Deputy Commissioner of Taxation v Stenner
[2003] QDC 53
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- Unreported Judgment
- Deputy Commissioner of Taxation v Stenner[2003] QDC 53
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Deputy Commissioner of Taxation v Stenner[2003] QDC 53
Deputy Commissioner of Taxation v Stenner[2003] QDC 53
![Deputy Commissioner of Taxation v Stenner [2003] QDC 53](/judgmentview/image?name=315653.001.png&id=315653)
DISTRICT COURT OF QUEENSLAND
CITATION: | Deputy Commissioner of Taxation v Stenner [2003] QDC 053 |
PARTIES: | DEPUTY COMMISSIONER OF TAXATION D 333 of 2002 Plaintiff v PETER JOHN STENNER Defendant AND DEPUTY COMMISSIONER OF TAXATION D 334 of 2002 Plaintiff v PETER JOHN STENNER Defendant |
FILE NOS: | D333 and 334 of 2002 |
PROCEEDING: | Application for summary judgment |
DELIVERED ON: | 30 May 2003 |
DELIVERED AT: | Brisbane |
HEARING DATE: | 16 May 2003 |
JUDGE: | Judge Brabazon QC |
ORDER: | Judgment for the plaintiff in each action in the amount of $155,798.22 together with interest of $18,800.35, and costs |
CATCHWORDS: | INCOME TAX – Penalty notice issued to directors of company in relation to unpaid tax – Application for summary judgment INCOME TAX – liability of director for penalty for the amount of tax not remitted by the company – where director raised ‘illness or other good reason’ defence pursuant to s. 222AOB – where director raised reasonable steps defence pursuant to s 222AOJ (3) Income Tax Assessment Act 1936 (Cth) s. 222ALA; s. 222AOB; s. 222AOJ Deputy Commission of Taxation v. Saunig [2002] ATC 5135 |
COUNSEL: | Mr P Bickford for the plaintiff |
SOLICITORS: | Australian Taxation Office, 2221 Logan Road, Upper Mt Gravatt Qld 4122 |
Introduction
- [1]These are claims by the Deputy Commissioner of Taxation to recover penalties against the Messrs Stenner, who were two directors of a company, Galeprufe Doors Pty Ltd.
- [2]That company set up a business manufacturing garage doors. It soon suffered a number of serious blows, particularly the insolvency of two or three substantial customers, and the theft of its products from a Sydney warehouse. It also had to contend with the usual variations of demand within the building industry. There seems no reason to doubt the quality of its products, or the determination of its principals, especially Mr Stenner Senior. He had worked as an accountant for other businesses, and was responsible for the company’s affairs. His son, Mr P J Stenner Junior, played an active role in the company, though he had little or nothing to do with the financial side.
- [3]There is no dispute about the calculation of the Deputy Commissioner’s claims. Those claims are based on four penalty notices totalling $155,798.22. The notices were served because the directors of the company had failed to ensure that certain taxes imposed on the company were paid to the Deputy Commissioner, especially amounts of PAYE, and other employee entitlements. (Mr Stenner Senior did say in court that the Deputy Commissioner had the benefit of $2,131 which was not recorded as a credit. However, there is nothing in the defendants’ affidavits to support that claim).
- [4]The defendants have represented themselves in this matter. They have managed to each file an extensive affidavit, and arranged for a member of the company’s staff to swear an affidavit on their behalf.
- [5]The hearing revealed the issues which they wished to raise. They are these – the possible remission of certain penalties because an agreement was made to repay them by instalments, the conduct of the Deputy Commissioner in winding up the company when efforts were being made to raise funds to allow it to continue, and the limited role played by Mr Stenner Junior.
- [6]Mr Stenner Junior said that he did not wish to put any more evidence before the court. Mr Stenner Senior did complain about the absence of company records, now in the hands of others. Therefore, this should still be regarded as an application for summary judgment. The question is, can the Deputy Commissioner show the court that the defendants have no prospect of resisting the claims, even taking the admissible evidence they have put forward at its highest?
The remission of penalties
- [7]On 24 November 2000 a penalty notice requiring payment of some $46,000 was served on the directors. Having set out the amounts claimed, the notice said this:
“The penalty in respect of each unpaid amount of the company’s liability will be remitted if, at the end of 14 days after this notice is given to you:
- (a)The company’s liability in respect of that unpaid amount has been discharged, or
- (b)An agreement relating to the liability is in force under s 222ALA of the ITAA 36, or
- (c)The company is under administration within the meaning of the Corporations Law, or
- (d)The company is being wound up.”
- [8]The evidence shows that an arrangement was then made to repay that amount at the rate of $1,000 per month. $4,500 was actually paid, and credited. There was no written agreement It is clear that there was no agreement within the meaning of s 222ALA.
- [9]It was submitted that the agreement that was made had the effect of extinguishing the debt owed to the Deputy Commissioner – that is to say, that liability was remitted upon the agreement being made. Mr Stenner Senior relied on the literal wording of the notice, and that the company’s liability had been remitted, because an agreement had been made. He had not read s. 222ALA of the ITAA36.
- [10]As the above extracts from the notice demonstrates, there are four ways in which a director can have the unpaid amount of the company’s liability remitted. At least one of the four steps has to be achieved before the expiry of 14 days after the notice is given. That did not happen in this case. There is nothing in the evidence to suggest that the Deputy Commissioner’s claims were extinguished and replaced by the expectation that the instalments would be duly paid. There was no written agreement.
An agreement to extend time
- [11]This claim is based on a discussion between Mrs Orran, an employee of the company, and Ms Pamela Johnson on behalf of the Deputy Commissioner.
- [12]Mrs Orran says that the discussion followed service of the penalty notices dated 8 June 2001. She knew that the company was then in financial difficulty. She says that Mr Stenner Senior asked her to contact the ATO in an endeavour to obtain an extension of time for the company to submit a payment arrangement, as he considered that it would take considerable time to gain all creditors approval to any scheme, and assess the businesses’ capacity to overcome the latest financial setbacks.
- [13]She says that she contacted Ms Johnson at the ATO and discussed the company’s problems with her. As she puts it “I understood that she agreed to this extension of time. I conveyed this information to John Stenner.”
- [14]The next six months saw Mr Stenner Senior make strenuous efforts to keep the company afloat. He did what he could to get the best financial accommodation from the company’s suppliers. He tried to sell land which seems to have been worth at least $1.3 million. He sought advice from accountants experienced in insolvency work. He spent a considerable time with the company’s bankers and potential financiers.
- [15]In September 2001 the Deputy Commissioner served the company with a statutory demand for payment of $345,902.53. (The company’s tax liability considerably exceeded the amounts for which the directors were personally liable).
- [16]That demand led to the company submitting a written payment arrangement in October 2001. Mr Stenner Senior had gone to much effort to put that arrangement forward. It was a blow to him when the ATO rejected the arrangement, in November 2001.
- [17]Mrs Orran again spoke to Ms Johnson. She was told that the file had been passed to the legal section of the ATO and the company would have to negotiate with an officer called Tzu-Kai Yang at the Upper Mt Gravatt office.
- [18]A further penalty notice was served on the directors on 19 November 2001.
- [19]Mr Stenner Senior arranged a meeting with two officers of the ATO – Mr Tzu-Kai Yang and Ms Donna Hayes. He told the meeting that an apparently genuine offer of $1.3 million had been made for the land, and that a somewhat larger sale figure should be able to be negotiated, with prospects of selling the land and settling the sale by the end of January 2002. The company had secured liabilities to its bank, the NAB, and had obtained approval to offer the ATO $100,000 from the proceeds of sale.
- [20]Mr Stenner Senior then made a further offer to pay off the outstanding debt over time. He says, at that time, that the company was able to pay its current liabilities as they fell due. He gave the ATO’s officers all those details. In effect, he made it clear to them that the business was just trading profitably at the time. The only prospect of paying its creditors was to continue trading. If the company ceased trading, he told them the only beneficiary would be the secured creditor – the NAB.
- [21]He received a faxed letter of 20 December 2001, telling him that the revised offer was rejected by the ATO. He telephoned Mr Tzu-Kai Yang. He expressed his disappointment and said that to resolve the matter he and his wife would sell other property, which they owned personally. (Mention of that had been made to the ATO officers at the previous meeting). He said that he would contact the ATO again in early January after talking about the situation with various real estate agents. Mr Stenner says that he understood that Mr Yang agreed with that course.
- [22]After the Christmas break, the company was served with a winding up notice, issued by the ATO dated 3 January 2002. Mr Yang, when contacted by telephone, said that he had no knowledge of the action and was not aware that the ATO had commenced the winding up proceedings.
- [23]Mr Stenner Senior took further advice from two insolvency firms. They both confirmed that there was no solution to the problem and that unless the debt to the ATO was paid before the winding up hearing, the court would have no option but to place the company in liquidation.
- [24]The debt was not paid, and the company was wound up. That happened on 7 February 2002. The NAB then foreclosed on its security over the fixed assets of the business, and over other real estate owned by Mr and Mrs Stenner.
- [25]Mr Stenner remains profoundly upset and disappointed at the actions of the ATO. He believes that it was commercially unrealistic, producing no good result for anybody, and that their last offer was a realistic and workable one, but it was not accepted. There were reasonable grounds to think the company could actually trade its way out of its difficulties, and pay its creditors. The commencement of winding up proceedings denied the company the opportunity to make a further offer, which would have led to an agreement to pay off its debt to the Deputy Commissioner. Mr Stenner emphasises that Mr Yang had indicated that another offer in January would be considered. Instead, the precipitate action in early January 2002 caused a fire sale of the assets of the company, and the liquidation of the business.
- [26]As Mr Stenner Senior puts the matter:
“After receiving legal advice in June 2001 I would not have commenced any attempt to try and save the business from bankruptcy had I not believed that an extension of time had been granted by the ATO and that I and my son would not be held personally liable for the ATO’s debt of the company providing this occurred. I would not have advised my son and fellow director, P J Stenner Junior that he was not to worry about the matter as I had obtained an extension of time for the company to resolve the taxation problem.”
- [27]Even if the actions of the ATO were discourteous, commercially naive and precipitate, as Mr Stenner complains, the facts just do not sustain any argument to the effect that the Deputy Commissioner was disentitled to wind up the company in January 2003. For a start, it can be seen that the alleged agreement in June 2001 was vague and uncertain, and had no definite limits. It cannot have had the effect of indefinitely postponing the Deputy Commissioner’s right to take proceedings, while negotiations continued as long as Mr Stenner wished. In any case, there were unmistakable warning signs that the Deputy Commissioner was refusing to accept the various payment arrangements offered, and would not wait much longer. The winding up notice gave a period of grace, before action was taken.
- [28]While Mr Stenner’s personal disappointment can be readily understood, there is no legal foundation to deny or suspend the Deputy Commissioner’s right to recover the directors’ debts due to the ATO.
Mr Stenner Junior
- [29]Mr Stenner Junior has had the misfortune to be a director of a company at a time when the duties upon directors, both active and passive, have been increased considerably.
- [30]He suggested that he had defences to the Deputy Commissioner’s claims. The first was based on s. 222AOJ(2) of the ITAA36 –
“It is a defence if it is proved that, because of illness or because of some other good reason, the person did not take part in management of the company at any time when the person was a director, and the directors were under the obligation to comply with s.222AOB(1)…”
Directors are able to comply with s. 222AOB(1) in the four ways set out in the penalty notice, mentioned above.
- [31]There is hardly a need to discuss this submission. Mr Stenner Junior in fact took quite a vigorous part in the company’s management. He was the sales manager. He was informed from time to time about the deteriorating financial position of the company. At most, he relies on the assertion that he was not involved in the company’s financial affairs.
- [32]It is difficult for a director to escape liability. A director has to show that he or she took no part in the management of the company, and did not do so for some good reason. The fact that he or she was not immediately interested in the financial affairs of the company does not matter, because of the strict requirement of s 222AOJ(2). Mr Stenner Junior has no good reason.
- [33]Secondly, reliance is placed on s 222AOJ(3):
“It is also a defence if it is proved that the person took all reasonable steps to ensure that the directors complied with ss 222AOB(1) … or there were no such steps that the person could have taken.”
- [34]In truth, it is difficult for any director to comply with the requirements of s 222AOB(1). The position was explained by Justice Heydon, when a member of the New South Wales Court of Appeal, in Deputy Commissioner of Taxation v Saunig [2002] ATC 5135. In that case, Mr Saunig was one of three directors of a company. He concentrated on sales and regarded another director as responsible for the management of the company. He became concerned about the company’s management, and that the so called “managing director” was no longer competent to do his job. He found out that the company had a significant liability to the Tax Office for PAYE instalments that had been deducted, and not remitted.
- [35]He took measures to calculate the size of the liability and tried to raise money to pay what was owing. The other directors were uncooperative. Finally he contacted the Tax Office of his own volition and attempted to resolve the matter. He then had another meeting with his fellow directors, and tried unsuccessfully to persuade them to put the company into liquidation.
- [36]In considering the director’s actions, Mr Justice Heydon put the matter this way [at 5142]:
“There is a certain harshness in the speed of action which s 222AOB(1) calls for because in the case of a company which cannot pay the deduction, the time allowed within which to arrive at an agreement with the Commissioner, appoint an administrator, or commence the winding up of a company is very short. The harshness was no doubt seen as appropriate because the evils of taxpayers deducting taxation payments from employees’ wages and not passing them to the authorities are considerable and perhaps widespread. The evils are not limited to the tax avoided; they extend to the use made of the money, namely either theft or use as working capital, thereby permitting companies to continue to trade which in truth are not capable of continuing to trade lawfully. … An early sign of problems in a company is its living on the false reserves of non-remitted deductions from employees wages. The harshness is to some extent ameliorated by the fact that the directors cannot be sued until a s 222AOE notice is served and by the time it has been served and a further fourteen days have passed, the director will have had a period sufficient to procure the company to take one of the four steps referred to in s 222AOB(1). If one of the steps is taken, the director ceases to be liable. Harsh or not, however, the legislative scheme is in this respect clear. By the time the notice was issued in this case, Mr Saunig had had an ample period within which to take the s 222 AOB(1) steps for the months before he was aware of the problem. However, he sought to answer that difficulty by contending that by then the other directors were not cooperating …”
- [37]In that case, the single factor which weighed most against Mr Saunig was the fact that he had not taken professional, legal or accounting advice when he became aware of difficulties that the company faced. Here, Mr Stenner Junior (like his father) had 21 days to pay the instalments when they became due. See para 4 of the statement of claim. He then had a further 14 days to repair the position, after receiving each of the four penalty notices. In each case, he was obliged to take one of the four prescribed steps if he was to avoid personal liability.
- [38]To raise this defence, the director must show the reasonableness of his conduct in relation to all four options offered to directors by s 222AOB(1). See Miller v. Deputy Commission of Taxation (1997) 38 ATR 51.
- [39]Mr Stenner Junior left the handling of financial difficulties to his father. For example, as a director, he could have begun winding up proceedings. He is not entitled to claim the benefit of this defence.
Conclusion
- [40]It follows that the Deputy Commissioner is entitled to judgment against each director.
- [41]There will be judgment in each action in the amount of $155,798.22, together with $18,800.35 in interest. The defendants are to pay the plaintiff’s costs to be assessed on the standard basis.