This is the second instalment in a series of articles examining director penalty notices issued under the Taxation Administration Act 1953 (Cth). If you missed the first instalment, you can find that article here.
So, you have received a director penalty notice (DPN). If the DPN is a “non-lockdown” DPN, you can avoid incurring personal liability if, within 21 days after the date of the notice, you:
(a) cause the company to pay the outstanding liabilities specified in the notice;
(b) place the company into administration or liquidation; or
(c) appoint a small business restructuring practitioner.
As discussed in our previous article, the options available to a director in receipt of a “lockdown” DPN are even more limited.
However, in either case, a director may be able to avail themselves of one of the statutory defences available under section 269-35 of schedule 1 of the Taxation Administration Act 1953 (Cth) (the Act). In this instalment, we examine a defence that may be available to a director who suffers an illness which precludes their participation in the management of the company (the Illness Defence).
The elements of the Illness Defence
The Illness Defence is contained in subsection 269-35(1) of schedule 1 of the Act, which provides as follows:
You are not liable to a penalty under this Division if, because of illness or for some other good reason, it would have been unreasonable to expect you to take part, and you did not take part, in the management of the company at any time when:
(a) you were a director of the company; and
(b) the directors were under the relevant obligations under subsection 269‑15(1).
In Deputy Commissioner of Taxation v Snell (“DCT v Snell”) [2019] NSWDC 159 (later affirmed on appeal before the NSW Court of Appeal in Snell v Deputy Commissioner of Taxation (“Snell v DCT”) [2020] NSWCA 29), the District Court of NSW conveniently sets out the key elements of the Illness Defence:
To establish the defence, it must be established that, because of illness:
(1) during the entire relevant period;
(2) the director did not take part in the management of the company; and
(3) it was unreasonable to expect the director to take such part.
Ascertaining the “entire relevant period”
The first element requires the director to establish that they suffered from the illness “during the entire relevant period”.
The Court of Appeal in Snell v DCT at [57]-[58] accepted that the “relevant period” commences on the due date for the liability in question and continues until the expiry of the DPN. Therefore, the Illness Defence will not be available to a director who suffers only a transient illness which does not continue for the entire duration of the “relevant period”.
Participation in the management of the company
The second element requires the director to establish that the illness precluded their participation in the management of the company during the relevant period. In Snell v DCT at [63], the Court of Appeal explains participation in management to mean “policy and decision-making relating to the business affairs of the corporation as a whole” which, at its core, involves “participation in the governance of the company”. The Court of Appeal accepted the District Court’s findings that actions amounting to participation in the management of the company may include:
(a) engaging with the ATO on behalf of the company;
(b) facilitating arrangements to pay company liabilities owed to the ATO; and
(c) both formal and informal discussions with other directors of the company.
Critically, if the director has, in fact, participated in the management of the company during the relevant period, the director will not be able to rely on the Illness Defence, notwithstanding that the director’s illness is sufficiently serious that it would otherwise be unreasonable to expect the director to participate in the company’s management.
When is illness sufficient to give rise to an expectation that it is “unreasonable” for the director to participate in the management of the company?
Evidence of illness alone, however serious or prolonged, is insufficient to establish the Illness Defence. Rather, the illness must have a “significant adverse impact” on the director’s ability to participate in the management of the company, although it is not necessary for the illness to be incapacitating: Snell v DCT at [71].
The requisite threshold for the severity of the relevant illness, and the impact of that illness on the director, is exceptionally high. For example, in Snell v DCT, the director tendered medical evidence establishing extensive bouts of significant ill-health, including angina, sleep apnoea, gout, diabetes, severe osteoarthritis, hypertension, chronic kidney disease and, ultimately, a heart attack.
The Court of Appeal accepted that it would have been unreasonable to expect the director to participate in management during periods of hospitalisation or convalescence. However, despite the director’s “laundry-list” of diagnoses, the Court of Appeal concluded that the director’s illnesses did not render it “medically impossible or imprudent” for the director to continue participating in the management of the company during the entire relevant period. The Court of Appeal also afforded significant weight to the director’s continued, albeit sporadic, involvement in the management of the company on certain occasions during the relevant period.
The decision in Snell v DCT makes it clear that a director will only be able to rely on the Illness Defence where:
1. the director suffers from an illness which is sufficiently serious to render it “medically impossible or imprudent” for the director to participate in the management of the company;
2. the director remains afflicted by that illness from the due date for the liability in question and continues until the expiry of the DPN; and
3. the director does not, in fact, participate in the management of the company during that period.
Further information
Pigott Stinson has recently assisted a number of clients who have received DPNs. Should you wish to discuss any aspect of this article or want legal advice about these matters, please call us on 02 8251 7777 or contact the following members of our Litigation and Dispute Resolution team:
Daniel Fleming, partner: d.fleming@pigott.com.au
Eleni Bastoulis, associate: e.bastoulis@pigott.com.au
Cameron Sydes, associate: cameron.sydes@pigott.com.au
This publication is produced by Pigott Stinson. It is intended to provide general information only. The contents of this publication do not constitute legal advice and should not be relied upon as legal advice. Formal legal advice should be sought from us in respect of the matters set out in this publication. Liability limited by a scheme approved under Professional Standards Legislation.