Court rescues director issued with DPN on a deregistered company

Liquidator’s appointment made at a time company was deregistered validated by Supreme Court

Almost exactly one year ago, I penned an article about the danger of allowing a company to be deregistered with an outstanding ATO debt, and the consequences where a Director Penalty Notice (DPN) is issued to the director. That article resonated with our readers and was judged the “most clicked“ article of 2023. I’m honoured that our readers shared my enthusiasm for this important topic.

One year later, I can provide an update that may bring comfort to advisors and their client directors where a DPN is issued to a company that has been deregistered. At the same time, comments made by the Judge in the case I refer to below, should sound a warning to advisors when it comes to the deregistration of insolvent companies.

Perrin v ASIC [2024] WASC 38

As previously indicated, the ATO can issue a DPN to a director of a deregistered company; and in the Perrin case, it did precisely that. On 7 February 2024, the ATO issued a DPN for $170,903 to the director of PSG Group Pty Ltd in circumstances where the company had been deregistered on 2 May 2021, having failed to pay ASIC fees.  It’s interesting to note that the DPN was issued almost 3 years after the company’s deregistration.

Readers may recall my earlier comments that the ATO reference a company’s ABN - and not ACN - when issuing DPNs.  The fact that the company had been previously deregistered (having no effect on the cancellation of the ABN) was of no concern to the ATO.  

Upon receipt of the DPN, the director contacted me to accept appointment as liquidator in order that the DPN penalty be remitted within 21 days of it being issued. Unfortunately, I had to advise that the company could not be placed into liquidation in the normal way (via Creditors Voluntary Liquidation) as it was deregistered. Neither was it likely that an application to ASIC to reinstate the company in order to then appoint a liquidator, could be achieved within the 21 day period allowed by the DPN.

The Orders sought from the Court

If the director wished to avoid the penalty under the DPN, their only option was to apply to Court for an order under s.601AH(2) of the Corporations Act 2001 (Cth).

Under this provision, the Court may order ASIC to reinstate the company, however that still left the timing of the reinstatement up in the air, and as her Honour said:

“I accept that if an order was made under s.601AH(2) of the Corporations Act directing that ASIC reinstate the registration of RSP Group Pty Ltd, it would likely take some time for it to be acted upon by ASIC. Mr Perrin proposed to deal with that period by seeking a further order of the court pursuant to s.601AH(3) validating any special resolution or other action of and relating to RSP Group Pty Ltd to implement a creditors voluntary winding up and the appointment of a liquidator“.

As is evident from the above comment, a Court may retrospectively validate a resolution or action done by a company at a time when it was deregistered, such that the resolution or act has the full force and effect as if it was done at a time when the company remained incorporated.

Set out in the director’s affidavit was the full suite of liquidator appointment documents including a signed consent from myself to act as liquidator, a signed resolution of directors calling a shareholders meeting and a signed special resolution of shareholders resolving to place the company into liquidation and appointing myself as liquidator.

The ATO’s position

Usefully, the company’s solicitors were able to locate an in-house lawyer from the Litigation and Legal Services Team within the Chief Tax Counsel of the ATO who attended Court.

Having been granted leave to be heard, the ATO’s lawyer informed the Court that the materials served on behalf of the director had been considered and the application for reinstatement was not opposed. They advised that prejudice to the Deputy Commissioner by the orders sought was not agitated.

ASIC

There was no appearance for ASIC. However, there was an undertaking from the director to pay any outstanding fees to ASIC in respect of the company.

Troubling evidence

During the hearing, her Honour sought to understand how the company became deregistered and commented that:

“There was troubling evidence before the Court that Mr Perrin was acting in accordance with professional accounting and taxation advice when he allowed RSP Group Pty Ltd to lapse its registration requirements with ASIC, so as to allow for deregistration to occur in circumstances where he believed RSP Group Pty Ltd to be insolvent”.

Advisors should note her Honour’s comments and be mindful of what advice is given to directors concerning the intentional deregistration of an insolvent company by failing to pay ASIC fees.  To be clear, intentionally allowing an insolvent company to be deregistered, as a strategy to avoid paying debt, should be avoided. In such circumstances, consider seeking advice from your local Worrells contact regarding the appointment of a Small Business Restructuring Practitioner, Administrator or Liquidator.

Tips and take-aways for advisors

• It’s useful to identify your client’s companies that have been deregistered with outstanding (ATO) debt.

• Where ATO debt is involved and no DPN has been issued, consider applying to ASIC to reinstate the company. This is the cheapest option and allows the director to either wait for the (inevitable) DPN or take proactive steps to place the company into liquidation.

• If a DPN has been issued to a deregistered company, seek immediate advice to begin the contemporaneous process of having a solicitor apply to Court for orders to reinstate the company (by ASIC) and the appointment of a liquidator.  It appears the court may be willing to reinstate a deregistered company and validate the appointment of a liquidator made at a time of deregistration, thereby satisfying the penalty under the DPN.   

• Be cautious in giving advice that sanctions a director’s intention to stop paying ASIC fees with a view to an insolvent company being deregistered.

Final Note

ASIC did reinstate the company on 26 February 2024, 11 days after judgment was delivered, and exactly 21 days after the DPNs were issued!