SUPREME COURT OF VICTORIA

Deputy Commissioner of Taxation v Moss

[2002] VSC 333

Nettle J

9 August 2002 - Melbourne

Nettle J. This is an appeal, of which notice was given on 26 July of this year, from a decision of the Master that there be summary judgment for the Deputy Commissioner of Taxation in the sum of $253,130.87 plus costs of $2746. The plaintiff's claim is made pursuant to s 222AQA of the Income Tax Assessment Act 1936 (Cth) (the ITAA 1936), which provides that, if a company incorporated under the Corporations Act 2001 (Cth) makes an agreement with the Commissioner of Taxation under s 222ALA of the ITAA 1936, the persons who are directors of the company from time to time must cause the company to comply with the agreement.

2 The defendant, Christopher Moss, was at all relevant times a director of Ward Hire Pty Ltd. On 8 July 1997, Ward Hire Pty Ltd entered into an agreement with the Commissioner of Taxation under s 222ALA. That agreement acknowledged that the company was substantially indebted to the Commissioner in respect of group tax deductions and provided for the company progressively to discharge that indebtedness by the payment of instalments at the times and in the amounts set forth in the schedule to the agreement. At the time at which the company entered into the agreement it was insolvent and without any assets from which it might have discharged its obligations under the agreement. It did not make any of the payments.

3 Section 222AQD of the ITAA 1936 provides that it is a defence to a claim made against a director under s 222AQA if the director took all reasonable steps to ensure that the company complied with the agreement, or there were no such steps that the director could have taken, provided that the director proves that at the time the agreement was made he had reasonable grounds to expect, and did expect, that the company would comply with the agreement.

4 As the matter now comes before me, there is no dispute that the company defaulted in its obligations under the agreement or that, subject to the defence provided for in s 222AQD, the Commissioner would be entitled to recover from the defendant the amount for which the Master gave summary judgment. The issue is whether the defendants' claim to be entitled to invoke the defence provided for in s 222AQD is arguable or, alternatively, is so hopeless that I should conclude that it is bound to fail.

5 The evidence as to the defendant taking all reasonable steps to ensure that the company complied with the agreement, and that at the time of entry into the agreement he had reasonable grounds to expect and did expect that the company would comply, is set out in an affidavit sworn by the defendant on 21 June 2002. During the course of the hearing it was sought to supplement that affidavit with a further affidavit sworn by Ivan Holko on 7 August 2002, but for reasons already given I refused special leave to do so.

6 The defendant deposes that at some time early in 1997 - no more precise specification than that is provided - he approached National Australia Bank to attempt to obtain funding for another of the companies of which he was a director, for 2 purposes: first, for that other company to acquire milling assets and, secondly, to provide funds to Ward Hire Pty Ltd by way of loan with which to meet its obligations under the agreement. As the defendant put it in his affidavit:

I approached Mr Holko, who was my bank manager at the National Australia Bank, and explained to him that I needed to borrow $1 million. I explained to him that the borrowings were for two purposes: first to pay for the milling assets, secondly to meet the outstanding group tax liabilities of Ward Hire. As the borrowings were to be those of Snow White Mills Pty Ltd, that company would need to lend the money to Ward Hire to enable the tax liabilities to be paid. At that time I was not seriously concerned about how Ward Hire would repay Snow White Mills because the debts would be between companies owned and controlled by me and not to third parties. Mr Holko helped me put together the material required by the bank and a form of application was made. This application was subsequently approved.

7 The approval of the application there referred to took the form of a letter of intent in which the Bank said that it would be prepared to advance a sum to Snow White Mills Pty Ltd, but only on the conditions set out, including the provision of securities apparently specified in a schedule or attachment. The schedule or attachment is not in evidence, so I do not know what was required.

8 After the letter of intent had issued, the defendant entered into negotiations about the price of the milling assets. I infer that he had no set idea of what the price of the milling assets would be until after that time.

9 Later, in August 1997, National Australia Bank withdrew its lending approval and refused to lend any money, and the defendant deposes that he then approached "numerous lending institutions" to try and borrow further funds. He says that he does not recall the names of the institutions other than Westpac and "the ANZ Bank". But in any event, the approaches were unsuccessful and he says that he could not raise any funds.

10 The evidence as to the defendant having had reasonable grounds to expect and that he did expect that the company would comply with the agreement at the time that it entered into it, is also set out in the defendant's affidavit. The defendant there deposes that the Bank had already approved the loan to Snow White Milling by the time of entry into the agreement and hence he believed that Ward Hire Pty Ltd would have access to sufficient funds to enable it to comply with the agreement. He says that if that approval not been in place, he would not have signed the agreement. Finally, he asserts that he "did everything that he could to raise further funds but could not do so".

11 Ms Davies, who appeared with Ms Mavroudis for the Deputy Commissioner of Taxation, accepted that the test upon an application such as this is whether the defences are hopeless. She argued nonetheless that I ought to conclude on the material and the absence of material before me that the defences are bound to fail. She submitted, first, that it was plain from the face of the letter of intent that the letter of intent was not legally binding upon the Bank and thus the Bank could at any time, as indeed it did, refuse to provide the funds which were sought. This alone, she said, was sufficient to demonstrate that there could not have been reasonable grounds to expect that the company would comply with the agreement.

12 Ms Davies next submitted that because the letter of intent was conditional upon the provision of securities, about the nature of which the defendant had chosen or failed to inform the court, the inference properly to be drawn was that the company or the defendant, or both, would have been unable to provide the securities for which the letter provided. That too was said to demonstrate that it was really a hopeless contention that there were reasonable grounds to expect that the company would comply with the agreement.

13 Ms Davies' third submission was that, although the letter of intent provided for a facility of $1 million, there could not be any degree of confidence of sufficient funds being available after purchase of the milling assets. At the time of entry into the agreement the defendant had not even begun his negotiations for the acquisition of the assets and therefore could not have known what the price of the assets would be.

14 Mr Hardy, who appeared for the defendant, emphasised that in an application for summary judgment it is a large thing for a court to close out the defendant from the opportunity of conducting his defence, and it is only in the clearest of cases that there ought to be summary judgment having that effect. He submitted that this is not such a case, for a number of reasons.

15 First, it was submitted that, because of an absence of authority directly on point, it is not clear what is required to be done by a director in order for it to be said that he has taken reasonable steps to ensure that a company complies with an agreement. Does it mean, he asks, that the director does what he can with the assets and resources of the company, or does it mean that the director must go further and use or endeavour to obtain assets of third parties?

16 Secondly, it was submitted that, in the absence of authority directly on point, it is not clear what is required to be shown to establish reasonable grounds to expect and an actual expectation that the company would comply with its agreement.

17 Thirdly, it was submitted that, quite apart from those difficulties, when one looks at the defendant's affidavit one should accept that, even if not now then at least at trial with the possibility of further evidence, the defendant may succeed in demonstrating that in the context in which he was operating, he did take all reasonable steps to ensure that the company complied with its obligations and that, within that context, there were reasonable grounds to expect, and that he did expect, that the company would comply with the agreement.

18 Counsel for both parties submitted that there has been no judicial determination of the meaning of the words "reasonable steps" and "reasonable grounds to expect" in subs 222AQD(3), and I have been unable to find any myself.^[1] Ms Davies, however, pointed me to a number of authorities concerning other provisions of the ITAA 1936, including the decision of Hill J in Peabody v Commissioner of Taxation ^[2] in which his Honour said that:

The determination under s 177C(1)(a) requires a finding based upon "reasonable expectation". In the context, expectation is not used in the sense of prediction as to the future but rather in the sense of supposition or hypothesis. But what is clear is that the expectation must be one which is reasonable and not one which is unreasonable, irrational or absurd.

Counsel for the appellant referred us to a number of cases, in differing contexts, in which the words "reasonable expectation", or cognate expressions, have been used. These included: Attorney-General v Cockcroft (1986) 64 ALR 97 at 106 per Bowen CJ and Beaumont J 111-2 per Sheppard J; Federal Commissioner of Taxation v Arklay (1989) 85 ALR 368 at 371-2 per Sheppard, Wilcox and Hartigan JJ, in which Cockcroft was followed; Dunn v Shapowloff (1978) 2 NSWLR 235 at 249 per Mahoney JA; East v Repatriation Commission (1987) 16 FCR 517 at 532-3 per Jenkinson, Neaves and Wilcox JJ; Secretary, Department of Social Security v Copping (1987) 73 ALR 343 at 348 per Jenkinson J; and Davies v Taylor (1974) AC 207 at 212 per Lord Reid and 219 per Viscount Dilhorne.

These cases indicate, what would presumably be in any event obvious, that the meaning of words such as "reasonable expectation" depends upon the context in which they appear. Nevertheless, in the present context, as in Cockcroft, the words were intended to receive, and should receive, their ordinary meaning. So too, as in Cockcroft, the word "reasonable" is used in contradistinction to that which is "irrational, absurd or ridiculous". The word "expectation" requires that the hypothesis be one which proceeds beyond the level of a mere possibility to become that which is the expected outcome.

That passage was approved in the joint judgment of the High Court on appeal in Federal Commissioner of Taxation v Peabody.^[3] There, their Honours of the High Court said that:

A reasonable expectation requires more than a possibility. It involves a prediction as to events which would have taken place if the relevant scheme had not been entered into or carried out, and the prediction must be sufficiently reliable for it to be regarded as reasonable.

19 Ms Davies also points to Dunn v Shapowloff,^[4] a decision of the New South Wales Court of Appeal which deals with insolvent trading provisions. Mahoney JA said there that:

Whatever meaning be given to "expectation", it goes beyond a mere hope or possibility. It requires, in a sense, a prediction as to the future ability of the company and the measure of the reliability of that prediction is in the words "reasonable or probable".

20 I accept Mr Hardy's submission that there is room to argue about the meaning of the requirement that a director take all reasonable steps to ensure that the company complies with an agreement within the meaning of subs 222AQD(3). I take leave to doubt that it means no more than using such resources as are available to the company. But the point is arguable.

21 I do not, however, accept Mr Hardy's submission that there ought be any doubt about the meaning of "reasonable grounds to expect" and "expecting that the company would comply with the agreement" in subs 222AQD(5). Despite the apparent absence of authority bearing directly upon the meaning of those expressions in subs 222AQD(5), I think that the authorities on similar expressions in other provisions, and in particular in the Bankruptcy Act 1966 (Cth) and the Corporations Act 2001 (Cth), and the Companies Code which preceded it, show that it means reasonable grounds as that expression would be understood by reasonable men and women armed with the relevant skill and knowledge.^[5]

22 I also consider that it is extremely doubtful that there were reasonable grounds to expect that the company would comply with its obligations under the agreement. It had a long history of financial difficulties. Matters were critical. There was no firmer commitment to provide finance than that which was set out in the letter of intent and, as far as one can see, there were no assets available to provide as security to National Australia Bank.

23 But the test is not whether I regard as being extremely doubtful the contention that there were reasonable grounds to expect that the company would comply with its obligations. It is rather whether the contention that there were reasonable grounds is so hopeless that it is bound to fail. And, upon an application such as this, I do not think I can exclude the possibility that at trial the defendant may be able to adduce further evidence which colours and informs the contention that there were reasonable grounds to expect that sufficient moneys would come through.

24 It is true, as Ms Davies points out in a forceful submission, that the defendant has not condescended to refer to any such material in his affidavit, when, if it were available, it would have been so easy for him to do so. But, despite the doubt that creates about the earnestness of the defence, I cannot conclude that there may not be such evidence available at trial, or that, when and if it is combined with the evidence already put before me, it could not lead a court to accept that there were reasonable grounds.

25 It is trite that the power to order summary or final judgment is one that should be exercised with great care and should never be exercised unless it is clear that there is no real question to be tried: see, for example, Clark v Union Bank of Australia Ltd;^[6]David Jones v Stone;^[7] Fancourt v Mercantile Credits Ltd;^[8] Webster v Lampard.^[9] In this case there is a real question to be tried.

26 In my view, the application for summary judgment should have been refused.