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26 Sep 06 Director relieved of liability for penalties on unpaid PAYG - Dick

The New South Wales District Court (Johnstone DCJ) has held that the defendant, Dick, who failed to comply with the requirements of s 222AOB(1) of ITAA 1936 in relation to unpaid PAYG deductions owed by a company of which he was a director and, as a result, became personally liable to penalties equal to the amount of the unpaid PAYG amounts, was nevertheless entitled to be wholly relieved from the liability under s 1318(1) of the Corporations Act 1936.

Section 1318(1) of the Corporations Act 1936 provides as follows:

“If, in any civil proceeding against a person to whom this section applies for negligence, default, breach of trust or breach of duty in a capacity as such a person, it appears to the court before which the proceedings are taken that the person is or may be liable in respect of negligence, default or breach but that person has acted honestly, and that having regard to all the circumstances of the case, including those connected with the person’s appointment, the person ought fairly to be excused for the negligence, default or breach, the court may relieve the person either wholly or partly from liability on such terms as the court thinks fit…” [The section applies to a director of a corporation: s 1318(4) and (5).]

The Commissioner submitted that s 1318 was not available to excuse the defendant’s failure to comply with the requirements of s 222AOB(1) of the ITAA36. This submission was rejected by the Court. The Commissioner further submitted that there was no relevant negligence, default, breach of trust or breach of duty, only a failure to comply with an obligation imposed by statute. This, too, was rejected by the Court, which held that the defendant’s liability arose by reason of a default. The Court said that a failure to comply with a statutory obligation is a breach of duty, or default.

The Court said, at para 131:

"I do not consider that there is any inconsistency between s 1318 and the relevant provisions of the ITAA36 or that those provisions constitute a code that leaves no scope for the operation of s 1318. Nor do I consider that s 1318 should be given the restrictive interpretation the plaintiff [Commissioner], contends for. In my view it is not a provision relating solely to liability arising from legitimate business decisions."

The Court had earlier rejected a defence under s 222AOJ(2), which excuses a director who did not take part in the management of the company at any time during the period that he was a director.

The Court said, at para 134:

"The defence provided for under s 222AOJ(2) of the ITAA36 is a limited one, directed at particular circumstances. It permits of no discretion having regard to other broader exculpatory circumstances. The broader provision for discretionary relief in s 1318 sits behind as a safety net, available to excuse a director either completely or partially, if there are other broader considerations which the court considers should properly be taken into account."

In relation to s 1318, the Court held that the defendant had acted honestly and, having regard to all the circumstances, should be wholly excused from the liability for the penalty: Deputy Commissioner of Taxation v Dick [2006] NSWDC 17 (NSW District Court, Johnstone DCJ, 6 September 2006).

For a copy of the decision, go here

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