Two matters have recently come across my desk involving companies that have been voluntarily deregistered under Section 601AA of the Corporations Act.
Section 601AA allows a solvent company to be de-registered by the ASIC under certain circumstances. Those include:
- all members of the company agree to deregister
- the company is not carrying on business
- the company’s assets are worth less than $1,000
- the company has no outstanding liabilities
- the company is not a party to any legal proceedings, and
- the company has paid all fees and penalties payable under the Corporations Act 2001.
Without going into the specifics of each case, they involved the following basic circumstances:
1. The companies in question had reached the end of their useful lives.
2. Creditors had been paid and the companies’ tax affairs finalised (or so the directors believed).
3. The companies were subsequently de-registered pursuant to Section 601AA of the Corporations Act.
4. After the companies were de-registered the Australian Taxation Office (ATO) audited the companies.
5. Revised liabilities for PAYG, GST and Income tax were issued; and
6. The ATO then issued Director Penalty Notices (DPNs) against the directors for the outstanding PAYG.
As covered in our previous newsletter articles, DPNs are issued by the ATO in an attempt to recover outstanding PAYG from directors personally.
In short, the notice prescribes that unless a director undertakes one of three options within 21 days of the notice they will become personally liable for the company’s debt as set out under the notice. The three options are:
1. Pay the tax debt in full; or
2. Appoint a Voluntary Administrator; or
3. Appoint a Liquidator.
We have previous article on this matter in October 2010 – “Director Penalty Notices Revisited“.
The problem for both companies was they were de-registered, so apart from paying the tax (which was disputed) the directors were unable to place the companies in liquidation or voluntary administration to comply with the notices and avoid personal liability.
This left two options to have the companies’ reinstated and then place them into liquidation or voluntary administration to comply with the notice.
1. An application to the ASIC to reinstate the company; or
2. An application to the Court to reinstate the company.
The problem with the ASIC application is that it generally take longer than the 21 day period provided under the DPN and there is no guarantee the ASIC will approve the reinstatement. For the ASIC to reinstate a company you will need to provide valid proof that will demonstrate that there was a procedural defect or oversight in the procedure leading to the deregistration. As indicated on the ASIC website “it is not enough just for the reinstatement to be convenient for you” to form a valid reason.
Likewise the application to the court could take longer than the 21 day period and making an application in a short period of time such as 21 day is very expensive and not an easy task.
In one of the cases in question the directors decided to pay the tax as the costs to make the application to court was greater than the debt.
In the other case the directors left the matter until the afternoon of the 21st day of the DPN to seek advice, so there was nothing that could be done to help them. Both directors of the later company became personally liable for the ATO debt (as per the DPN) as they were unable to comply with the notice.
These cases should serve as a warning that voluntary deregistration will not banish a company’s past sins in respect of TAX debts and should only be used in circumstances where the company’s affairs have truly been finalised.
If there is any doubt about the past sins of a company, other options involving members or creditors voluntary liquidations maybe a better option to finalise a company’s affairs and avoid any DPN surprises. If you have any questions regarding this type of situation, please contact your local Worrells office