DCT v Wilson – DPN liability for director of construction company – despite shareholder/director agreements to avoid PAYGw liability by not hiring employees, broken by the other directors, in their area of geographic responsibility and timely meetings to appoint an administrator or liquidator (where he was outvoted)

The NSW District Court has rejected a director’s defences to a director’s penalty notice (DPN) for $111,798.

The defendant was the director of a construction company, formed in April 2015. Its activities were mainly conducted in Western Australia. The company lodged BASs in respect of the periods 1 April 2015 to 30 June 2015 and 1 July 2015 to 30 September 2015. The BASs identified PAYG withholding amounts in relation to employee salaries totaling $111,798. However, no amounts were paid to the ATO.

A DPN was served on the defendant in February 2016 for the sum of $111,798.

He accepted that he was liable, subject to the following statutory defences: s269-35(2)&(3) of the TAA, which are in the following terms.

(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, 436B or 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 were no reasonable steps you could have taken to ensure that any of those things happened.

(3)  In determining what are reasonable steps for the purposes of subsection (2), have 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.

The following facts are interesting, having regard to the ‘all reasonable steps’ fulcrum on which the case was to turn.

1. The defendant and  Mr Wheatley formed a company which they jointly owned, and the directors were both men, plus Mr Wheatley’s wife.
2. The company was to undertake surplus work from Compile-Ryobi using their contractors, on secondment. If need be further contractors might be hired. In other words, the directors of the company did not expect there to be any PAYGw obligations as they’d have no ’employees’ for tax purposes.
3. The defendant was responsible for work on the east of Australia and Mr Wheatley was responsible for work in the west. It turned out that Mr Wheatley did start hiring employees in the west, but the defendant knew nothing about it until he received the DPN (on 18 Feb 2016) and it said that there were unremitted PAYGw liabilities.
4. Four days later, the directors met to discuss this tax liability. Mr & Mrs Wheatley thought the company only had a ‘temporary lack of liquidity’. The defendant though the company was insolvent and moved a motion that the company appoint an administrator, which was defeated. He then moved a motion of shareholders to appoint a liquidated, but that failed too. Mr & Mrs Wheatley believed that the company’s current liability was only the result of a “temporary lack of liquidity”.
5. Eight days after receiving the DPN (26.2.16) the defendant took legal advice about his imminent tax-related liability. This was to the effect that he could not appoint an administrator alone and his only other option was to apply to Court, as a director and shareholder, for the company to be wound up on grounds of insolvency, which he’d have to establish, which would be difficult, as he was not responsible for the day to day operations of the company. Further, time would be against him as he only had 13 of the 21 days allowed in the notice, to ‘begin’ to wind up the company. A further option was for the company to pay the PAYGw amounts or someone to make the payment for it (which defendant couldn’t do, because of a bad credit record).
6. Shortly after getting that advice, Mrs Wheatley advised that accountants had been retained to organise a payment plan, with the ATO.
7. On 18 August 2018 (6 months after the DPNs were served), Mr and Mrs Wheatley capitulated and agreed to appoint an administrator – but, of course, this was far to late to avoid the DPN liability crystallising.

The Courts findings on the defences, were as follows:

• He claimed that, when he received the DPN, he believed the company had systems in place to ensure it complied with its taxation obligations, and had remitted all amounts due to the ATO. He believed that only GST would be remitted. This was because he understood that the company engaged only contractors and had no employees and therefore there would be no PAYG amounts.
  • The Court found that the defendant failed to prove that he took all reasonable steps to ensure that the company complied with its obligations. The Court said that the defendant, as a director of the company, had a duty to ensure that an appropriate system was in place to manage its taxation liabilities, regardless of where the company’s activities where undertaken (the ‘east’ and ‘west’ dichotomy).
• Additionally, the Court considered that it was insufficient for the defendant to just call a meeting to propose a resolution to appoint an administrator which was defeated.
  • The Court said he should have called a further meeting in order to persuade the other directors to resolve to appoint an administrator or to begin to wind up the company.

In my opinion, this is a tough judgement. I would have thought that a director, who relied on the founding agreement, to only engage contractors and on the split in geographic responsibility for day to day operations, at director level, had taken reasonable steps to have the company comply with its obligations (or come very close to that), bearing in mind that the liability sprang from his fellow directors breaking the agreement and hiring staff, in their place of geographic responsibility, and without any notice to their fellow board member, that they had changed arrangements pertinent to the company’s tax liabilities.

Further, I’m not sure that having failed in one meeting, to have an administrator or liquidator appointed, that having further meetings could reasonably be expected to be successful (and be a requirement for ‘reasonable efforts’. The defendant was only one of three directors and the other two were husband and wife and had a view that it was only a ‘temporary lack of liquidity.

Further again, the defendant took his obligations seriously enough to get legal advice within 8 days of receiving the DPN (leaving 13 days before the 21 DPN period expired). The advice was correct, that he could not appoint an administrator alone and it would be difficult to wind up the company (because of the need for evidence of insolvency) and there was little time left to relevantly ‘begin’ that winding up.

That leaves two possible but both dubious possibilities for avoiding liability. One was to try again to persuade his fellow directors to appoint an administrator and the other was to commence court action as quickly and as best he could. The Court seems to have siezed on his failure to pursue these two difficult opportunities as evidence that there were not “no reasonable steps” he could take to achieve one of the three ways of avoiding liability.

In my opinion, this is a tenable but very tough view. The ATO could have been content with it’s DPN notice on the director(s) responsible for the company’s liabilities (in the west).

(DCT v Wilson [2018] NSWDC 302, NSW District Court, Mahony DCJ, 19 October 2018.)

FJM 7.11.18

[LTN 207, 26/10/18; Tax Month – October 2017]

 

CPD questions (answers available)

1. Did the defendant director fail in his attempt to avoid personal liability for his company’s failure to remit $111,798 withheld from staff wages?
2. Was the arrangement, between the directors/shareholders, that the company would only engage contractors and thus have no PAYGw responsibilities?
3. Was the defendant responsible for the company’s activities in the west of Australia, where it appears that the other directors engaged employees, without the defendant’s knowledge?
4. Did the other two directors agree that the company was ‘insolvent’?
5. Was the defendant able to persuade them that they should appoint an administrator or a liquidator to the company?
6. Did the defendant seek early legal advice?
7. Did the defendant rely on the statutory defences in s269-35(2)&(3) of the TAA?
8. Did the Court accept that a director had taken reasonable steps to ensure that the company complied with its PAYGw responsibility, by relying on his fellow directors to abide by their agreement about how the company was going to be run, in their area of geographic responsibility, when those directors gave the defendant notice of the change in their agreement?
9. Did the Court expect the defendant to have tried again to get his fellow directors to accept that the company was ‘insolvent’ and it should appoint an administrator or a liquidator (despite having failed once)?
10. Did the Court expect that, absent that, the defendant should have undertaken the expense of unilateral Court action, with the twin difficulties of evidence and time?