Federal Court decision limits the liability of those operating licensed premises

In February 2017 the AAT handed down its decision in Zaps Transport (Aust) Pty Ltd, Domenic Zappia and John Zappia ats the Comptroller – General of Customs (Zaps Case). Readers are referred to a previous discussion of this case available here.

The decision followed the established practice of finding that those operating licensed premises are liable for amounts equivalent to customs duty when goods are not accounted for or are not kept safely. However, the decision went further to extend that liability to individual directors and officers of the licensee.

The case was appealed to the Full Federal Court. The appeal and its implications were the subject of a webinar held for the Customs Brokers and Forwarders Council of Australia Inc. (CBFCA) members on 11 October 2017.

While the Court set aside part of the AAT’s decision, it did not comprehensively reassure individual directors and employees of licensed premises as to their liability under section 35A of the Customs Act 1901 (Act).

Legislative Background

Goods such as tobacco and alcohol are often imported into Australia in bulk and stored at licensed premises where customs duty and GST does not need to be paid. The goods stored in these warehouses are deemed to be ‘under customs control’ and are subject to a strict regime which imposes significant obligations on the licensees.

Section 35A of the Act provides that where a person who has or is entrusted with ‘the possession, custody or control’ of dutiable goods which are subject to customs control, fails to keep those goods safely or does not account for those goods in accordance with section 37 of the Act, that person shall be liable for an amount equal to the amount of the duty that would have been payable on those goods. That liability is incurred even if duty is not yet payable on the goods.

Section 35A applies almost absolute liability with very few arguments to avoid liability. Justice Finkelstein, in an earlier decision of the Federal Court, stated that:

‘Thus, short of showing that, say, Godzilla had stomped the warehouse, the respondents could not avoid liability for failure to keep goods safe, no matter how many precautions they had taken in an attempt to safeguard cigarettes.’

In addition to liability under section 35A of the Act, section 36 of the Act also makes it an offence to fail to keep goods under customs control safely or to be unable to account for those goods and imposes penalties for those offences. Those penalties are both fault-based or imposed by strict liability when the Infringement Notice Scheme would be available.

The AAT decision

The value and volume of goods which are subject to section 35A of the Act means that theft of those goods is a significant risk and the consequences for corporate licensees and now individual officers can be far reaching.

The AAT in the decision of Zaps Case extended liability under s35A to a director of the corporate licensee and an employee of that corporate licensee. The case had potentially wide spread implications for the industry and the individuals central to its operation.

As is often seen in s35A cases, liability in Zaps Case arose from the theft of goods from a licensed warehouse. Zaps, the licensee, had taken delivery of cigarettes from its client. Zaps licence was subsequently varied to remove its ability to store tobacco products following a series of thefts from its warehouse. Permission to move the cigarettes to another bonded warehouse was not given. Zaps was also in negotiations with its clients for amounts owing to it and was holding the cigarettes on account of those moneys allegedly owing by the client.

400,000 of the client’s cigarettes remained in the warehouse during this time until they were stolen from that warehouse. A demand was then issued for an amount equivalent to the duty that would have been payable on those goods. This demand was issued not just to the corporate licensee but to the director, John Zappia, and his son, Domenic Zappia, a manager of the warehouse and employee of the corporate licensee.

All three were found to have or have been entrusted with possession, custody and control of the goods so all three were liable for the amount equivalent to the duty otherwise payable.

Grounds for appeal

Following the AAT decision, Zaps went into liquidation and John Zappia was made bankrupt leaving only Domenic to appeal the decision.

Appeals from an AAT decision are based on either questions of law or on the basis that the decision was completely unreasonable. The facts in a case are not re-examined instead the legal reasoning behind the decision is scrutinised.

Domenic, as the employee of the corporate licensee, appealed on the grounds that an employee who was subject to the direction and control of his employer was not a person entrusted with the possession, custody and control of the goods. Domenic also argued that, on proper construction of section 35A, only one entity could have possession, custody and control of the goods. So, as the AAT had already found Zaps had possession, custody or control, he could not also have possession, custody or control.

The Federal Court decision

Section 35A imposes broad obligations on corporate licensees however, the AAT decision went further, extending that liability beyond the entity of the company to the individuals behind that company. On appeal the Full Federal Court seemed to roll back that liability to a degree, but not to an extent that would allay all fears of directors or employees.

The AAT took a very broad approach to its analysis of Domenic’s role as a manager of the warehouse and did not look in detail at his duties. The Full Federal Court found that this analysis was insufficient and that the AAT had not applied the correct legal test.

The Full Federal Court found that it was not sufficient to say that, as an employee has at times during the course of performing their duties, possession of the goods, that employee is also a person who is entrusted with the custody and control of those goods. The Court recognised that corporate licensees have a responsibility and the power to take steps to keep the goods safely at all times and to respond to demands to account for those goods. Employees, in general, do not have and cannot exercise that level of control over the goods. However, the Court did not entirely exclude employee liability and instead said that liability will be determined on a case by case basis.

The matter has been remitted to the AAT to apply the correct legal test. The Commonwealth may choose to pursue the matter again through the AAT or they may drop the issue. If they do pursue the case the AAT may still find the employee liable. As a result, the decision does not provide a settled answer on how far liability under section 35A of the Act may extend.

Consequences

The Full Federal Court did not consider the liability of the director. Director’s liability remains unsettled and directors are not precluded from liability by this decision. In fact, the Court’s position on the meaning of ‘control’ suggests that there may well be circumstances in which directors can be found personally liable. The Court also, did not address the offence provisions under section 36 of the Act and the impact of the decision on those provisions remains to be seen.

It is also conceivable that, if the Commonwealth chooses to pursue the matter, the AAT may still find the employee liable. Liability of employees is decided on the facts which means there is no definitive answer to the question if an employee will be liable. Circumstances where the employee is, in fact a “shadow director” or, on the facts, does have power to exercise control over the goods could lead to the employee being found liable.

In light of this, conducting licensed premises carries great risk and serious consideration should be given to any choice to hold a licence in an individual’s name or in a trustee capacity. This could expose the assets of the individual or the trustee.

The decision also raises other concerns:

• The question of whether a licensee could also be liable for primary customs duty as the ‘owner’ of the goods should be considered in light of this decision. The Federal Court in Coynes held that the licensee would not be an ‘owner’. However, the DIBP Notice on the definition of ‘owner’ seems to extend the liability to almost all parties in the supply chain without reference to Coynes.
• Licensees should look at the insurance available for them, their directors and their employees and if that insurance will cover them for the extent of their potential liability.
• The scope of the liability in section 35A of the Act and the associated penalties make the provision of terms and conditions of trade of paramount importance. Indemnities for that liability should be included in any terms of trade and must be enforceable.
• Being found liable under section 35A of the Act or section 36 of the Act may render a party not ‘fit and proper’ to be licensed as a customs broker, or to conduct a licensed premises (by the DIBP or ABF) or to hold a permit or an Approved Arrangement (by the DAWR). It could also affect other entitlements under other legislation such as trusted trader status.
• The imposition of liability under section 60 of the Excise Act 1901 was not addressed by this decision. There is an ongoing question of how this decision may impact future interpretation of section 60 of that Act as it is similar to section 35A of the Act.