Canty v Deputy Commissioner of Taxation [2005] HCATrans 670 (2 September 2005)

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Canty v Deputy Commissioner of Taxation [2005] HCATrans 670 (2 September 2005)

Last Updated: 15 September 2005

[2005] HCATrans 670

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Sydney No S249 of 2005

B e t w e e n -

PAUL BRIAN CANTY

Applicant

and

DEPUTY COMMISSIONER OF TAXATION

Respondent

Application for special leave to appeal

GUMMOW J
HAYNE J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 2 SEPTEMBER 2005, AT 11.01 AM

Copyright in the High Court of Australia

MR C.J. BEVAN: If your Honours please, I appear with my learned friend, MR E.W. YOUNG, for the applicant. (instructed by Evangelos Patakas & Associates)

MR M.R. ALDRIDGE, SC: If it please the Court, I appear for the respondent with my learned friend, MR P.D. RODIONOFF. (instructed by Australian Government Solicitor)

GUMMOW J: Yes, Mr Bevan.

MR BEVAN: Your Honours, the special leave questions framed at application book 64 and 65 turn on the proper interpretation of Part VI, Division 9, Subdivision B of the 1936 Tax Act. Those provisions are to be found at page 22 of the bundle of materials and authorities.

The relevant duty to bring about one of the four outcomes specified in 222AOB(1) – bundle page 23 – is imposed on the directors. There is relevantly no ambiguity there. The Court of Appeal so determined that at AB 38, paragraph 13. The penalty for breach of that duty is imposed on the directors under 222AOC – bundle pages 23 to 24 – again, no ambiguity. The Court of Appeal so concluded at AB 38, paragraph 13.

The penalty is remitted in full if the person on whom the penalty is imposed, amongst other things, complies with the director’s penalty notice issued under 222AOE within 14 days: see 222AOG, which is bundle page 25. Now, 222AOG makes no mention of the word “director”. It refers only to “person” and “the person” on whom the penalty is imposed and on whom the director’s penalty notice is served.

We submit that 222AOG, which is to be found at bundle page 25, does not need to refer to the word “director” because in its very terms, the introductory words, it assumes that the person who is looking for remission is a director:

If:

(a) a penalty is payable by a person under this Subdivision –

and, of course, a penalty is only payable by a person under the subdivision if they are a director. It follows from the previous provisions.

The Court of Appeal, we submit, fell into error at paragraph 14, which is page 38 of the application book, when it focused on the literal language of 222AOJ in its use of the word “person”. That was in the context of defence provisions. Of course we say the defence provision is not enlivened if, in fact, the applicant never became susceptible to a recovery notice. We say the Court of Appeal failed to appreciate that 222AOG(a) has already characterised the person, the only possible recipient of a recovery notice - - -

GUMMOW J: Your client was a director during the relevant period of the company’s activities; is that right?

MR BEVAN: He was, but before the recovery notice was issued he ceased to be a director.

GUMMOW J: Yes. So?

MR BEVAN: We say in order to obtain remission he must comply with an AOE notice within 14 days. In order to comply with an AOE notice he must take one of the four steps in AOB(1). The four steps in AOB(1) are the four objects of the subdivision. The objects of the subdivision are specified in 222ANA(1), requiring the company to either meet its obligations by payment or agreement, to go into voluntary administration or to go into liquidation.

If by the time the Deputy Commissioner decides to take his recovery action the recipient has ceased to be a director, we say that the first two statutory objects and also the first two of the four limbs of AOB(1) cannot be achieved, because he no longer has any status within the company. The third statutory object, which is the third limb of AOB(1), cannot be achieved because as a director under 513A he does not have standing to appoint an administrator; only the company can do that. Sections 513B and 513C are where an administrator is appointed by other persons – that is the Corporations Act I am referring to there. The relevant Corporations Act provisions are at pages 220 and following of the bundle.

GUMMOW J: What do you say about the court below’s treatment at paragraph 29 on page 42?

MR BEVAN: We say, firstly, what the court say there is inconsistent with what it said differently constituted in Saunig where the court looked in great depth at the question of standing and the necessity for the recipient to be a director in order to bring about one of the requirements of AOB(1). In particular, if I could take your Honours to the leading judgment of Justice Heydon in the Court of Appeal, his Honour focuses on standing, starting at bundle page 183 where he looks at the obligation to comply with AOB(1) in paragraph 21 and in paragraph 23 on bundle page 184 his Honour looks at the need for Mr Saunig to call a meeting of directors to either appoint an administrator or a liquidator. He goes on in paragraph 24, which is at about point 8, to look at the effect of 459P where the articles require more than one director to constitute a coram into buying the company.

At the foot of bundle page 185, the last seven lines of paragraph 28, which is the last seven lines of the page, his Honour looks at what would need to be done by the directors for the purposes of taking all the reasonable steps to comply with AOB(1). That is not just for the purposes of the AOJ(3) defence but it is also the fact of undertaking those steps in order to obtain remission under AOJ itself, because remission under AOJ is conditional upon compliance with one of the four steps in AOB(1) within the 14 days.

Now, the other complaint we make against the Court of Appeal’s treatment of standing is their Honours assume for the purposes of the administration provisions in the Corporations Act and the relevant winding-up provisions – the relevant winding-up provisions at the time were 513A – which provided that, amongst other things, a person who was a contingent creditor could have standing to apply with the leave of the court subject to a number of conditions about prima facie case and security.

Now, although they do not say it here, what their Honours were relying on was the statutory indemnity in AOI, which is to be found at bundle page 25. Section 222AOI gives directors a right of indemnity. Where they have paid the penalty they have a statutory right of indemnity against the company. Now, we say if, on the proper construction of AOE and AOG, the recipient must be a director at the time of the issue of a notice in order that they have the standing to take one of the four steps which is a precondition to remission of the penalty, then there is no statutory right of indemnity because the person is either not liable to pay the penalty in order to give rise to the statutory right of indemnity or has not as a fact paid it. Now, we say that you cannot - - -

GUMMOW J: What is the indemnity provision again, Mr Bevan?

MR BEVAN: Section 222AOI, which is page 25 of the bundle at the bottom of the page. We say if a person is otherwise not within the Corporations Law as it was in 1999 class of persons who can apply to appoint an administrator or wind up, so the person is not a director, not a member, not a creditor, not a contributory, we say you cannot characterise the person as a contingent creditor under 22AOI because that is putting the cart before the horse.

You are effectively assuming away the impediment to recovering the tax from a non-director under AOE and AOG in order to make the person a person who qualifies for the right of indemnity under AOI in order to then go back to the threshold issue of characterisation of a person for the purpose of recovering.

Now, we say that whereas in this case the Commissioner delays in his recovery until a time when the former director is no longer a director and can no longer achieve any of those four statutory objects at the very start in ANA, and having regard to the approach to construction that we have contended for, in particular our reliance on CIC Insurance at 408 and our criticism of the Court of Appeal at 19 where the Court of Appeal say you must find ambiguity in order to go to context and - - -

GUMMOW J: Well, the objects are in 222ANA, are they not?

MR BEVAN: Yes, and we say the moment we resign as a director we cannot fulfil any of those objects. We cannot procure the company to pay the tax, to make an agreement to pay the tax, to appoint an administrator or to wind the company up.

GUMMOW J: The object of the legislation, one of them is to impose a duty on your client.....to do certain things, and the things were not done.

MR BEVAN: Yes, at two different times, your Honour. The first is before the due date under AOV(1), but the second time is by the fourteenth day after issue of an AOE notice, because keep in mind, your Honours, that AOE is facilitative of AOG which is a remission provision. If the Commissioner’s approach is right and the former director cannot somehow convince the ongoing directors to take one of those steps, the recipient of that notice, being a former director, simply has no power during that second period, the second opportunity to fulfil the statutory objects, to fulfil them.

Of course we say that being facilitative of a remission provision in a tax statute it must be construed relevantly for the benefit of the class of persons for whom it is enacted, which is the persons on whom a penalty has been imposed, because at the end of the day AOE is a two-edged sword. It not only is a condition precedent for the Commissioner’s recovery of a penalty, it is also a condition precedent, that is compliance with it, to remission of the penalty, and the legislation quite clearly gives two separate opportunities to comply with that AOB requirement and it gives the recipient/director two separate temporal opportunities to fulfil the statutory objects.

Now, we do not dispute that the penalty was imposed because we did not comply during the first period, but we say we simply cannot comply during the second period. We say our construction is squarely supported by what Senator McMullan said in his second reading speech, what the explanatory memorandum said, what the statutory objects at the front say and, indeed, what the very heading to the division which has operative force under the Acts Interpretation Act says, “Penalties for directors of non-remitting companies”. We say that if one adopts what we would submit is the CIC Insurance approach, which is to look at context at the start - - -

GUMMOW J: You would be pretty foolish to stay a director once you got wind that something was happening, would you not? You would just resign.

MR BEVAN: But keep in mind that this is a case, as many of these cases are, your Honour, where a person is relying on other directors. That is why there was an AOJ(3) defence run but ultimately not pursued beyond the Court of Appeal. But people operate under an assumed state of affairs because they trust people and then people let them down. Now, the reality is that once you have in good faith resigned as a director you simply cannot, without the continuing directors feeling sorry for you - - -

GUMMOW J: You do not invite an investigation into the good faith of the resignation in each case, do you?

MR BEVAN: We do not, your Honour, but what we do say is the Commissioner must act properly for all the reasons the Court of Appeal said in George and Saunig and a number of other cases. He must issue his AOE notice while the directors are still in office. Of course, as the Court of Appeal said here, your Honours, the Commissioner himself has better knowledge than the very director who is being pursued for the penalty because it is the one receiving the instalments or not receiving them as the case may be. It is the one that is on notice as to when it should act properly, not in this case for the best part of nine or ten months not acting while the director was still in office.

Now, your Honour, the last point I wanted to make was since 1 July 2000 these provisions have adopted something of a greater life than they had prior to 1 July 2000 because the tax regime they apply to was extended beyond pay-as-you-earn tax deductions which is the subject of this matter to the new pay-as-you-go regime and the non-cash benefits and various other regimes, so that Division 9’s operation was extended in its operation beyond 1 July 2000 and we say has continuing application for directors of companies which employ people in various different capacities and we say, if anything, that reinforces the importance of the Deputy Commissioner’s position here because on his position theoretically once a director resigns, whether it is in good faith or otherwise, the director is indefinitely liable for the penalty after he has left for theoretically years and years if the company continues to trade and either no prompt action is taken or prompt action is taken against the existing directors, the Commissioner’s
remedies are exhausted and he then comes after the former directors years later. We say that must have continuing importance for the directors of companies employing persons in various different capacities. If your Honours please.

GUMMOW J: We do not need to call on you, Mr Aldridge.

We see no reason to doubt the correctness of the conclusion of the Court of Appeal in this matter and special leave is refused with costs.

The Court will adjourn to reconstitute.

AT 11.20 AM THE MATTER WAS CONCLUDED