Directors continue to push the boundaries
It is becoming all too common when a business starts to struggle the directors and company officers make questionable decisions as the company heads down the path to insolvency.
We see a number of transactions that are either recoverable by a liquidator, may be considered as an offence, or simply delays the inevitable financial burdens on directors. These types of transactions are frequently identified in liquidations, as we will show in the case of Simple Pty Ltd.
Simple Pty Ltd
Simon was the director of Simple Pty Ltd. The business traded successfully for years but was falling on tough economic times, sales had declined and fixed costs were higher than could be sustained for a long period. Simon thought he could ride out the tough times and to ease cash flow he started drawing a director’s loan—as opposed to wages—that reduced the PAYG Withholding liability the company was required to remit to the Australian Taxation Office (ATO). The tough times continued and the company could not pay all its PAYG Withholding and superannuation liabilities and trade creditors were chasing substantial amounts. Simon then entered into payment arrangements with the ATO and some trade creditors.
After failing to meet those payment arrangements Simon finally accepted that he couldn’t find a solution, and sold the assets of the company for a modest amount. Simon used the entire sale proceeds to repay the balance of the outstanding directors loan. A few months later, a creditor obtained a winding up order from the Court appointing a liquidator.
Simon then faced the following issues from the liquidator, ATO, trade creditors and ASIC:
- Voidable transactions, namely payments to reduce the director loan account.
- Preferential payments from the ATO and trade creditors.
- Potential insolvent trading claim against Simon.
Reports to ASIC
Potential offences report regarding breach of fiduciary duties, not acting in the best interests of the company —including the voidable transactions and insolvent trading.
- Potential investigation into Division 7A loan account and any unpaid personal taxation obligations.
- Simon is unable to claim personal withholding tax as a credit for net wages received from the company when the company failed to remit the PAYG Withholding to the ATO resulting in potential increase in personal taxation liability.
- Seeks to recover amounts from Simon that the liquidator has recovered from the ATO as a preferential payment.
- Issues a Director Penalty Notice for failure to lodge various PAYG and Superannuation lodgements outside of 90 days of the due lodgement date.
Personal guarantees claims.
Insolvent trading and other potential offences.
No one sets out to end up in Simon’s position, but directors need to be conscious of conflicts of interest and remember to always act in the interests of the company. If directors make decisions purely for their own benefit and not the company’s, it often comes back to haunt them. The importance of obtaining early and regular advice may be the difference in avoiding such scenarios.