District Court New South Wales Medium Neutral Citation: Deputy Commissioner of Taxation v Stuart Grant Smith [2017] NSWDC 102 Hearing dates: 12 and 13 April 2017 Date of orders: 12 May 2017 Decision date: 12 May 2017 Jurisdiction: Civil Before: Montgomery DCJ Decision: (1) Judgment for the plaintiff against the defendant in the sum of $108,699.85. (2) The defendant to pay interest pursuant to s 100 CPA from the due date of each instalment. (3) The defendant to pay costs of the proceedings. (4) I direct the parties to deliver to my Associate within 14 days of the date hereof an agreed Schedule calculating interest pursuant to Order 2 hereof for the making of final orders. (5) In the event of a failure to agree in relation to Order 4 hereof, liberty to restore on three (3) days' notice. Catchwords: Director Penalty Notice – all reasonable steps Legislation Cited: Tax Administration Act 1953 Civil Procedure Act 2005 District Court Act 1973 Cases Cited: Canty v Deputy Commissioner of Taxation (2005) 63 NSWLR 152; (2005) 226 FLR 121; [2005] NSWCA 83 Deputy Commissioner of Taxation v Dick (2007) 242 ALR 152; (2007) 226 FLR 388; (2007) 64 ACSR 61; [2007] NCA 190 Deputy Commission of Taxation v Saunig (2007) 55 NSWLR 722; 43 ACSR 387; 51 ATR; [2002] NSWCA 390 Category: Principal judgment Parties: Deputy Commissioner of Taxation (Plaintiff) Stuart Grant Smith (Defendant) Representation: Solicitor: Mr P.C. Bavin (Plaintiff) Self-Represented (Defendant) File Number(s): 2013/00194268 Publication restriction: None JUDGMENT 1. The defendant denies that he is personally liable for a tax debt enforced pursuant to a Director Penalty Notice (DPN) dated and issued by the Deputy Commissioner of Taxation (the Commissioner) on 22 April 2013 for the liability of CCIA Employees Pty. Ltd. (CCIA Employees). The Commissioner sues to recover amounts not paid by CCIA Employees pursuant to its obligations under Subdivision 16-B in Schedule 1 of the Tax Administration Act 1953 (TAA) for the period 1 November 2011 to 28 February 2013. Each of the amounts claimed to be withheld were itemised in the DPN which is Exhibit B to the affidavit of Ms Anita Tiku made 27 June 2016. 2. The defendant who was a director of CCIA Employees between its formation on 3 March 2010 and his resignation as a director on 31 August 2013, admitted that CCIA Employees withheld amounts it was liable to pay under Division 12, Schedule 1 of the TAA, but did not admit the amounts, claiming that he had no way of determining whether or not the allegations were correct. 3. For the plaintiff, the affidavits of Ms Anita Tiku made 27 June 2016 and of Mr Michael Fenech made 9 March 2017 and 12 April 2017 were read without objection. Those affidavits establish the instalment amounts withheld by CCIA Employees at the date of hearing, after credit allowed for payments received, to calculate to a total balance, principal sum of $108,699.85. The plaintiff also proceeds for interest pursuant to s 100 Civil Procedure Act 2005 (CPA). 4. CCIA Employees was incorporated on 3 March 2010 and deregistered on 24 July 2016. 5. The defendant was unrepresented. I observed him carefully as he appeared at the bar table and as he gave evidence under oath in the witness box. I found him to be intelligent, articulate, open, frank and honest. He was willing to make concessions against self-interest. 6. The Defence drawn at paragraphs [5] to [19] originally set out the grounds for denial of liability. Paragraphs [13] to [16] were struck out by order of her Honour Judge Norton on 24 February 2017. 7. In order to give full expression to the Defence and because the pleading has not been settled with legal expertise, I set out the relevant paragraphs in full: 5. In respect of the allegations set out in paragraphs 6 to 10 of the Statement of Claim, the Defendant: (a) states that the Defendant is the only Defendant in these proceedings; and (b) denies that he is indebted to the Plaintiff in the amount claimed or at all, and relies on the matters pleaded in paragraphs 6 to 19 below. Business operations of the company 6. At all relevant times, the company was a member of a group of companies (the Medica Group) that together operated a private hospital located in Hurstville, New South Wales, and known as 'The Medica Centre, Hurstville'. The company employed staff and contracted those staff members to the operator of the private hospital. Particulars A group structure chart and other documents demonstrating the relationship between the company and other members of the Medica Group is available for inspection by appointment with the Defendant. 7. At all relevant times, the Defendant was a non-executive director of the company, the executive function being carried out by the company's other director, Michael Joseph McGrath. Other functions of the company, including all financial matters and the payment of the company's liabilities, were carried out by staff employed by other companies in the Medica Group on behalf of the company. Defendant's understanding of the liability 8. At all relevant times, the Defendant was advised by staff acting on behalf of the company including the other director, Michael Joseph McGrath, and the company's Financial Controller, Austin Pu, that the liabilities of the company were being met, and that satisfactory arrangements were in place for the payment of all taxation liabilities to the Plaintiff. Defendant took all reasonable steps 9. The Defendant is not liable for the amount claimed or at all because, in his capacity as a director of the company, the Defendant, at all times, took every and all reasonable steps (sic) to ensure the company met its obligations under Division 12 in Schedule 1 of the TAA 1953. Particulars (a) The Defendant attended all meetings of directors of the company and monitored payment arrangements regarding the payment of the company's obligations to the Plaintiff. (b) The Defendant made inquiries of relevant officers of the company, including the Chief Financial Officer for the Medica Group and received assurances to the effect that satisfactory arrangements for the company's obligations to the Plaintiff were in place and those liabilities would be met. (c) Took all steps that he could reasonably take to ensure the company met its obligations to the Plaintiff. Company was under a payment arrangement 10. At all times whilst the Defendant was a director of the company, the company had a binding arrangement with the Plaintiff for the payment of amounts due to the Plaintiff, and there was no obligation or liability on the Defendant to pay the amounts claimed by the Plaintiff or any part of it. Particulars Particulars of the payment arrangements are set out in correspondence between the Plaintiff and the company's Chief Financial Officer, Mr Austin Pu, details of which will be available following discovery and inspection of documents. Company was in a position to meet liability to Plaintiff 11. At all material times prior to 19th September 2013, the Medica Group had access to funding sufficient to meet the operating liabilities of the Medica Group. Particulars Companies within the Medica Group had access to a financial facility from Suncorp Metway Limited and later Goldman Sachs as set out in documents available for inspection by appointment with the Defendant. 12. The Defendant was not aware at any time prior to 20th January 2014 that the liability claimed by the Plaintiff had not been met, or that no suitable payment arrangement was in place. Had the Defendant been aware, prior to his resignation as director, that the liability of the Plaintiff existed, the Plaintiff would have made arrangements to meet that liability out of the financing facility or he would have taken steps to have a voluntary administrator appointed to the company. Plaintiff in breach of its own policies [Paragraphs 13 to 16 struck out by order of Norton DCJ on 24 February 2017] Plaintiff's actions solely responsible for the liability 17. The Plaintiff's actions in not bringing the amount claimed by the Plaintiff to the attention of the Defendant have resulted in the liability not being paid by the company or the company being placed in voluntary administration. Defendant's liability limited to liability of other director 18. If the Defendant is liable to the Plaintiff (which is denied), the Defendant is only indebted in an amount equal to one half of the total amount owed to the Plaintiff, the other half being owed by the other director, Michael Joseph McGrath. 19. To the Defendant's best of knowledge, the executive director responsible for [the] [c]ompany's business activity has not been pursued. The Plaintiff owes the Defendant a right to be treated fairly by pursuing the executive director. 1. By Reply filed 1 March 2017, the Plaintiff pleads, in effect, that albeit pursuant to s 269-15 (3) of Schedule 1 of the TAA, the Commissioner must not commence or take a procedural step as a party to proceedings to enforce an obligation or recover a penalty from a director if an Arrangement covering the company's obligation is in force under s 255-15, the Commissioner may nevertheless issue a DPN under those circumstances (Note 2 to s 269-25). There was not, either at the date of issue of the DPN or at the time of the commencement of these proceedings, an Arrangement in force covering the relevant company's obligation. 2. The statements of law and of fact in the Reply were not disputed following the evidence. 3. The defences pleaded in paragraphs [18] and [19] of the Defence are contrary to the express provision of Schedule 1, s 269-20 (1) and (5) TAA, which plainly state that a director's liability for the amount of a penalty under a DPN is equal to the unpaid amount of the company's liability. Accordingly, the defences described in those paragraphs are dismissed. 4. There is no obligation at law for the Commissioner to bring to the attention of directors of a company its liability for unpaid tax as described in paragraph [17] of the Defence. The defendant conceded receipt of the DPN issued 22 April 2013 and discussing it with an officer of the Australian Taxation Office (ATO) in May 2013. That the Commissioner by taking earlier action against a company for its default to pay the withheld monies can avoid a director becoming aware of his liability for the company's failure at a later time when the debt has magnified, was a scenario recognised by Handley JA in Canty v Deputy Commissioner of Taxation [2005] NSWCA 84 at [71] to [79]. His Honour observed that a lack of diligence by the Commissioner may in a particular case be a proper reason for refusing to award some or all of the pre-judgment interest, in the event of judgment for the plaintiff. 5. In my opinion, if Defence paragraph [17] is directed to opposing the plaintiff's claim for interest, this is not in the category of case contemplated by Handley JA in Canty v Deputy Commissioner of Taxation [2005] NSWCA 84. Among the uncontested facts here are that the defendant was aware that CCIA Employees was not actively trading in business and other companies of the Medica Group were funding CCIA Employees in order for it to pay the employees. It was in relation to those payments of wages that the subject debt arose. In that scenario, the defendant's duty as a director to ensure the tax liability was being met was not distant or quiescent because companies in the Group controlled by him were funding CCIA Employees for its payment of wages. As will also be seen in the facts below, in 2012 the Medica Group retained Mr Austin Pu, a Certified Practising Accountant and holder of a Master's Degree in Commerce, as Chief Financial Officer. There is no evidence that had the defendant sought his assurances that tax liabilities were being met, the defendant would not have been informed of the subject tax debt. 6. In my opinion, this is not a case where any failure to give notice by the Commissioner would justify a reduction in pre-trial interest, and further, the facts do not require me to investigate further case law on the compensatory provision of pre-trial interest under s 100 CPA and its predecessor s 83A District Court Act 1973. The Facts 1. Cancer Care Institute of Australia Pty. Ltd. (CCIA) and CCIA Employees were two companies incorporated as part of the Medica Group in 2010. The intended Group enterprise was the development of a "paperless" hospital called the Medica Centre in Hurstville, New South Wales. CCIA purchased medical equipment. Whilst Mr McGrath's function was management and operations of CCIA and CCIA Employees, he and the defendant were directors of CCIA Employees. 2. The purchase of the medical equipment by CCIA was organised by Mr McGrath. Due to financial trading circumstances of the Group, at some stage, as I understand it, in 2011 but which date is not immediately important, the vendors of that equipment recovered it from CCIA. The CCIA Employees workers never operated the equipment. 3. CCIA Employees' sole function identified in the evidence of the defendant was that it retained the workers who the Medica Group intended to operate the equipment owned by CCIA. 4. The Medica Centre opened in January 2011. It was operated by Surgery Centres of Australia Pty. Ltd. and labour for the Medica Centre was provided by SCA Employees Pty. Ltd. Later in 2011, a diagnostic business commenced operation at the Medica Centre. The company running that component of the Group enterprise was Medical Radiology and Nuclear Medicare Pty. Ltd. 5. From November 2011, the defendant caused funds to be transferred from other companies within the Group operated by him to payment of the wages of CCIA Employees workers. The defendant said that Mr McGrath continued to insist that he would be able to resurrect the CCIA business. CCIA entered Voluntary Administration on 21 August 2012, and was placed into liquidation on 1 March 2013. 6. The defendant said that even when CCIA was placed into Voluntary Liquidation, Mr McGrath spoke to him in words to the effect "I can get the funding out of the US to keep my dream alive". A reason why CCIA had been unable to trade was that it was waiting for Health Department approvals for operation. When the defendant suggested to Mr McGrath that he approach the Minister, Mr McGrath responded in words to the effect "Get out of the way". I accept that Mr McGrath avoided contact from the defendant and generally did not cause or co-operate in causing CCIA Employees to comply with its obligation to pay the withheld moneys. 7. These facts composed part of the defendant's factual case that he was not involved in the day to day management of CCIA or of CCIA Employees. He worked in a different part of the Medica Group enterprise. His management control area of the enterprise was operation of the Medica Centre and diagnostic imaging. In 2012, the Medica Centre was completing 8,000 surgery events per annum. The companies operated by the defendant were financially viable and retaining sufficient cash revenue that they were able to fund CCIA Employees to pay wages for that period. 8. The Group banked with Suncorp Metway Ltd. (Suncorp). 9. In the environment of the post-global financial crisis conditions, previously expected financial arrangements dissipated, and the enterprise came under financial pressure. 10. In 2012, the Group retained Mr Austin Pu as Chief Financial Officer. Mr Pu continued to fund payment of the CCIA workers' wages from other Group companies. 11. The defendant did not dispute that as a director he was aware that Mr Pu had a responsibility for satisfying wages and tax liabilities. He understood that a director was responsible to check that those liabilities were satisfied. He said that until just prior to April 2013 when he had checked by inquiry, what was reported by Mr Pu caused him to believe that those liabilities were in fact satisfied. I accept that evidence. 12. The defendant did not require Mr Pu to prepare monthly financial reports. The defendant was until just before April 2013 told by Mr Pu and by Mr McGrath (to the extent that they had contact) that all liabilities were under control. 13. With frankness typical of his evidence, the defendant offered in cross-examination that he had not specifically asked about whether the CCIA tax liabilities were being met when due. 14. It was just prior to April 2013 that Mr Pu informed the defendant that CCIA Employees was behind in its payment of withheld monies from sometime commencing in 2012. At the same time Mr Pu informed the defendant that he had been for some time negotiating with the ATO an Arrangement to satisfy that liability. 15. The plaintiff's running log is annexed to the defendant's affidavit of 7 April 2017 (ATO Log). At page 42 of 55 of the ATO Log for date 7 February 2013, it is recorded that Mr Pu called the ATO regarding tax liabilities of CCIA Employees requesting that the ATO agree a payment Arrangement under which CCIA Employees would pay approximately $50,000-$70,000 as an upfront payment. In refusing that offer, the ATO referred to "the 5 defaulted arrangements since 2011" and suggested that a proposal supported by written financial information for the payment of all outstanding tax liabilities of CCIA Employees be made to the ATO "in the shortest possible timeframe, while allowing all future tax obligations to be met." Whilst the ATO log entry, relied upon by the defendant, does corroborate the fact that Mr Pu was seeking to negotiate an arrangement for payment of tax liabilities with the ATO, the entry characterises that the advices of Mr Pu and of Mr McGrath prior to service of the DPN, to the effect that all liabilities were under control (paragraph [25] above) as not describing more than continuing default by CCIA Employees whilst avoiding any drastic proceedings for recovery by the Commissioner. Again, the defendant's reference to the notation and the frankness of his evidence, leaves me in no doubt that he as a director was given assurances but that he did not as a director take steps to ensure that compliance was being achieved as set out in Schedule 1 s 269-15 TAA, other than to rely upon Mr Pu. 16. Taking the evidence as a whole, the Defence paragraph [10] must fail. As the ATO Log at page 42 of 55 confirms, and there is no evidence to the contrary, there was not "At all times" whilst the defendant was a director of the company a binding Arrangement between CCIA Employees and the Commissioner. The Question to be Answered 1. The defendant's personal liability primarily arises from his failure to cause the company to comply with its obligation (s 269-15) and is deemed as a penalty equal to the amount of each unpaid instalment arising on the day it was due: s 269-20. 2. On 17 May 2013, upon expiry of the period permitted by the DPN for the defendant to satisfy his s 269-15 obligations, the Commissioner became entitled to commence proceedings against the defendant personally for recovery of that debt: ss 269-20 and 269-25. 3. Because as pleaded in Defence paragraph [11] and as confirmed in the defendant's evidence, CCIA Employees was able to meet its operating liabilities including the subject debt on the due date of each instalment and of the amount outstanding as at 17 May 2013, the only question for answer in this case is whether the defendant proved that he took all reasonable steps to ensure that the directors caused the company to comply with its obligation in that period: s 269-35(2)(a)(i). This is the defence pleaded in Defence paragraph [9]. 4. The defendant says, and I accept, that he was only on 20 January 2014, upon receipt of a second DPN, aware that the Commissioner was proceeding against him personally for the recovery of the debt. In relation to the DPN dated 22 April 2013, the defendant did not have an actual recollection of its receipt but properly conceded that receipt and the accuracy of the ATO Log at page 33 of 55 recording telephone follow up on the DPN by an officer of the ATO on 29 May 2013. That Log entry records the defendant having informed the officer that CCIA Employees had sent correspondence to the ATO addressing the debt and requesting a payment Arrangement. The officer informed him that the ATO would correspond in response to whether or not the proposed Arrangement was acceptable. 5. The defendant said that at no point did he go to a solicitor to seek advice because he fully trusted Mr Pu who he considered to be well-qualified to negotiate an arrangement for the payment of the debt with the ATO. He conceded that it did not occur to him that the DPN elevated the tax debt to an urgent priority whilst the negotiations with the ATO being conducted by Mr Pu continued. He sought advice from the Liquidator of CCIA about removing Mr McGrath from directorship of CCIA Employees because of Mr McGrath's neglectful operation of the company. 6. A component of the defendant's claim that he "took all reasonable steps" is found in evidence of his activity post-dating 17 May 2013. Over objection, I admitted it as relevant to the defendant's proof relevant to characterisation of the steps taken by him before 17 May 2013 to ensure that the directors caused the company to comply with its obligation by achieving an Arrangement for payment with the ATO. Negotiations with the ATO as directed by the defendant commenced before service of the 22 April 2013 DPN. The evidence of that course of transaction after 17 May 2013 is relevant to the reasonableness of the defendant's expectation; of ultimately achieving compliance before 17 May 2013. Satisfaction of its obligation by performance of such an Arrangement would have been compliance by CCIA Employees within the terms of s 269-15(2)(a). This was not disputed. Pursuant to s 269-15(3), the Commissioner was prevented from commencing proceedings to enforce that obligation or to recover the subject penalty "if an Arrangement that covers the company's obligation is in force under s 255-15". That section provides: 255-15 to permit payments by instalments (1) Commissioner may, having regard to the circumstances of your particular case, permit you to pay an amount of a tax related liability by instalments under an arrangement between you and the Commissioner whether or not a liability has already arisen. (2) the arrangement does not vary the time at which the amount is due and payable. Note: despite an arrangement under this section, any general interest charge or other relevant penalty, if applicable for an unpaid amount of the liability, begins to accrue when the liability is due and payable under the relevant taxation law, or at the time as varied under section 255-10 or 255-20. 1. I accept that when at about the commencement of April 2013 Mr Pu informed the defendant of the subject tax liability, the defendant understood those negotiations to be ongoing. The negotiations continued through the events of service and expiry (17 May 2013) of the DPN. I accept that to the extent that the defendant believed the advice given to him by Chief Financial Officer Mr Pu, he believed that compliance was likely to be achieved by way of successfully negotiating such an Arrangement and by CCIA Employees achieving compliance by satisfying such an Arrangement. 2. I accept that whilst Mr McGrath removed himself to the U.S.A for the first half of 2013, the defendant took steps to cause the company to achieve that compliance by striking an Arrangement with the ATO. 3. The unchallenged evidence of the defendant was that prior to June 2013, the Medica Group had financial facilities with Suncorp from which there was sufficient money which could have been transferred to CCIA Employees for the satisfaction of the subject debt. Accordingly, I accept that up until September 2013, funds to pay the debt were available either through borrowing through financial facilities or from funding provided by other companies in the Group, or a combination of those. 4. In particular, the defendant said that the Medica Centre operating companies within the Group had a capacity to provide funds, and were negotiating for payments from health funds which were slow in paying. Whilst conceding that there were commercial difficulties, the defendant's evidence was that between May and his resignation of directorship on 31 August 2013, the Medica Group did not have sufficient cash to pay all debts at once but that he expected the Group by achieving payments from health funds, was able to pay liabilities as it went along. In short, I understood his evidence to be that on no one day did the Group have cash funds to pay all of its liabilities, but that it was able over time to satisfy its debts. 5. On these facts the inquiry is whether or not: 1. the defendant's reliance upon assurances of Mr Pu and Mr McGrath that the withheld monies liability to the Commissioner was under control, to the point at the beginning of April 2013 when Mr Pu informed the defendant of the actual non-compliance; and, 2. the defendant's energy directed to causing the company to achieve an Arrangement from that date satisfies the test to take all reasonable steps to ensure that the directors caused CCIA Employees to comply with its obligation: s 269-35 (2) (a) (i). The Defendant's Personal Liability 1. Schedule 1, Division 269, TAA provides for recovery of tax liability owed by a company from its directors personally. The object of the division is to ensure that a company either: 1. meets its obligations under: 1. (i) subdivision 16-B (obligation to pay withheld amounts to the Commissioner); … or 2. goes promptly into voluntary administration under the Corporations Act 2001 or into liquidation: Section 269-5. 1. Whilst (as above) the defendant frankly admitted his awareness that as a director of a company he was responsible for ensuring that it paid its tax, the extent of the director's obligation in that regard pursuant to the regime must be understood in order to appreciate the context in which defences against personal liability available to a director are placed. 2. Section 269-15 imposes a duty on directors to cause their company to pay to the Commissioner all amounts it withholds from payments it makes to its employees. The obligation is: Section 269-15 (1) The directors (within the meaning of the Corporations Act 2001) of the company (from time to time) on or after the initial day must cause the company to comply with its obligation. (2) The directors of the company (from time to time) continue to be under their obligation until, (a) The company complies with its obligation; or (b) An administrator of the company is appointed under ss 436A,436B or 436C of the Corporations Act 2001; or (c) The company begins to be wound up (within the meaning of the Act). (bold added) 1. The Commissioner's recovery of the company's liability from a director for failure of the director's duty expressed in 269-15 takes the form of the Commissioner's recovery of a penalty in an amount equal to the unpaid amount: s 269–20(5). 2. The Commissioner is prohibited from commencing proceedings to recover from the director a penalty until the director has been served with a DPN and the time pursuant to that notice has expired: s 269-25. In these proceedings, there is no issue that pursuant to the DPN issued 22 April 2013, time for the defendant to comply by satisfying his director's obligations (s 269-15) expired on 17 May 2013. 3. The severity of the obligation upon the director is emphasised by s 269-30 which provides that the director's penalty is remitted if the company complies with its Subdivision 269 obligations either before the Commissioner gives the director the DPN or before the expiry of the 21 day period for performance under the DPN (in this case 17 May 2013). 4. Defences available to a director for personal liability for the penalty equal to the unpaid amount of the company's liability are limited and set out in s 269-35. Section 269-35(1) relates to illness which is not relevant in the present case. The onus rests upon the director, to show that he or she took "all reasonable steps" to make sure the directors caused one of the three things to happen. The section provides as follows: 269-35 (2) you are not liable to a penalty under this Division if: (a) you took all reasonable steps to ensure that one of the following happened: (i) the directors caused the company to comply with its obligation; (ii) the directors caused an administrator of the company to be appointed under section 436A, section 436B, or section 436C of the Corporations Act 2001; (iii) the directors caused the company to begin to be wound up (within the meaning of that Act);or (b) there are no reasonable steps you could have taken to ensure that any of those things happened. (c) in determining what are reasonable steps for the purposes of subsection (2), having regard to: (a) when, and for how long, you were a director and took part in the management of the company; and (b) all other relevant circumstances. 1. Unlike liability for negligence or default or breach of duty in the capacity of director where, the person having acted honestly, the Court has a discretion to relieve the person from liability (s 1318(1) Corporations Act) the defences prescribed under s 269-35 form part of the complete code of Division 269 Schedule 1 TAA and leave no room for the Court to retain a discretion to provide such relief beyond those prescribed defences: Deputy Commissioner of Taxation v Dick (2007) 242 ALR 152; (2007) 226 FLR 388; (2007) 64 ACSR 61; [2007] NCA 190. 2. In Canty v Deputy Commissioner of Taxation (2005) 63 NSWLR 152; (2005) 226 FLR 121; [2005] NSWCA 83; special leave refused: [2005] HCA Trans 670, Heydon JA (as His Honour then was) explained that the apparent harshness of imposing upon a director a personal liability even in a case where the director would have difficulty causing the company to do any of the things in the present legislation listed in s 269-35 (2) was ameliorated by the extension for compliance offered by the DPN. The effect of the DPN is not to create the duty, but rather to give 21 days notice that unless the director satisfies their duty, the Commissioner will be able to proceed personally against the director for recovery of the tax debt; subject only to those s 269-35 (2) and (3) defences being made out by the director: Canty's case, supra, at [28]-[29]. 3. In order to avoid liability, the defendant had to show that he had taken all reasonable steps to ensure that the directors caused CCIA Employees to achieve compliance, appointment of an administrator, or commencement of the winding up of the company unless there were no such steps that he could have taken. On the achievement of any one of those events, the defence would be made: Canty's case, supra, at [33] to [41]. 4. The approach set out in Canty's case, supra, to the facts of this case, dictates that as compliance did not occur within the period of the notice (in this case 17 May 2013) the defendant became liable for failing to secure compliance for the whole of the period claimed: Canty's case, supra, at [44]. 5. In Canty's case, supra, at [37], it was recognised that "if payment is out of the question or cannot be achieved, the person bound must address the other steps," being the defences set out in 269-35 (2): at [37]. However, in this case CCIA Employees is said by the defendant to have been able to pay the withheld moneys at least from November 2011 and during the 21 day notice period provided by the DPN which expired on 17 May 2013. 6. It was conceded by the plaintiff that given the lack of co-operation of the other director Mr McGrath, it was not for the purposes of s 269-35, open for the defendant to cause CCIA Employees to appoint an Administrator. The second listed option under the section therefore requires no further consideration. 7. Corporations Act s 459P(1)(d) gave the defendant standing as a director of CCIA Employees to apply for the company to be wound up in insolvency, but the application required the leave of the Court: s 459P(2)(c): see also Deputy Commission of Taxation v Saunig [2002] NSWCA 390; 55 NSWLR 722; 43 ACSR 387; 51 ATR; at [33]. However, unlike in that case, here the evidence does not support a finding that at the relevant times CCIA Employees was an insolvent company and therefore the leave, particularly if proposed such as by Mr McGrath would not have been forthcoming. This defence s 269-35 (2) (ii) was not developed by either party in evidence or in argument. 8. Applying the above principles to the facts here, the question posed at paragraph [40] (a) must be answered in the negative. 9. As to the inquiry posed at paragraph [40] (b); this was in essence the case pressed by the defendant at hearing to make out the defence available pursuant to s 269-35(2)(a) in that he argued that he took all reasonable steps from April 2013 to ensure that the directors caused the company to comply by achieving the Arrangement, which was struck between CCIA Employees and the Commissioner on 4 September 2013. Consideration of the defendant's press for compliance by Agreement 1. After receiving on 29 May 2013 the telephone call from the office of the ATO following up on the DPN, the defendant continued his direction of Mr Pu to negotiate an Arrangement. The ATO Log shows that in late May and in early June 2013, the ATO officers were unable to speak to Mr McGrath, no doubt because he was overseas. The ATO Log for 12 June 2013 records that Mr Pu had called several times chasing up the payment proposal he had advanced but had not received a response from the ATO. Unfortunately, he was then advised that the CCIA Employees' proposal had been refused, but that the Commissioner had not sent notification of that refusal. On Mr Pu requesting additional information and requiring an extension of time to permit further submission, he was advised that the Commissioner required the following terms of Arrangement: 1. an upfront payment of 50% of the debt - $130,998.80; 2. the last 2 years of balance sheets or statements of assets and liabilities; 3. interim balance sheets or statement of assets and liabilities to date; 4. last 2 years to date of profit and loss statements; 5. last 3 months banking statements; 6. details of existing overdraft/loan facilities and amounts drawn down; 7. aged creditor listing; and 8. aged debtor listing. 1. The information was to be provided within one week, by 19 June 2013. 2. A telephone call between an officer of the ATO and Mr Pu following up progress occurred on 19 June 2013. 3. Mr Pu reported that the negotiations with the ATO were proceeding positively. At the direction of the defendant, Mr Pu caused to be paid, and on 4 July 2013 the ATO received, the 50% upfront payment of $130,998.80. 4. Mr Pu continued to pursue an instalment plan for payment of the balance debt. On 30 July 2013, he inquired of progress of what he had for CCIA Employees proposed, and was assured that the Commissioner would not take further interim legal action. 5. The ATO Log shows that on 7 August 2013, Mr Pu called the ATO requesting an update regarding his correspondence, and was informed that the CCIA Employees' proposal had not been actioned. He was informed that it would be actioned the next day, 8 August 2013, and on his expressing his concern, was assured that the Commissioner would not take further recovery action without notifying him of the outcome. 6. The ATO Log confirms that unfortunately on 29 August 2013, when Mr Pu again telephoned to inquire if CCIA Employees' request lodged 11 July 2013 for a payment Arrangement, had been considered, and referring to his 5 prior inquiries of the same effect, he was told that it had not. The ATO Log confirms that the request was 21 days over the date for consideration of 8 August 2013. It is recorded that emails were sent internally requiring that consideration of the CCIA Employees proposal be actioned urgently. 7. The ATO Log records the making of an Arrangement on 4 September 2013, accepting the CCIA Employees' proposal for payment of the balance debt of $135,752.65 by way of 4 monthly instalments of $15,000.00 commencing 1 October 2013, and a final instalment of $6,521.84. By that arrangement, the Commissioner accepted a 50% discount. 8. In the intervening period, the defendant directed numerous requests to Mr McGrath to attend a director's meeting to discuss the future of CCIA Employees. Mr McGrath refused to have any meetings, stating that he had things in hand. By August 2013, the defendant informed Mr McGrath that if a director's meeting was not convened, the defendant would resign. Mr McGrath did not attend the director's meeting then organised, so the defendant resigned as a director on 31 August 2013. More precisely, he sent to Mr McGrath his resignation as a director on that date, and when he received no response, on 24 September 2013 he sent a copy (Form 370) to ASIC, registering his resignation. 9. The defendant said that just prior to 31 August 2013 he arranged for a sum of $130,000.00 be made available to Mr Pu, in the realistic expectation that the provision would be adequate for Mr Pu to achieve an Arrangement. He authorised those funds out of the cashflow of the companies of which he was the controlling director within the Medica Group by directing Ms Julie Zhu, bookkeeper of Surgery Centres of Australia Pty. Ltd., to direct those funds to Mr Pu. He said that Ms Zhu could not transfer the monies without approval of two other authorised persons within the Group. 10. Plainly, CCIA Employees achieved an Arrangement with the ATO immediately following the defendant's notifying Mr McGrath of his resignation and before he registered his resignation of directorship. However, CCIA Employees did not make any of the payments under the instalment plan of the Arrangement. The defendant agreed that there are no documents available to him as corroborative proof of his having provided authority for that second provision of $130,000.00. He was adamant and unshaken in his evidence in regard to it during cross-examination. Given that he did cause CCIA Employees to make the first instalment of 50% of the debt, and given that there was no challenge in cross-examination to the positive cashflow position of the Medica Group companies of which the defendant was the operating director, including Surgery Centres of Australia Pty. Ltd., I accept that the defendant authorised the bookkeeper, Ms Zhu, to process the transfer of those funds. The evidence did not go to why, the defendant having so authorised, the funds were not paid in satisfaction of the instalment plan in accordance with the Arrangement. 11. At the time of his resignation on 31 August 2013, the defendant believed, as he was entitled to do, that CCIA Employees would achieve an arrangement with the ATO and that he had authorised funds for the successful performance of that Arrangement, soon to be agreed. It is therefore fair to conclude that as at the date of his resignation, the defendant had put CCIA Employees in a position of capacity for the company to achieve compliance. Ultimate Liability 1. Ultimately, CCIA Employees by failing to make the instalment payments pursuant to the 4 September 2013 Arrangement, failed to comply. That failure may have been the result of recalcitrant activity by other persons with authority within CCIA Employees for directing the funding authorised by the defendant. 2. The defendant must be unsuccessful in these proceedings because as a director he failed to cause CCIA Employees to comply with its obligations when the instalments were due (s 269-15 (1)), and that obligation continued until CCIA Employees complied, which in fact it never did (s 269-15 (2)). 3. That the defendant trusted Mr McGrath and Mr Pu and accepted their reports that tax liability and other debts were under control whilst he remained ignorant of the fact that the tax liability was not in fact being paid, and that Arrangements entered into prior to April 2013 were not performed, does not rise to the standard required of taking "all reasonable steps". As stated by Heydon JA, with whom the Court agreed, in Deputy Commissioner of Taxation v Saunig (2002) 55 NSWLR 722; 43 ACSR 387; 51 ATR; [2002] NSWCA 390: While even in a relatively small organisation [like Medica Group] … it may not be right to require each director to take personal steps to ensure compliance, [s 269-15] it was incumbent upon [the defendant] 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." [at [28]] (The words in brackets inserted) 1. That did not occur in this case. The defendant did not require monthly financial reports for CCIA Employees. Whilst being the operational director of other companies in the Medica Group, the defendant let Mr McGrath be the operational director of CCIA Employees, and by so doing, accepted the consequence of the governance of CCIA Employees by him. 2. In order to succeed in the defence of taking all reasonable steps under s 269-35 (2) (a) (i), it was necessary for the defendant to show that he satisfied his obligation under s 269-15 for the whole of the period between the due dates and the expiry of the DPN on 17 May 2013: Canty's case, supra, at [42]. 3. Whilst the defendant chose from April 2013 until he resigned as a director on 31 August 2013, to cause CCIA Employees to achieve compliance by entering into and satisfying an Arrangement, and whilst it is available on the evidence to see that he took substantial and perhaps all reasonable steps between April and 31 August 2013 to bring that about; nevertheless that CCIA Employees failed to achieve compliance by making the instalments, the first of which was due on 1 October 2013, meant that his obligation as a former director continued. That the DPN period had expired permitted the Commissioner to proceed personally against him for a penalty of equal sum to the debt, as the Commissioner has done in these proceedings: s 269-20; s 269-25; Canty's case, supra, at [40] and [41]. 4. Indeed, the defendant became liable as a director of CCIA Employees on the company's failure to make each instalment on its due date. CCIA Employees was capable to make those payments. Application of Canty's case (supra) and Saunig's case (supra) to the facts here does not permit a finding that before 17 May 2013 there were no reasonable steps which he could have taken to ensure the company complied. When the defendant chose to permit the 21 day period for compliance under the DPN to expire on 17 May 2013, he entitled the Commissioner to proceed against him personally for a penalty equal to the sum of the debt. By relying on the prospect of a negotiated resolution through achieving an Arrangement which he expected CCIA Employees to satisfy, the defendant quite simply chose to take the risk of a negotiated resolution against the consequence of being personally liable for his obligation of directorship under the Schedule 1, Division 269 regime. ORDERS 1 Judgment for the plaintiff against the defendant in the sum of $108,699.85. 2 The defendant to pay interest pursuant to s 100 CPA from the due date of each instalment. 3 The defendant to pay costs of the proceedings. 4 I direct the parties to deliver to my Associate within 14 days of the date hereof an agreed Schedule calculating interest pursuant to Order 2 hereof for the making of final orders. 5 In the event of a failure to agree in relation to Order 4 hereof, liberty to restore on three (3) days' notice. ********** 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. Decision last updated: 03 July 2017