Advisors unaware of risks in facilitating ATO repayment arrangements

Potential insolvent trading claim must be factored.

As discussed in our March edition of ‘On the Pulse’, the recent Federal Circuit and Family Court of Australia decision of Clifton (Liquidator) v Kerry J Investment Pty Ltd trading as Clenergy[1] has reset the thinking around the effect that entering into an payment arrangement with the Australian Taxation Office (ATO) has on solvency. 

When dealing with normal commercial creditors, entering into a payment arrangement has the effect of improving the debtor company’s solvency as the due date is extended, thereby improving the entity’s ability to pay all of its debts ‘as and when they become due and payable’.[2] However, as was found in the Clifton matter, this is not the case with a payment arrangement with the ATO.

In the Clifton matter the Court found that the ATO payment arrangements were made under section 255-15 of the Taxation Administration Act[3] which provides at section 255-15(2), that a payment arrangement between a taxpayer and the Commissioner ‘does not vary the time at which the amount is due and payable’.[4]

So, why is this so important?

If a subsequently appointed liquidator is assessing the company’s financial position, the full tax debt owing will be taken into account in determining the date of the company’s insolvency.  

The commercial reality is that with a payment arrangement in place (and assuming there’s no breach of the arrangement), there is little reason for the ATO to wind up the company. However, if the company did find itself in liquidation after entering into the ATO payment arrangement (e.g. if another creditor petitioned its wind up, or the shareholders voluntarily appointed a liquidator), the liquidator, in considering an insolvent trading claim against the director/s may consider the full amount of the ATO debt as due and payable and therefore the payment arrangement will not mitigate any insolvent trading claim.

What’s the risk to an advisor? Three factors must be considered:

1. Advising a client that a payment arrangement with a creditor may resolve a situation where the company is trading while insolvent is not correct when the creditor is the ATO.[5]

2. Directors should be advised that where the ATO agrees to a payment arrangement, that agreement does not improve the company’s solvency—it’s purely a commercial arrangement that may benefit the company’s cash flow. Therefore, despite the payment arrangement, the company may still be trading while insolvent and the director/s may still be at risk of an insolvent trading claim being brought by a future liquidator.  

3. Advisors assisting with ATO payment arrangements should enter into a stand-alone engagement letter with a clear explanation of the effect of section 255-15(2) of the Taxation Administration Act; and have the director/s acknowledge that despite the ATO agreeing to a payment arrangement the company may still be regarded as being unable to pay its debts as and when they fall due, and the director/s may remain at risk of an insolvent trading claim.

Such an engagement letter will be a valuable tool should a director later assert negligence on the part of the advisor for not providing full and correct advice in relation to the effect of the company entering into a payment arrangement with the ATO.  

For more information about insolvent trading, go to our knowledge base for all the FAQs click here or download our complimentary Guide to Corporate Insolvency click here.

[1] [2020] FCAFC 5.

[2] s.95A(1) Corporations Act 2001 (Cth).

[3] Schedule 1, Taxation Administration Act 1953 (Cth).

[4] The Court’s findings are supported by earlier authorities including Hall v Poolman [2007] NSWSC 1330 and Smith v Bone [2015] FCA 319.

[5] See. S.255-15(2) ibid