to do at least one of the following " namely:

5. 

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The second relevant step in the statutory scheme under the ITAA is the liability imposed by s 222AOC. That section applies if s 222AOB is " not complied with " . This is a reference to the statutory obligation imposed upon the directors of the company, rather than a reference to the original obligation of the company itself. By force of s 222AOC each director " is liable to pay to the Commissioner, by way of penalty, an amount equal to the unpaid amount of the company ' s liability " .

6. Provision is then made for the Commissioner to give a director notice before proceedings to recover a penalty (s 222AOE). Furthermore, the penalty imposed by force of s 222AOC is itself remitted by force of s 222AOG if s 222AOB " is complied with " within 14 days after the Commissioner gives the person such a notice.

7. Section 222AOJ provides for certain defences in any proceedings to recover a penalty payable. The penalty is recoverable as a debt due to the Commonwealth pursuant to s 255-5(1) of the Taxation Administration Act 1953 (Cth).

8. The formulation in s 222AOB(1), that a director " must cause the company " to do one of four things, can fall within the natural and ordinary meaning of the word " duty " for purposes of a formulation such as " breach of duty " . Furthermore, the failure to do something which a person " must cause " to occur may constitute a " default " in that word ' s ordinary meaning, as confirmed by the formulation " not complied with " , found in each of s 222AOC(1) and s 222AOG.

9. The issue in the present appeal, in my opinion, falls to be determined on the basis of whether or not the words found in s 1318 are intended to apply to obligations imposed by statute other than by the Corporations Act itself.

Interpreting s 1318

10. Although words such as " breach of duty " and " default " are capable of extending, respectively, to a breach of statutory duty and to a contravention of a statutory provision, there are textual and contextual reasons for concluding that that was not the intention behind the use of these particular words in s 1318.

11. The words appear interspersed in a context which extends to " civil proceedings … for negligence, default, breach of trust or breach of duty " . Words such as " negligence " and " breach of trust " would not extend, in their natural and ordinary meanings to statutory obligations. Each clearly refers to obligations under the general law. In my opinion, the other words should be similarly so confined, save with respect to many, if not all, of the obligations imposed by the Corporations Act itself.

12. The relevant principle of statutory interpretation is noscitur a sociis, which has been imaginatively translated by Lord McMillan as " words of a feather flock together " . As his Lordship went on to explain the principle: " The meaning of a word is to be judged by the company it keeps " . (Lord McMillan Law & Other Things Cambridge Uni P, Cambridge (1937) p166.)

13. This general principle of the law of interpretation has a number of specific sub-principles, including the ejusdem generis rule. The relevant sub-principle for present purposes is the maxim propounded by Lord Bacon: copulatio verborum indicat acceptationem in eodem sensu - the linking of words indicates that they should be understood in the same sense. As Lord Kenyon CJ once put it, where a word " stands with " other words it " must mean something analogous to them " . (
Evans v Stevens (1791) 4 TR 224 ; 100 ER 986 at 987. See also W J Byrne (ed) Broomes Legal Maxims (9th ed) Sweet & Maxwell London (1924) pp373-374.) This principle was recently applied by this Court in
Lend Lease Real Estate Investments Limited v G P T Re Limited [ 2006 ] NSWCA 207 at 30-31 and see
National Roads & Motorists ' Association v Whitlam [ 2007 ] NSWCA 81 at [ 63 ] .

14. As I pointed out in
Lend Lease v GPT supra at [ 31 ] , Lord Diplock warned in
Letang v Cooper [ 1965 ] 1 QB 232 at 247:

" The maxim noscitur a sociis is always a treacherous one unless you know the societas to which the socii belong. "

15. In s 1318 of the Corporations Act, the range of words chosen are interrelated, overlapping expressions intended to cover a wide field within the context of civil proceedings. The relevant words are " breach of

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duty " and " default " . In my opinion the words used do not suggest that the field should extend to duties imposed by statutes or contraventions of statutory provisions which impose obligations on directors and the other persons to whom s 1318 extends. However, it is a short step, long since taken, to accept that s 1318 does apply to civil proceedings with respect to duties imposed by, or contraventions of, the Corporations Act itself, particularly as many of the statutory duties reflect the general law.

16. If s 1318 were to extend to statutory obligations, it would apply to a broad range of conduct, which has no relationship to corporations law, by persons acting in any of the following capacities:

17. The possibility of impact upon a wide range of other statutes, which have statutory objects quite distinct from the Corporations Act or the general law relating to corporations, suggests that it is unlikely Parliament intended any such wide ranging application. It is, for example, common for occupational health and safety legislation or consumer protection legislation to impose obligations upon directors and management.

18. Nothing in the scope and purpose of the legislation, nor in the text to be interpreted, suggests a legislative intention to qualify every statute which imposes obligations upon company directors etc. as such, either extant at the various times in which s 1318 and its predecessors have been enacted and re-enacted or for any future statutory provision. This would include, since 2001, an intention by the Commonwealth Parliament to override any future State legislation imposing obligations upon directors etc., irrespective of the scope and purpose of such subsequent State legislation. I am unable to detect any such wide-ranging intention for s 1318. Indeed ss 5E, 5F, 5G and 185 of the Corporations Act create a detailed regime to preserve State laws and the common law. (See
Chung v Regina [ 2007 ] NSWCCA 231 at [ 18 ] - [ 24 ] and [ 29 ] - [ 30 ] .)

19. Mr D Robinson SC, who appeared for the Respondent, submitted that, if s 1318 did not extend to all statutory obligations, it should be interpreted as extending to statutory obligations which serve a corporate law purpose. As shown by s 222ANA, reflected in the third and fourth options in s 222AOB and s 222AOE, part of the purpose of Div 9 of the ITAA was to ensure that if deducted amounts were not paid, the company should be " promptly … dealt with under the insolvency laws " . (
Deputy Commissioner of Taxation (Cth) v Woodhams 2000 ATC 4141 ; (2000) 199 CLR 370 at [ 34 ] .)

20. In my opinion, this submission should be rejected. Divisions 8 and 9 are one part of a set of interrelated provisions which could be said to simultaneously serve both revenue and corporations law purposes. However, s 1318 was directed, and directed only, to corporations law purposes, both statutory and under the general law.

21. In any event, in my opinion, the prompt winding up of a defaulting company for purposes of the ITAA regime only serves a revenue purpose, not a corporations law purpose. The relevant tax obligation is owed by the salary or wage earner, from whose regular income deductions have to be made by the company. Collection of tax by the company at source involves administrative convenience for the Commissioner and brings forward the receipt of revenue in time. The Commissioner has a real interest in ensuring that a defaulting company be placed in the hands of controllers who will undoubtedly perform these functions.

22. This conclusion is reinforced by the fact that the new regime adopted in 1992 replaced provisions giving the Commissioner priority in a winding-up which were found, not in the Corporations Law , but in s 221P and s 221YHJ of the ITAA.

23. This interpretation of s 1318 is, in my opinion, strongly supported by the history of legislation with respect to corporations, dating back to the mid 19th century Companies Acts in England.

24. 

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Throughout that period, and particularly in the period since about the 1970s, when Australian legislation has been under constant review, the area of corporations law has been treated as quite distinct from other fields of statutory intervention. The framers of the respective waves of reform of corporations law have not had regard to other legislation. Indeed, they have acted to disentangle corporations law from the few fields in which, in the past, it has adopted laws of general application, such as the Bankruptcy Act 1966 (Cth).

25. For about a century and a half, changes to corporations law have had a self-referential quality. Many principles of the general law relating to corporations have been reinforced and modified by statute. I can detect no intention to impinge indirectly on other statutes passed at different times for non-corporations law purposes.

History of s 1318

26. This interpretation of s 1318 also receives support from the history of its predecessor sections. The history of the original provisions is set out in the joint judgment of Young CJ and Newton J in
Lawson v Mitchell (1975-1976) CLC ¶ 40-200 ; [ 1975 ] VR 579 at 585-592. The history is brought up-to-date by Austin J in
Australian Securities & Investments Commission v Vines (2005) 23 ACLC 1,387 ; (2005) 65 NSWLR 281 at [ 10 ] - [ 18 ] . See also the observations of Young CJ in Eq in
Edwards v Attorney General (NSW) (2004) 22 ACLC 1,177 ; (2004) 60 NSWLR 667 at [ 25 ] - [ 27 ] .

27. Section 1318 can be traced back to the Report of the Company Law Amendment Committee of 1906, which made two recommendations to the effect that the Court should be empowered to relieve a director from (1) breach of any duty imposed by the Companies Acts and (2) in any action for " negligence or breach of trust " .

28. It is notable that the English Companies Act 1907 adopted only the second of the two recommendations of the Report, i.e. the Court was empowered only to relieve from liability for negligence or breach of trust, but not empowered to relieve from liability for breach of any duty imposed by the Companies Act. It may once have been arguable that, by reason of this history, the succeeding sections did not extend to contraventions of the Companies Act. That application has been well established and affirmed by re-enactment in subsequent legislation. (See e.g. Lawson v Mitchell supra at 594-595, 599.)

29. With respect to the application of s 1318 to contraventions of the Corporations Act itself, it is pertinent to note a significant difference between the Australian legislative history in corporations law and that of England. Commencing with the Companies Act of Victoria in 1958, some aspects of the general law duties of company directors, both tortious and fiduciary obligations, were incorporated as statutory provisions. This kind of provision has been developed and modified in a number of respects in subsequent Australian corporations legislation. It has not been a feature of the English company law legislative history, until the Companies Act 2006 (UK). There has not been, and in my opinion could not be, any suggestion that the power to grant exemptions under the various provisions re-enacted in the form now found in s 1318, would not apply to statutory obligations under the Corporations Act itself.

30. The references to " breach of duty " and to " default " were added in England by the Companies Act 1929. This precise form was subsequently adopted in Australian legislation and can be traced, as Austin J does in Vines supra at [ 18 ] , in a direct line from State legislation, through uniform national legislation, through State-based adoption of Commonwealth legislation, to the present regime of Commonwealth legislation. Nothing in the developments since 1929 suggests any intention to substantially alter the scope of the power that was created by the English Companies Act of 1929, as subsequently adopted in Australia.

31. Until the decision of Johnson DCJ in this case I am unaware of, and the Court has not been referred to, any case, in Australia or England which has applied the power to the breach of a statutory obligation imposed by legislation other than a corporations law. Obviously its applicability to general law duties has never been in question. I will discuss below one authority relied on by the Appellant.

32. The 1929 amendments were based on the Report of the Company Law Amendment Committee 1925-1926 , known as the Greene

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Committee after its Chairman. That Report at [ 46 ] drew attention to
In re City Equitable Fire Insurance Co Ltd [ 1925 ] Ch 407 , which concerned the common form of article that exempted directors from liability, save in the case of " wilful neglect or default " . It also referred to the occurrence of articles which went further and exempted directors from liability in all cases other than those involving actual dishonesty.

33. The Report said:

" [ 46 ] To attempt by statute to define the duties of directors would be a hopeless task and the proper course in our view is to prohibit articles and contracts directed to relieving directors and other officers of the company from their liability under the general law for negligence and breach of duty or breach of trust. "

34. The Report went on to note the difficulties that may be occasioned for directors by this proposal and, accordingly, recommended that the court, in exercising its power to grant relief, should have regard to certain matters which may justify the conduct of directors. Further, the Committee recommended that the then existing section of the Act, which empowered the court to relieve directors from " liability for negligence or breach of trust " , should be amended by reference to certain relevant considerations.

35. As quoted above, par [ 46 ] of the Report made reference to " breach of duty " as well as the pre-existing formulation, " negligence or breach of trust " . Nothing in this Report, however, refers to the " default " element which was in fact introduced in the 1929 legislation. In my opinion, the origin of the word " default " lies in the common form of exempting article which referred to " neglect or default " . It was never intended to encompass statutory obligations.

36. The legislative history, up to and including s 161 of the Uniform Companies Act 1961, is set out in the joint judgment in Lawson v Mitchel l supra at 585-592. That case was primarily directed to the issue whether, contrary to certain English decisions, the power to relieve from liability extended to criminal proceedings. The Court ' s rejection of that proposition was affirmed by successive sections, leading down to s 1318, which were expressly limited to civil proceedings.

37. Lawson v Mitchel contains a careful analysis of the case law in England and its treatment by the Greene Committee. The Court found at 588-590 that the wider terms of the 1929 Act were expressly related to the enactment of the provision which invalidated any Article of Association that exempted a director, manager, officer or auditor of a company from liability. The section of the Act which carried into effect that recommendation was the section that introduced for the first time the broader range of language.

38. Section 152 of the 1929 English Companies Act, also adopted in Australia, was relevantly in the following terms:

" Any provision, whether contained in the Articles of a company or in any contract with a company or otherwise, for exempting any director … from, or indemnifying him against, any liability which by virtue of any rule of law would otherwise attach to him in respect of any negligence, default, breach of duty, or breach of trust of which he may be guilty in relation to the company shall be void. " [ Emphasis added ]

39. As the Full Court concluded at 589 with reference to the English provisions, including s 372 which was equivalent to s 1318:

" The wide words in s 372(1) ' negligence, default, breach or duty, or breach of trust " in fact simply reproduced the same set of words in s 152. "

40. It is pertinent to recall that the words " breach of duty " and " default " find their origins in legislation directed at overturning provisions in Articles of Association, which provided a contractual exemption from general law duties, save in the case of " wilful neglect or default " or " actual dishonesty " .

41. The word " default " , which first appeared in the 1929 legislation, originates in contractual provisions expressly confined to liability to the company at general law for " wilful default " . Furthermore, the extended formulation " negligence, default, breach of trust or breach of duty " , did not stem from a desire to add references to " breach of duty " and " default " to the longstanding words, which obviously overlapped with the new

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words, namely " negligence " and " breach of trust " . Rather, those words found their origin in the new provision of 1929 prohibiting articles or contracts which limit the liability of directors. This context was directed to the enforcement by the company of duties owed to it. It was not concerned with statutory obligations.

42. Section 1318 and its predecessors in Australian legislation clearly derive from the English model. Nevertheless, although the words are the same, English authority is now unlikely to be of use in interpreting the section. The process of divergence probably began in 1958 when the Victorian Companies Act for the first time enacted common law duties as statutory obligations, provisions which became universal throughout Australia with the Uniform Companies Acts of 1961. In any event, the divergence became clear in 1975 when the Full Court of the Supreme Court of Victoria in
Lawson v Mitchell refused to follow English authorities which held that the English equivalent of s 1318 permitted a Court to relieve from liability for criminal prosecutions. This became part of statutory provision by the express restriction to civil proceedings, originally enacted as s 535 of the Companies Code 1981.

43. The divergence became even more pronounced upon the creation in 1992 of a quite distinct civil penalty regime. This regime required the legislature to attend to a range of issues concerning the extent to which the civil penalty regime would be assimilated to the statutory treatment of civil liability, or to make special provision to take into account the higher level of seriousness attendant upon a finding of a contravention of a civil penalty provision.

44. In this new regime a provision in virtually identical terms to s 1318 was introduced as s 1317JA of the Corporations Law 1991 and is now found as s 1317S of the Corporations Act 2001. Plainly, with respect to the power to impose pecuniary penalties, and probably also with respect to the power to make a disqualification order, Parliament proceeded on the basis that the interpretation of s 1318 either required a clear extension of the reference to " civil proceedings " in s 1318 itself or a new parallel provision. Parliament chose the latter course. In so doing Parliament proceeded on the assumption that s 1318 would not, of its own force, apply to proceedings for a penalty even if, by statute, any such " penalty " was recoverable by civil proceedings.

45. No doubt this choice was made, in part, as a matter of convenience in order to have all of the civil penalty provisions together in Pt 9.4B of the Act. The separate provision, now found in s 1317S, which operates in parallel with s 1318, may reflect the objective of establishing a regime involving a clear pyramid of enforcement containing a hierarchy of sanctions, increasing in seriousness from civil liability to civil penalty liability to criminal liability. The legislation was based on this regulatory philosophy as expounded by the Senate Standing Committee on Legal and Constitutional Affairs Report, Company Directors Duties: Report on the Social and Fiduciary Duties and Obligations of Company Directors 1989 (called the " Cooney Committee Report " ). (See generally Helen Bird, " The Problematic Nature of Civil Penalties in the Corporations Law " (1996) 14 Companies & Securities Law Journal 405; Vicky Comino, " The enforcement record of ASIC since the introduction of the civil penalty regime " (2007) 20 Australian Journal of Corporations Law 183 esp at 185-191.)

46. Nevertheless, the fact that separate provision was made for civil penalties under the Corporations Act does suggest that s 1318 should not be understood to extend to other statutory regimes for civil penalties, such as Divs 8 and 9 of the ITAA. However, as the possibility that s 1317S and s 1318 are mutually exclusive has not been argued, I do not decide the issue of interpretation on this alternative basis.

Case law

47. Mr S Gageler SC, who appeared for the Appellant, relied in this Court on a case to which Johnstone DCJ ' s attention was not drawn at first instance, namely
Customs & Excise Commissioners v Hedon Alpha Limited [ 1981 ] QB 818 .

48. In that case the director of an off-course bookmaker sought to rely on the then English equivalent of s 1318, namely s 448 of the Companies Act 1948 (the equivalent of s 1318), in defence to an action by the revenue authority pursuant to a statutory provision which made

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directors liable for duty payable by a corporate bookmaker. The relevant statutory provision under the Betting & Gaming Duties Act 1972 (UK) imposed a joint and several liability to pay betting duty on both a corporate bookmaker and any director of a corporate bookmaker.

49. In that case the company was insolvent. The director contended that what had occurred was a " default " within the meaning of s 448 of the Companies Act 1948. The Court rejected the director ' s contention for two reasons. First, as Stephenson LJ held, s 448 was " inapplicable to any claim by third parties to enforce any liability except a director ' s liability to his company or his director ' s duties under the Companies Act " (p824D-E). This aspect of the judgment has been rejected in Australia. (See
Daniels v Anderson (1995) 13 ACLC 614 ; (1995) 37 NSWLR 438 at 524-525;
Edwards v Attorney General supra at [ 137 ] - [ 141 ] .)

50. Furthermore, in Hedon Alpha the judgments proceeded on the basis that s 448 of the Act would extend to criminal or penal proceedings brought under the Companies Act. (See e.g. at 823D-E, 826B and 828B.) As I have noted above, this is contrary to Australian authority, i.e.
Lawson v Mitchell supra, decided before the matter was put beyond doubt by statutory amendment.

51. The Appellant relied on the alternative basis upon which some members of the Court proceeded in Hedon Alpha. Stephenson LJ said at 824G-H:

" … If s 448 could apply to claims by third parties the Commissioner ' s claim is not a proceedings for default, since s 2(2) gives a right to recover a debt against a director who is not in breach of any duty except a duty to pay on demand which you would not owe had it not been placed on him by the Act of 1972. If there was any default it was the company ' s … He was required by the Act of 1972 to answer for it and the Commissioner ' s action against him was not a proceeding in respect of default even if their action against the company was. " (to 825A)

52. To similar effect was the reasoning of Ackner LJ at 825G-H.

53. Hedon Alpha is a decision of dubious authority in Australia. In any event, the legislation under consideration in that case was quite different to that presently under consideration. The relevant provision only referred to the mechanisms by which the duty could be " recoverable " . That is to say, the section there under consideration was the equivalent of s 225-5 of the Taxation Administration Act 1953 (Cth). There was nothing in the legislation under consideration in Hedon Alpha equivalent to the express duty imposed upon directors to " cause the company to " act in the way that s 228AOB does. (See also
Commonwealth Bank of Australia v Friedrich (1991) 9 ACLC 946 ; (1991) 5 ACSR 115 at 192-193;
Standard Chartered Bank of Australia Ltd v Antico (1995) 13 ACLC 1,381 ; (1995) 38 NSWLR 290 at 369-371 and c/f
Kenna & Brown Pty Ltd (in liq) v Kenna (1999) 17 ACLC 1,183 ; (1999) 32 ACSR 430 at [ 144 ] - [ 156 ] .) Hedon Alpha does not assist the Appellant.

Conclusion

54. There is no authority which would prevent this Court adopting the interpretation I have set out above. In my opinion, s 1318 has no application to any obligation imposed by statute upon a company director, employee, etc. as such, other than obligations imposed by the Corporations Act 2001.

55. Since writing the above, I have read the judgment of Basten JA in draft. If I were wrong in my interpretation of s 1318 then I would agree, for the reasons his Honour gives, that s 1318 has no application to a director ' s liability under s 222AOC of the ITAA.

56. I agree with the orders proposed by Santow JA.

 

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