Reported Decision : [2000] 45 ATR 139 New South Wales Supreme Court CITATION : DCT v Pejkovic [2000] NSWSC 881 CURRENT JURISDICTION: Common Law FILE NUMBER(S) : SC 12043/99 HEARING DATE(S) : 28 August 2000 JUDGMENT DATE : 4 September 2000 Deputy Commissioner of Taxation (Plaintiff) PARTIES : Steve Pejkovic (Defendant/Cross Claimant) Lend Lease Projects Pty Ltd (Cross Defendant) JUDGMENT OF : Master Harrison COUNSEL : Mr J Simpkins (Defendant) Mr David Morris Australian Government Solicitor (Plaintiff) SOLICITORS : S Nemes of Heaney Richardson & Nemes (Defendant) CATCHWORDS : Summary judgment - s 222AOJ Income Tax Assessment Act 1936 Supreme Court Rules - Part 13 r 2 LEGISLATION CITED : Income Tax Assessment Act 1936 - ss 220AOJ, 222ANA, 222AOB, 222AOE Taxation Administration Act s 8ZL Air Services Australia v Zarb (NSWSC unreported, 26 August 1998) Dey v Victorian Railway Commissioners (1948-49) 78 CLR 62 General Steel Industries Inc v Commissioner for Railways (1964) 112 CLR 125 CASES CITED : Webster & Anor v Lampard (1993) 177 CLR 598 Simpson & Ors v Deputy Commissioner of Taxation 33 ATR 139 Re Scobie & Anor, exparte Deputy Commissioner of Taxation 95 ATC 4519 DCT v Woodhams 169 ALR 503 DECISION : See para 27 9 THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION MASTER HARRISON MONDAY, 4 SEPTEMBER 2000 12043/99 - DEPUTY COMMISSIONER OF TAXATION v STEVE PEJKOVIC & ORS JUDGMENT (Summary judgment - s 222AOJ Income Tax Assessment Act 1936) 1 MASTER: By notice of motion filed 13 April 2000 the plaintiff seeks the defendant's defence be struck out pursuant to Part 13 r 2 of the Supreme Court Rules (SCR). The plaintiff relied on two affidavits of Recep Yerlikaya sworn 27 March 2000 and 1 June 2000 and the affidavits of Richard Howard sworn 20 March 2000 and Dianne Smith sworn 21 March 2000. The defendant relied on his affidavit sworn 24 May 2000. 2 The statement of claim seeks amounts from the defendant as penalties in relation to non-payment of group tax and prescribed payments. The statement of claim filed 20 August 1999 alleges that the company owed monthly payments of employees group tax from 1 November 1997 to 1 January 1999. Subsequently, payments have been made up to January 1998. (paras 3-7 S/C). It is alleged that the defendant did not cause and the company did not do before the due dates (being the 7th day of the following month) any of the things set out in s 222AOB(1) or (2) of the Income Tax Assessment Act 1936 (ITAA 36) and that the defendant is liable by force of s 222AOC of ITAA 36 to pay the Commissioner of Taxation by way of penalty in the sum of $1,784,535.19. Two penalty notices were issued on 14 April 1999 and their validity is not disputed. 3 The plaintiff also alleges that the company should have made deductions known as prescribed payments (payment of tax by contractors) for the period 1 July 1997 until 31 October 1997. Both the group tax and prescribed payments fell due on the seventh of the subsequent month. For example the July 1997 payment of prescribed payments fell due on 7 August 1997 (paras 18-21). Similarly, it pleads that the defendant was obliged to cause the company to do one of the things set out in s 222AOB(1) of ITTA 36 and it did not cause the company to do so, and the company did not do, before the respective dates any of the things set out in s 222AOB(1) and (2) of the ITAA 36 (paras 25-26 S/C). A penalty notice was forwarded to the defendant on 16 December 1997. It is not disputed. The plaintiff seeks the sum of $84,044 as a payment for penalty for the company's non-payment of prescribed payments. 4 The following facts are not in dispute. (1) SJP (Formwork (NSW) Pty Limited ACN 003957391 (SJPN) was incorporated under the Corporations Law. (2) At all material times the defendant was the sole director and secretary of SJPN. On 28 May 1999 Ronald John Dean-Willcocks was appointed voluntary administrator of SJPN. On 8 September 1999 Ronald John Dean-Willcocks was appointed the liquidator of SJPN. (3) On 16 December 1997 the plaintiff served the defendant with a penalty notice in relation to prescribed payments. (4) On 14 April 1999 the plaintiff served the defendant with two penalty notices in relation to group tax. (5) On 30 April 1999 the defendant had a telephone conversation with officer Garry Bartlett to the following effect. The defendant said "We are meeting with Civil and Civic today to sort this out. We should be right by Monday or Tuesday depending on what arrangements we make with Civil and Civic." Mr Bartlett replied "Let me know how you get on next week." The law in relation to summary judgment 5 The relevant parts of Pt 13 r 2 (SCR) says: "2(1) Where, on application by the plaintiff in relation to any claim for relief or any part of any claim for relief of the plaintiff - (a) there is evidence of the facts on which the claim or part is based; and (b) there is evidence given by the plaintiff or by some responsible person that, in the belief of the person giving the evidence, the defendant has no defence to the claim or part, or no defence except as to the amount of any damages claimed, the Court may, by order, on terms, give such judgment for the plaintiff on that claim or part as the nature of the case requires. 6 In a recent decision Air Services Australia v Zarb (NSWSC unreported, 26 August 1998) Rolfe AJA found it useful to remind himself of the highly demanding test imposed on a party seeking summary judgment. His Honour referred to Dey v Victorian Railway Commissioners (1948-49) 78 CLR 62; General Steel Industries Inc v Commissioner for Railways (1964) 112 CLR 125 and Webster & Anor v Lampard (1993) 177 CLR 598. I have reproduced some of the passages quoted in Zarb. 7 In General Steel Barwick CJ, who heard the application alone stated: "Although I can agree with Latham CJ in the same case when he said that the defendant should be saved from the vexation of the continuance of useless and futile proceedings, in my opinion great care must be exercised to ensure that under the guise of achieving expeditious finality a plaintiff is not improperly deprived of his opportunity for the trial of his case by the appointed tribunal. On the other hand I do not think that the exercise of the jurisdiction should be reserved for those cases where argument is unnecessary to evoke the futility of the plaintiff's claim. Argument, perhaps even of an extensive kind, may be necessary to demonstrate that the case of the plaintiff is so clearly untenable that it cannot possibly succeed." 8 Barwick CJ also said: "It is sufficient for me to say that these cases uniformly adhere to the view that the plaintiff ought not to be denied access to the customary tribunal which deals with actions of the kind he brings, unless his lack of cause of action - if that be the ground on which the Court is invited, as in this case, to exercise its powers of summary dismissal - is clearly demonstrated. The test to be applied has been variously expressed; 'so obviously untenable that it cannot possibly succeed'; 'manifestly groundless'; 'so manifestly faulty that it does not admit of argument'; 'discloses a case which the Court is satisfied cannot succeed'; 'under no possibility can there be a good cause of action'; be manifest that to allow them' (the pleadings) 'to stand would involve useless expense." 9 In Webster Mason CJ, Deane and Dawson JJ reinforced the rigorous testing stating, at 602: "The power to order summary judgment must be exercised with 'exceptional caution' and 'should never be exercised unless it is clear that there is no real question to be tried."' 10 According to Rolfe AJA in Zarb: "The demanding nature of the test is in no way lessened in circumstances where there are the potential for difficult factual and legal issues to arise. Rather, as the decision in Webster made clear, it is heightened: see also Wickstead & Ors v Browne (1992) 30 NSWLR 1 and Esanda Finance Corporation Limited v Peat Marwick Hungerfords (1997) 188 CLR 241." 11 The defendant submitted that there may have been other conversations which mean that pursuant to s 222AOJ, he took all reasonable steps; secondly, that s 222AOJ may be interpreted in a manner not raised in Simpson & Ors v Deputy Commissioner of Taxation 33 ATR 139 and Re Scobie & Anor, exparte Deputy Commissioner of Taxation 95 ATC 4519; and thirdly, although the quantification of the amounts due are not disputed, the date upon which the payment fell due has not been proved by evidence. 12 The first two submissions involve s 220AOJ of ITAA 36. Section 220AOJ appears in Division 9 of the Act which is headed "Penalties for directors of non-remitting companies". It is necessary to look at the framework of Division 9. 13 The object and outline of this division is set out in s 222ANA which states: "Object and outline (1) The purpose of this Division is to ensure that a company either meets its obligations under Division 1AAA, 3B, 4 or 8, or goes promptly into voluntary administration under Part 5.3A of the Corporations Law 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. (4) Sections 220AAZA, 221YHZJ and 221YR provide for the recovery of amounts payable under this Division." 14 The reference to obligations under Division 1 AAA, 3B 4 or 8 is an obligation to pay the amount due. 15 Section 222AOB provides: "Directors to cause company to remit or to go into voluntary administration or liquidation (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 Division 1AAA, 3B or 4, as the case may be, in relation to each deduction: (i) that the company has made for the purposes of Division 1AAA, 3B or 4; and (ii) 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; (c) appoint an administrator of the company under section 436A of the Corporations Law; (d) begin to be wound up within the meaning of that Law." 16 Section 222AOE provides: "Commissioner must give 14 days' notice before recovering penalty The Commissioner is not entitled to recover from a person a penalty 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 section 222AOC; 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 Law; or (iv) the company is being wound up." 17 The section, the subject of the defence, s 220AOJ provides: "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). (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); 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 ; (b) all other relevant circumstances." 18 In a recent joint decision of the High Court in DCT v Woodhams 169 ALR 503 stated: "The first purpose of the notice is to inform the recipient of the unpaid amount of the company's liability under the remittance provisions, and of the recipient's liability to a penalty in the same amount. The second purpose, consistently with s 222ANA, is to inform the recipient of the alternative courses available, as set out in s 222AOE(b), which will result in remission of the penalty, the object being to encourage the recipient to take such steps as are necessary to bring about the result that one or other of those courses is followed." 19 In Simpson, a decision of Duggan J, Supreme Court of South Australia. His Honour stated: "Whatever might be said as to the situation the directors found themselves in at the time of the serving of the notice, the fallacy in this argument is the premise that the relevant time for considering whether the defence is provided is the time at which the notice is given. It is true that at this stage the directors are given an opportunity to take action so as to lead to the penalties being remitted, but their liability does not arise for the first time at this point; nor does their obligation to cause the company to do at least one of the things prescribed by s 222AOB commence at this stage. Section 222AOB(1) places the primary obligation on the directors and it requires that at least one of the prescribed events is to take place "on or before the due date". The defence under s 222AOJ(3) is concerned with steps which might or might not have been taken to ensure compliance with s 222AOB(1). It is clear, therefore, that the appellants could not ignore the period before the due date when setting out to prove the defence. If this were not so then the object of the legislation in compensating the loss of the Commissioner's priority by ensuring that the company either meets its obligations under the Act or goes promptly into voluntary administration or into liquidation (s 222ANA) would be rendered nugatory in many instances. The requirement that attention be given to the courses of action under s 222AOB(1) on or before the due date answers Mr J Wilkinson's alternative argument that there was insufficient time as at the respective due dates to cause the company to go into liquidation." 20 In Re Scobie Cooper J said: "The respondents' submission that the phrase "begin to wound-up" means, and is satisfied by, the filing of an application seeking an order for winding-up, and the alternative argument that the directors in this case took all reasonable steps within the terms of s 222AOJ(3), rely upon the contention that the directors' obligation was only referrable to the contents of the notice given by the Commissioner as required by s 222AOE. … In my view the approach of the respondents is misconceived. They seek to equate the giving of a necessary notice as a condition precedent to recovery proceedings for a penalty with the point in time at which a duty of compliance by the directors arises. They also seek to set the requirements of compliance as the doing or causing to be done of one act specified in the notice within the period specified in the notice. It is only because the respondents seek to impose a 14 day time limit on the occurrence of all factual circumstances described in the notice that the submission can be made that "the option of winding-up the company [would be] illusory" if the time for compliance was fixed when the process of winding-up commenced, in fact, or by the operation of s 513A of the Corporations Law . As I set out earlier in these reasons, the obligation imposed on directors arises from the first deduction day and continues until compliance by the occurrence of one of the events specified in s 222AOB(2). The submissions of the respondents totally ignores the obligation case upon the directors in the period prior to receiving the notice. The obvious purpose of Div 9 of Pt VI of the Income Tax Assessment Act 1936 is to force directors to address the issue of compliance before the due date and to take whatever action is appropriate to bring about compliance. The duty is enforced by penalty which arises if there is non-compliance on the due date. There is nothing in the scheme of the Division which necessitates a construction of the compliance requirements in s 222AOB (2) which enable each of the four circumstances to occur on or before the due date without the imposition of a penalty. This is particularly so where the Division provides for the remission of any penalty by operation of the statute at any time prior to the expiration of 14 days after the giving of a notice as provided for in s 222AOB. It is entirely contrary to the purpose of the division to construe the requirements of compliance on the basis that directors are free to ignore the continuing statutory obligation imposed upon them by s 222AOB(1) until receipt of the notice." 21 The defendant did not pay the amounts due. He did not, at the date when the payments fell due or at the latest at the date of the expiry of fourteen days after the notices were served enter into an agreement. Nor did he during this period appoint an administrator of the company or begin to cause the company to be wound up. 22 The only step that the defendant took on the fourteenth day after service of the notice was that to enter into negotiations on behalf of the company with Civil and Civic to seek that Civil and Civic pay the money due under the penalty notices. The defendant's counsel acknowledged that these negotiations took place after "the due date". It was held in Simpson and Scobie that the operative date that it had to one of the alternatives in s 222AOE(2) as the "due date". However he submitted that contrary to the decisions in Simpson and Scobie, the duty can be interpreted as a ongoing one. He specifically referred to s 222AOB(3) where it states: "(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." 23 According to the defendant s 222AOB(1) should be modified or extended by s 222AOB(3) so that the reasonable steps can be ongoing after the due date. This argument is clearly contrary to Simpson and Scobie. In my view this argument is unsustainable. 24 Further the defendant submitted that there may have been other conversations that have not been included in his affidavit and these conversations would demonstrate that he either took reasonable steps or there were no such steps he could have taken. If such conversations did actually take place the defendant had the opportunity to put them in evidence and elected not do so. If he had any other evidence he wanted to put before the court he had an opportunity to do that. As the defendant was sole director from 1997 until 1999, it is difficult to accept that he could not take any steps - see 222AOJ(4). 25 Thirdly, the defendant put into issue that the payments were due on the seventh of the following month. Although this is pleaded the defendant asserts that the plaintiff has not provided evidence on this topic. However, s 222(f)(5) and s 220AAM(1) ITAA36 provide that payments of group tax fall due on the seventh of the following months. Likewise, s 221YHN(2) ITAA36 provides that prescribed payments fall due on the seventh of the following month. Also s 8ZL of the Taxation Administration Act provides a statement or averment contained in a claim is prima facie evidence of the matter so stated or averred. The defendant does not have an arguable defence. The defence is hopeless, unsustainable and should be struck out. The plaintiff is entitled to summary judgment. 26 Costs are discretionary. Costs should follow the events. The defendant is to pay the plaintiff's costs of the motion and of the proceedings. 27 The orders I make are: (1) The defence is struck out. (2) The plaintiff is entitled to summary judgment. The registrar is to enter summary judgment upon the filing of an affidavit of debt in the registry and compliance with the Rules. (3) The defendant is to pay the plaintiff's costs of the motion and of the proceedings. ********** Last Modified: 09/27/2000 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.