Reported Decision : (2003) 43 ACSR 387 (2002) 55 NSWLR 722 New South Wales Court of Appeal CITATION : Deputy Commissioner of Taxation v Saunig [2002] NSWCA 390 FILE NUMBER(S) : CA 40628/01 HEARING DATE(S) : 20 August 2002 JUDGMENT DATE : 6 December 2002 PARTIES : Deputy Commissioner of Taxation (Appellant) John Peter Saunig (Respondent) JUDGMENT OF : Sheller JA at 1; Heydon JA at 2; Gzell J at 45 LOWER COURT JURISDICTION : District Court LOWER COURT DC 8323/99 FILE NUMBER(S) : LOWER COURT Gibb DCJ JUDICIAL OFFICER : COUNSEL : Mr P D Rodionoff (Appellant) Respondent in person SOLICITORS : Australian Government Solicitor (Appellant) Respondent in person CATCHWORDS : Taxation - companies - PAYE tax instalments deducted from employees' wages - failure to pass payment to Taxation Office - breach of statutory obligation - Income Tax Assessment Act 1936 (Cth) s 221F - company directors - personal liability to penalties incurred for breach of statutory obligation - Income Tax Assessment Act 1936 (Cth) s 222AOB, s 222AOJ(3) - whether actions of director "reasonable" - availability of such defence - Statutes - construction - "reasonable" - D LEGISLATION CITED : Corporations Law Income Tax Assessment Act 1936 (Cth) Deputy Commissioner of Taxation v George [2002] NSWCA 336 CASES CITED: In Re A Solicitor [1945] 1 KB 368 Miller v Deputy Commissioner of Taxation (1997) 98 ATC 4059 DECISION : See paragraph 44 - - IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40628/01 DC 8323/99 SHELLER JA HEYDON JA GZELL J 6 December 2002 DEPUTY COMMISSIONER OF TAXATION v John Peter SAUNIG Taxation – companies – PAYE tax instalments deducted from employees' wages – failure to pass payment to Taxation Office – breach of statutory obligation – Income Tax Assessment Act 1936 (Cth) s 221F – company directors – personal liability to penalties incurred for breach of statutory obligation – Income Tax Assessment Act 1936 (Cth) s 222AOB, s 222AOJ(3) – whether actions of director "reasonable" – availability of such defence Statutes – construction – "reasonable" The defendant was one of three directors of a company incorporated under the Corporations Law. The defendant did not regard himself as responsible for the management of the company. In early 1997 the defendant became concerned about the management of the company. He ascertained that the company had a significant liability to the Taxation Office for failure to pass PAYE tax instalments deducted from employees' wages to the Office. He took measures to calculate the size of the liability and to repay it. The other directors were uncooperative. Attempts to resolve the matter through discussions with officers of the Taxation Office and through meetings with the other directors failed. The Deputy Commissioner brought an action in the District Court under s 222AOC of the Income Taxation Assessment Act 1936 (Cth) for recovery of the debt. The trial judge found that the defendant was prima facie liable but attracted a defence under s 222AOJ(3) of the Act as a person who "took all reasonable steps to ensure that the directors complied with subsection 222AOB(1)". A verdict was given in favour of the defendant and judgment was entered against the plaintiff. On 24 April 2002 the plaintiff was granted leave to appeal against those orders. Held (Heydon JA, Sheller JA and Gzell J agreeing), allowing the appeal, 1. The better construction of s 222AOJ(3) is that the test is an objective one. There is nothing in any of the relevant sections suggesting that all that matters is the actual knowledge of the director or that a director who is ignorant of the law or of any fact of which he ought to know is in a better position than a director aware of the law and aware of facts which he found out. In other words, the prima facie meaning of "reasonable" given to that word in In Re A Solicitor [1945] 1 KB 368 at 371 is not displaced. On its true construction, s 222AOJ(3) gives a defence to a defendant to proceedings for the recovery of a penalty imposed by s 222AOC if the defendant proves that he or she took all steps which were reasonable, having regard to the circumstances of which the defendant, acting reasonably, knew or ought to have known, to ensure that the directors complied with s 222AOB(1). It was unnecessary to decide whether that test would in other circumstances be qualified: [25]. In Re A Solicitor [1945] 1 KB 368, applied. 2. Although the evidence before the trial judge was jumbled and confused, it was not necessary to resolve it; the appeal could be decided on the basis of certain factual assumptions made by the defendant. On each of those assumptions the defendant failed to make out the defence available to him under s 222AOJ(3) to the claim brought under s 222AOB. Even if the defendant were ignorant of the fact that the company's taxation affairs were not properly being attended to, the defendant had had an ample opportunity to take steps under s 222AOB(1); he could as a single director have caused the company to begin to be wound up under s 459F(1)(a) of the Corporations Law; he could have established a prima facie case that the company was insolvent in order to take steps to begin winding up proceedings; and he should as a reasonable director have sought and obtained legal advice from a lawyer or practical advice from an accountant. Advice that the directors were in serious breach of the law for which they were incurring personal liabilities to penalties would probably have stimulated the defendant's previously non-cooperative codirectors to agree to some course to forestall any action against them personally for penalties. It followed that the defendant had not demonstrated that he took the reasonable steps referred to in s 222AOJ(3) or that it was not possible to do so. His personal ignorance of s 222AOB(1) did not assist in establishing that defence. The trial judge erred in limiting the inquiry to the defendant's personal "knowledge of the options available to him and his company" and not extending it to what a reasonable director in his position would have known had the inquiries been made which ought to have been made: [29], [34]-[35], [37], [39]. Commissioner for Taxation v George [2002] NSWCA 336, considered. ORDERS 1. The appeal is allowed. 2. The orders of the trial judge are set aside. 3. There will be a verdict for the appellant and judgment in the sum of $97,747.94. 4. The respondent is to pay the appellant's costs of the proceedings in the District Court. 5. The respondent is to have a certificate under the Suitors Fund Act 1951. IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40628/01 DC 8323/99 SHELLER JA HEYDON JA GZELL J 6 December 2002 DEPUTY COMMISSIONER OF TAXATION v John Peter SAUNIG Judgment 1 SHELLER JA: I agree with Heydon JA. 2 HEYDON JA: This is an appeal, by leave granted on 24 April 2002, against orders of Gibb DCJ made on 15 August 2001. She found a verdict in favour of the first defendant/respondent and entered judgment accordingly against the plaintiff/appellant. The case was heard on 15 August 2001 and judgment was effectively delivered ex tempore. The trial judge's reasons for judgment 3 The trial judge found the following facts. 4 The respondent, Mr Saunig, became director of a company in July 1995. The company was called, at different times, Moreglide Pty Ltd, Contracard Pty Ltd and Contracard Ltd. Mr Saunig satisfied himself that there were not at that time any relevant taxation liabilities. 5 From July 1995 until early 1997 Mr Saunig worked at the Sutherland premises of the company, concentrating on sales. The other two directors, Mr Pryke and Mr Brown, worked in Newcastle. Mr Saunig regarded Mr Pryke as being responsible for the management of the company. 6 In early 1997 Mr Saunig became concerned about the management of the company. He formed the view that Mr Pryke was no longer competent and was significantly affected by alcoholism; and that Mr Brown tended merely to do Mr Pryke's bidding. 7 In March-June 1997 Mr Saunig ascertained that the company had a significant liability to the Taxation Office: it had deducted PAYE taxation instalments from its employees' wages pursuant to s 221C of the Income Tax Assessment Act 1936 (Cth), but had not passed them to the Taxation Office as required by s 221F. Mr Saunig went to some lengths to calculate what was owing and tried to raise money to pay what was owing. Eventually he informed the Taxation Office of the problem of his own volition and calculated what was owing; he made some payments, but could not pay all of what was owing. He had various meetings and discussions with officers of the Taxation Office. He experienced a total lack of co-operation from the other two directors. At a meeting in February/March 1998 Mr Saunig tried unsuccessfully to persuade the other directors to put the company into liquidation. 8 Around August 1999 Mr Saunig secured professional advice. In reliance on it, he placed the company into administration after securing the consent of one of the other two directors to do so, but the Taxation Office on the same day, 14 September 1999, put the company into liquidation. 9 By an Amended Statement of Liquidated Claim, the plaintiff claimed $97,747.94. The claim was made under s 222AOC of the Income Tax Assessment Act. Its operation depends on s 222AOB, and both must be read with s 222AOA. Those three sections provided: "222AOA. (1) This Subdivision applies if a company incorporated under the Corporations Law of a State or Territory has made, for the purposes of Division 1AA, 2, 3A, 3B or 4, one or more deductions having a particular due date. (2) The earliest day on which the company made for the purposes of that Division a deduction that has that due date is called the first deduction day . (3) That due date is called the due date . 222AOB. (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 1AA, 2, 3A, 3B or 4, as the case may be, in relation to each deduction: (i) that the company has made for the purposes of that Division; 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. (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 Law; or (d) the company begins to be wound up within the meaning of that Law; 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. 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: (a) that the company has made for the purposes of Division 1AA, 2, 3A, 3B or 4, as the case may be; and (b) whose due date is the same as the due date." 10 The appellant's right of action to recover monies pursuant to Mr Saunig's s 222AOB obligations depended on compliance with s 222AOE. It provided: "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 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." 11 Section 222AOG provided: "If: (a) a penalty is payable by a person under this Subdivision; and (b) section 222AOB is complied with at a time when the Commissioner has not yet given the person a notice under section 222AOE, or within 14 days after the Commissioner gives the person such a notice; the penalty is remitted because of this section." A notice was served on 26 June 1998. 12 Section 222AOJ(1), (3) and (4) provided: "(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). … (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; and (b) all other relevant circumstances." 13 The Amended Statement of Liquidated Claim alleged that the directors had failed to cause the company to do any of the four things referred to in s 222AOB(1). The total claim was the sum of seventeen deductions for the months November 1996 to March 1998, less a small sum which was paid. Each deduction should have been paid no later than the 7th day of the month following the month for which the deduction was made under s 221F as then enacted. The claim was made against all three directors, but only proceeded against Mr Saunig. 14 By the end of the hearing below, the only issue before the trial judge (and the only issue before this Court) is whether Mr Saunig established the s 222AOJ(3) defence. 15 The trial judge said: "In his final submissions, the plaintiff's counsel submitted that the plaintiff might succeed in part or lose in part if I accepted that reasonable steps had been taken in respect of particular outstanding payments. I have not accepted that characterisation of the plaintiff's claim. I have treated the plaintiff's claim as a single claim as it was structured, as being a single liquidated claim for a single specified sum, albeit a sum quantified by reference to specific sums at specific periods totalled for the whole of the period. I have considered the steps taken by the first defendant across the whole of the period that is in issue and not in respect of particular payments at particular times. … When (in late 1999) Mr Saunig finally sought and obtained professional advice from Hamiltons, Mr Saunig's adviser was able to secure Mr Brown's consent to the appointment of an administrator by facsimile. Mr Saunig did not try to use that avenue of resolution by facsimile during the relevant period. Mr Saunig recalled that his accountant 'did the talking' with Mr Brown. That same strategy might have been successful if it had been implemented in the relevant period. It did not occur to Mr Saunig in the relevant period, although it was an option contemplated by the company's articles and memoranda with which he was familiar. … It seems to me, however, that the appropriate test in this context is to have regard to that which the director did in the context of his knowledge of the options available to him and his company, and his continuing efforts to achieve compliance with the statutory obligations. With the benefit of hindsight, there is no doubt that steps should have been taken sooner to obtain professional advice. Had he done that, he might have secured compliance by the appointment of an administrator within the relevant time. It is at least possible that, had professional advice been obtained at the right time, then it may have been possible to achieve compliance with the relevant statutory obligations. In the circumstances, it would not have been possible to secure an agreement within the meaning of the Income Tax Assessment Act 1936 (Cth) . Mr Saunig was told that there would be no agreement with the Commissioner until on-going liabilities were met. In turn, that depended upon securing further financing, with which his fellow directors would not agree, and therefore to which the Board would not agree. The first defendant appears to have found himself in something of a loop. Everything he set out to do rested upon securing further financing. Mr Saunig tried to further finances for the company, but was denied agreement to that by the majority on the Board. He was unable to put forward any formal proposal to the Commissioner absent any re-financing sufficient to warrant such an agreement. He was told no agreement would be forthcoming without discharge of continuing liability – and that also rested upon securing further financing. Steps were taken towards paying the outstanding taxation liability, but success in that depended upon securing further financing. Steps were taken to reach an agreement with the Commissioner, although no precise formulation was put, and Mr Saunig did not appreciate that the arrangement that he secured in September 1998 was not such an agreement, although the Australian Taxation Office was obviously conscious of that. Steps were taken to 'close down' the company, but no agreement was secured in that respect. I am required by 222AOJ(4) of the Income Tax Assessment Act 1936 (Cth) to have regard to when and for how long a person is a director, the role of which he took in management of the company and any other relevant the circumstances. The role that this director played in the company changed in 1997. The period covered by this is from the period 1 November 1996 through to 31 March 1998 in terms of deduction periods, and to 7 April 1998 in terms of the due dates. By February/March 1998, which falls within the period, the question of liquidation had been raised and rejected at the Board level. It seems to me that in these circumstances it is an appropriate case to form a view that the defence has satisfied me that he took all reasonable steps, albeit steps that were ultimately inefficient and ineffective, and, to the extent that he did not take steps, there were no effective steps available to him. I am satisfied that Mr Saunig had made out and proved his defence under s 222AOJ(3) of the Income Tax Assessment Act 1936 (Cth) ." Single liquidated claim or not? 16 The first ground of appeal on which the appellant relied was: "Her Honour erred in finding the Claimant's claim to be a single liquidated claim for a specific sum, albeit a sum quantified by reference to specific sums at specific periods totalled for the whole of the period." 17 The outcome of this appeal does not turn on the trial judge's characterisation of the claim in the first of the passages quoted above. Neither side suggested that the respondent might have been able to establish a defence in respect of some payments but not others. The appellant said that the defence was not established for any payment. The respondent said it was established for all. Accordingly, it is not necessary to deal with this ground. Ground 2: the relevance of the director's ignorance 18 Ground 2 was: "In considering a defence under s 222AOJ(3) her Honour erred in applying a test which took into account the director's personal knowledge of his obligations to effect compliance with s 222AOB of the Act." 19 The appellant argued that s 222AOB(1) created an imperative obligation on the directors to cause the company to bring about one of the four outcomes. The appellant said: "Nowhere does the legislation state that any of the obligations is dependent upon the director's understanding of what is to be done to comply with that obligation, nor does the legislation provide any defence for ignorance of the requirements of the duty." The appellant submitted that Miller v Deputy Commissioner of Taxation (1997) 98 ATC 4059 at 4063-4064, a case on s 222API(3) which was in similar form to s 222AOJ(3), required the taking of all objectively reasonable steps, including the addressing of each of the four outcomes. The appellant submitted that a director's ignorance of the law, and in particular ignorance of the obligations of directors under the Income Tax Assessment Act, could not create a defence. A person who agrees to become a director takes on all the obligations of a director, and if that person does not know what they are, competent professional advice should be obtained. The appellant pointed out that Mr Saunig had not only not obtained legal advice before 26 June 1998, he had failed to respond to the s 222AOE notice served on him that day by obtaining professional advice as to what should be done about it. 20 The appellant submitted that the test to be applied in deciding what steps were reasonable turned on how a reasonable director in the position of the particular director would behave, unless the particular director had knowledge and abilities which were superior to those of an ordinary reasonable director. 21 The appellant submitted that in relation to each of the seventeen monthly deductions in relation to which the respondent was sued, the respondent was obliged to show that he took all reasonable steps to comply with one of the four s 222AOB(1) obligations not only in the period from the day the deduction was made (the "first deduction day") until the due date, namely the 7th day of the following month, but also thereafter until payment (by reason of the continuing obligation imposed by s 222AOB(3)). 22 These submissions must be evaluated against the background of the Articles. Article 66 provided that the business of the company was to be managed by the directors. Article 68 provided that all cheques were to be signed by any two directors or in such other manner as the directors determined. Articles 69-70 provided: "69. (1) The Directors may meet together for the despatch of business and adjourn and otherwise regulate their meetings as they think fit. (2) A Director may at any time, and a Secretary shall on the requisition of a Director, convene a meeting of the Directors. 70. (1) Subject to these regulations, questions arising at a meeting of Directors shall be decided by a majority of votes of Directors present and voting and any such decision shall for all purposes be deemed a decision of the Directors. (2) In case of an equality of votes, the Chairman of the meeting, in addition to his deliberative vote (if any), has a casting vote." Article 73 provided: "At a meeting of Directors, the number of Directors whose presence is necessary to constitute a quorum is such number as is determined by the Directors and, unless so determined, is two (2)." Mr Saunig gave evidence to the trial judge that no number other than two had ever been determined by the directors. Article 77 provided: "(1) If all the Directors have signed a document containing a statement that they are in favour of a resolution of the Directors in terms set out in the document, a resolution in those terms shall be deemed to have been passed at a meeting of the Directors held on the day on which the document was signed and at the time at which the document was last signed by a Director or, if the Directors signed the document on different days, on the day on which, and at the time at which, the document was last signed by a Director. (2) For the purposes of sub-regulation (1), two (2) or more separate documents containing statements in identical terms each of which is signed by one (1) or more Directors shall together be deemed to constitute one document containing a statement in those terms signed by those Directors on the respective days on which they signed the separate documents. (3) A reference in sub-regulation (1) to all the Directors does not include a reference to a Director who, at a meeting of Directors, would not be entitled to vote on the resolution." 23 In this case the appellant submitted that Mr Saunig's duty was to call a meeting of directors to discuss "the issue of administration and of appointing a liquidator, not merely to call a meeting of directors to discuss a refinancing package". If nobody turned up but the director calling the meeting, the appellant submitted that the course open to the director was to resign and thus escape any continuing liability. 24 The essential points advanced by Mr Saunig, who appeared for himself during the appeal, were that he was not involved in the management of the company until March-June 1997; until then he observed no tax irregularities; he later realised that certain facts had been hidden from him; on discovering the truth he did a great deal of work in calculating what was owed; he tried to raise funds to pay what was owed and did pay some of what was owed; he tried hard to call meetings of directors but with only limited success; and the other directors would not permit the company to be put into administration. He also said that the Articles of the company prevented one director commencing winding up proceedings even if the company was insolvent. He was speaking without a copy of the Articles to hand: this particular submission is not supported by them and also overlooks s 459P of the Corporations Law. However, his address also suggested that the company was not insolvent. He said that, faced with recalcitrant or non-cooperative or absent co-directors, there was nothing more that he could have done. 25 In In Re A Solicitor [1945] 1 KB 368 at 371 Scott LJ, delivering the judgment of the Court of Appeal, said: "The word 'reasonable' has in law the prima facie meaning of reasonable in regard to those existing circumstances of which the actor, called on to act reasonably, knows or ought to know." The better construction of s 222AOJ(3) is that the test is an objective one, corresponding to that of Scott LJ. There is nothing in any of the relevant sections suggesting that all that matters is the actual knowledge of the director or that a director who is ignorant of the law or of any fact of which he ought to know is in a better position than a director aware of the law and aware of facts which he found out. In other words, there is nothing in the legislation to displace the prima facie meaning of "reasonable" in s 222AOJ(3) which adoption of Scott LJ's approach would ascribe to it. Hence, on its true construction, s 222AOJ(3) gives a defence to a defendant to proceedings for the recovery of a penalty imposed by s 222AOC if the defendant proves that he or she took all steps which were reasonable, having regard to the circumstances of which the defendant, acting reasonably, knew or ought to have known, to ensure that the directors complied with s 222AOB(1). It is not necessary to decide in this case whether the qualification to the test propounded by the appellant, namely that it was legitimate to take into account the knowledge and abilities of a particular director which were superior to those of an ordinary reasonable director: Mr Saunig did not have knowledge and ability superior to those of an ordinary reasonable director. 26 The evidence before the trial judge was tendered in a jumbled and confused way. It was difficult for the trial judge, in her ex tempore judgment, to reduce it to order, and it remains difficult to do so. Indeed, it was one of the appellant's themes that Mr Saunig bore the burden of proof in relation to the defence relied on, and the unsatisfactory nature of the evidence in point of chronology and precision alone rendered it impossible for that burden to be discharged. 27 However, for the purposes of deciding this case it is not necessary to seek complete precision, because Mr Saunig's case proceeded on various assumptions. One assumption was that for some time he took no part in the management of the company in the sense of being abreast of its taxation position. Another assumption is that once he did become aware of its taxation position, he made attempts to remedy the problem, but these attempts were constantly obstructed by the failure of the other directors to attend meetings he called, or, when they did attend them, to respond rationally to the company's taxation predicament. He saw these assumptions as favourable to his case, and no other assumptions even approaching conformity with the evidence could have been more favourable to his case. It is possible to dispose of this appeal by accepting these assumptions for the sake of argument. 28 Let it be assumed that for some period which included the early months of the seventeen month period in relation to which the appellant sued Mr Saunig, he was not attending to the company's taxation affairs, was trusting one or other or both of the other two directors to handle those affairs properly, and was ignorant of the fact that that role was not being satisfactorily performed. Even on that assumption, it cannot be said that during that period Mr Saunig established that he took all reasonable steps to ensure that the directors complied with s 222AOB(1). While even in a relatively small organisation like the company in this case it may not be right to require each director to take personal steps to ensure compliance with s 222AOB(1)(a), it was incumbent upon Mr Saunig to ascertain what the company's duties in relation to tax instalments deducted from employees' wages were and to ensure that some system was in place which would produce compliance. There was no evidence of any such system. There may have been an issue between the parties as to whether the s 222AOB(1) duty arose from the day each deduction for employees' wages was made (which the appellant favoured) or whether it only arose from the 7th day of the next month (which Mr Saunig appeared to favour at an early stage, though not at a later stage, of the argument below). The better construction is the former, but on either view Mr Saunig has not demonstrated that the s 222AOJ(3) defence has been made out. Applying the construction of s 222AOJ(3) adopted above, Mr Saunig's conduct must be judged not only by a reference to what he knew, but also by a reference to what he ought to have known. He ought to have known that there were deduction payments, that the deduction payments should have been passed to the Taxation Office and that they were not being passed to the Taxation Office. 29 There is a certain harshness in the speed of action which s 222AOB(1)(b)-(d) calls for because in the case of a company which cannot pay the deduction under paragraph (a), the time allowed within which to arrive at an agreement with the Commissioner, appoint an administrator, or commence the winding up of the company is very short. The harshness was no doubt seen as appropriate, because the evils of tax payers 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. To adopt the language of Gzell J in Deputy Commissioner of Taxation v George [2002] NSWCA 336 at [33], 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 222AOB(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. 30 Let it be assumed, then, secondly, that at all material times after he found out the facts Mr Saunig was receiving no cooperation from the other two directors. On that assumption, it was not open to Mr Saunig acting alone to cause the company to carry out the first step contemplated by s 222AOB(1)(a), namely to pay the deductions, because the company cheque required the signatures of two directors. 31 Nor was it open to Mr Saunig acting alone to cause the company to carry out the second step contemplated by s 222AOB(1)(b), namely to make an agreement with the Commissioner. To do that would have been an act of management in relation to the business of the company, and hence something committed by Article 66 to the directors. The non-cooperation of the other two directors would mean that either no quorum would be achieved at a directors' meeting pursuant to Article 73, or no unanimity could be achieved for the purpose of Article 77. 32 Nor was it open to Mr Saunig acting alone to cause the company to take the third step contemplated by s 222AOB(1)(c), namely to appoint an administrator under s 436A of the Corporations Law. Section 436A provided: "(1) A company may, by writing, appoint an administrator of the company if the board has resolved to the effect that: (a) in the opinion of the directors voting for the resolution, the company is insolvent, or is likely to become insolvent at some future time; and (b) an administrator of the company should be appointed. (2) Subsection (1) does not apply to a company that is already being wound up." For reasons given in relation to the second step, the company could not appoint an administrator without a majority of directors, which ex hypothesi did not exist. 33 Was it open to Mr Saunig acting alone to cause the company to take the fourth step contemplated by s 222AOB(1)(d), namely to cause the company to "begin to be wound up" within the meaning of the Corporations Law? Section 459F(1)(a) of the Law gave an insolvent company standing to apply to be wound up in insolvency. Section 459P(1)(d) gave a director standing to apply, but the application required the leave of the court: s 459P(2)(c). A contributory also had standing, with the leave of the court: s 459P(1)(c) and (2)(b). Mr Saunig was a contributory. That leave required a prima facie case that the company was insolvent: s 459P(3). Section 462(2)(a) and (c) gave the company and a contributory, but not a director, standing to apply for an order winding up a company on one of the grounds provided for in s 461(1). A creditor also had standing: s 462(2)(b). Two of those grounds may have applied to this company, if Mr Saunig is correct, namely s 461(1)(e) and (f), which provided: "(e) directors have acted in affairs of the company in their own interests rather than in the interests of the members as a whole, or in any other manner whatsoever that appears to be unfair or unjust to other members; or (f) affairs of the company are being conducted in a manner that is oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members or in a manner that is contrary to the interests of the members as a whole; or" Further, s 461(1)(h) provided: "The Commission has stated in a report prepared under Division 1 of Part 3 of the ASC Law that, in its opinion: (i) the company cannot pay its debts and should be wound up; or (ii) it is in the interests of the public, of the members, or of the creditors, that the company should be wound up;" And s 462(2)(e) gave the Australian Securities Commission standing to apply pursuant to s 464. Section 464 provided: "(1) Where the Commission is investigating, or has investigated, under Division 1 of Part 3 of the ASC Law: (a) matters being, or connected with, affairs of a company; or (b) matters including such matters; the Commission may apply to the Court for the winding up of the company. (2) For the purposes of an application under subsection (1), this Act applies, with such modifications as the circumstances require, as if a winding up application had been made by the company. (3) The Commission must give a copy of an application made under subsection (1) to the company." Hence an approach by Mr Saunig to ASIC may have led to the company being wound up. 34 On one construction, the placing of the company in liquidation by a director or a contributory or the Commission would not be compliance with s 222AOB(1)(d). On that construction, the paragraph requires the company to place itself in liquidation. However, that construction is probably unsound. The verbs in paragraphs (a)-(c) are in the active voice: it is the company which must "comply", "make" or "appoint". But the verb in paragraph (d) is not in the active voice: the directors must "cause the company to … begin to be wound up". The process of causing the company to begin to be wound up can be effected by someone else other than the company. It is probable that the only person or persons other than the company who can cause it to begin to be wound up in compliance with s 222AOB(1)(d) are the directors or a director. That conclusion follows from the reference to directors in s 222AOB(1), from the imposition of a penalty on directors but not on other persons, and from s 222ANA(1) and (2), which provide: "(1) The purpose of this Division is to ensure that a company either meets its obligations under Division 1AA, 2, 3A, 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." And since the liability of each director for penalties is personal, and the defence given to each director is personal, so that one director of a company may be able to prove a defence even though another director of the same company may not, it is probable that s 222AOB(1)(d) is satisfied if a single director causes the company to begin to be wound up. 35 Mr Saunig could have caused the company to begin to be wound up if he could have established a prima facie case that the company was insolvent. Could he have done this? The trial judge made no express finding about the company's solvency at any particular time. What she did say about Mr Saunig's unsuccessful attempts to recover debts owed to the company, his attempts to raise outside funds, and his use of his own funds to pay the Taxation Office suggests the company could not pay its debts as they fell due. In evidence in chief Mr Saunig, speaking of back payments owed to the Taxation Office, said: "we didn't have the cash flow to make those payments". Speaking of a later time, after he was in negotiation with the Taxation Office and shortly before the Taxation Office put the company into liquidation, he said: "the company still didn't have funds to pay". He also said in evidence in chief that in September or October 1998 he told the Taxation Office that the company could not pay a lump sum of $25,000 owing under an interim agreement made with it. Mr Saunig also gave evidence that he would not have put the company into liquidation without another director's consent. His submissions argued for solvency, but not, in the light of this evidence, persuasively. All this material suggests that he could have put the company into liquidation by himself if he had wished to do so. Hence, despite the fact that Mr Saunig told the trial judge that at one stage the company was owed $300,000 (a figure greatly exceeding its taxation obligations), it cannot be said that he has proved that a prima facie case of insolvency could not have been established by a director applying to have the company wound up on grounds of insolvency. 36 The trial judge criticised Mr Saunig for not seeking competent professional advice earlier than he did. This criticism is sound. Once he learned of the problem, he could have done one of two things. He could have approached officers of the Taxation Office at once, thrown himself on their mercy and sought their advice as to the resolution of the problem. Judging by their apparent uncooperativeness at later periods, that tactic may not have been very successful, and in any event s 222AOB(1) imposes no duty to adopt it. But if that approach was to be abjured, the only alternative was to comply with the law. The proposition that if monies were deducted by the company from employees' wages and not paid to the Taxation Office, some Commonwealth statute might apply, is not one which would have startled or escaped the attention of a reasonable director. A reasonable director would have sought legal advice from a lawyer or practical advice from an accountant (as after some time Mr Saunig did). Any professional adviser consulted would have gone through the various possibilities set out above; might have been able to threaten or influence the other directors into behaving more sensibly than Mr Saunig was able to; might have been able to form a view about the company's solvency and about whether the directors were engaging in insolvent trading, which view might have been a spur to the directors to act collaboratively to appoint an administrator or to cause the company to begin to be wound up; and would have been able to advise the winding up of the company at the instance of Mr Saunig as director. 37 Quite apart from the possibility of Mr Saunig acting alone commencing winding up proceedings against the company, had he behaved as a reasonable director in his position would have behaved and obtained professional advice, that advice would have been to the effect that he and the other directors were committing serious breaches of the law in respect of which they had personal liabilities to penalties. Communication of that advice to the other directors would probably have stimulated the other directors to agree with Mr Saunig to appoint an administrator or commence winding up proceedings so as to forestall any action against them personally for penalties. As counsel for the appellant said, while the primary duty under s 222AOB(1) is to achieve one of the four outcomes, the statutory defence under s 222AOJ(3) does not require the outcomes to be achieved, it requires only the taking of reasonable steps to achieve them or a demonstration that it was not possible to take reasonable steps. The failure of Mr Saunig to obtain early advice meant that he was never in a position to confront his co-directors with a correct statement of the choices facing them or to chart a course which, had the others agreed, would have led to compliance, however belatedly, with s 222AOB. Given that the onus of proving the defence lay on Mr Saunig, he had to negate, on the balance of probabilities, the conclusion that professional advice would not have had that result. This he did not do. 38 The last month of payments in relation to which Mr Saunig was sued was March 1998. If that month and any preceding month falls within the period in which Mr Saunig contends the company board was in effect deadlocked, Mr Saunig's defence was not established for the reasons just given. If that month and any preceding month fell within a period in which the other directors were minded to cooperate, then the failure to obtain advice is more starkly to be seen as unreasonable. When proper advice eventually was sought, it did not take the adviser long to procure the consent of another director to the appointment of an administrator, apparently by purported recourse to Article 77. It is not clear at what earlier times that action would have succeeded, but Mr Saunig has not excluded the conclusion that it would have if advice had been sought earlier. 39 It follows that Mr Saunig has not demonstrated that he took the reasonable steps referred to in s 222AOJ(3) or that it was not possible to do so. His personal ignorance of s 222AOB(1) does not assist in establishing that defence. The trial judge erred in limiting the inquiry to Mr Saunig's personal "knowledge of the options available to him and his company" and not extending it to what a reasonable director in his position would have known had the inquiries been made which ought to have been made. 40 In the circumstances, though the appellant contended that in several respects the facts did not correspond with the second of the two assumptions just made, it is not necessary to arrive at conclusions about what exactly Mr Saunig did from November 1996 on, what he knew, and what the other directors did. Other grounds of appeal 41 The other five grounds of appeal were either repetitive of Ground 2, or relied on reasoning which has been adopted above in dealing with Ground 2, or need not be dealt with for some other reason. Orders 42 The appellant seeks a verdict and judgment in the sum of $97,747.94. To this relief it is entitled. The appellant does not claim interest. The appellant seeks an order for the costs of the trial and for the costs of this appeal. So far as the appeal is concerned, there are unsatisfactory features in the appellant's conduct of it. It is the prime role of an applicant to whom leave to appeal has been granted to ensure that, if conventional appeal books are not to be employed, the White Book contains all the materials necessary for the determination of the appeal. The materials before this Court were incomplete and directions had to be given for a search of the District Court file, for the court to be supplied with what was missing, and for further submissions. For that reason, the appropriate step to take in relation to the costs of the appeal is to not make any order as to those costs. However, there is no reason not to order that the costs of the appellant below be paid by the respondent. 43 However, there is one troubling feature of the case. It is understandable why the appeal was brought: the orders of the trial judge turned on legal reasoning and assumptions as to the law which the appellant would understandably wish to have examined by an appellate court. What is less understandable is the appellant's belated zeal in relation to Mr Saunig. Mr Saunig may have acted tardily and unreasonably, but it was he who approached the Taxation Office about the problem, not the other way round. This was so even though the Taxation Office was at least as well placed as a director to ensure that a company employing employees who claim in their tax returns that deductions have been paid has in fact paid them. The Taxation Office did not move fast on being informed of what had happened: cf Deputy Commissioner of Taxation v George [2002] NSWCA 336 at [33]. The conduct of which Mr Saunig gave evidence to the trial judge, the fact that she evidently formed a favourable impression of him, and the impression he gave in this Court, in which he represented himself, were all suggestive of an honest man doing what he thought was the right thing, though totally out of his depth. Persons of this kind who come forward to help the authorities should not be discouraged. The treatment of Mr Saunig by the Taxation Office once he had approached it was of a kind not likely to encourage other honest, conscientious, but not wholly reasonable persons in his position to come forward. Yet the successful administration of provisions of the kind examined in this case may be assisted to some extent by company officers who volunteer to the authorities information about the misdeeds of other company officers. Counsel for the appellant said in the course of his argument on the appeal: "Certainly one has a great deal of sympathy for the respondent." That is an emotion which is likely to be shared widely. It is also strange that he, the most energetic of the directors in seeking to ensure that the Taxation Office was paid, is the only one against whom the appellant has pressed these proceedings to a conclusion. In all the circumstances it is to be hoped that the appellant, having obtained success on the primary legal point agitated, will not seek to enforce its costs order or for that matter its judgment against Mr Saunig. 44 The following orders are proposed. 1. The appeal is allowed. 2. The orders of the trial judge are set aside. 3. There will be a verdict for the appellant and judgment in the sum of $97,747.94. 4. The respondent is to pay the appellant's costs of the proceedings in the District Court. 5. The respondent is to have a certificate under the Suitors Fund Act 1951. 45 GZELL J: I agree with Heydon JA. ********* 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.