Director guarantees and penalty notices during small business restructures

What happens when creditors agree to accept a return of less than 100c?

At Worrells, we have seen incredible uptake in Small Business Restructuring (SBRs), with a significant number of restructuring plans being accepted by creditors. We have published a number of articles on SBRs and how they work which can be accessed here, so I do not propose to go into that in detail.

However, in instances where creditors agree to accept a restructuring plan which provides a return of less than 100 cents in the dollar, one may ask: what happens to a director’s personal exposure? This includes any guarantees they may have provided, or any Director Penalty Notices (DPNs) issued by the Australian Taxation Office (ATO).

Personal guarantees

It is important to note, that in our experience, many directors have provided guarantees for financed assets which are subject to security interests registered against the Company on the PPSR (Personal Property Securities Register). More often than not, it is business as usual, and the creditor is content to rely on its security without the need to call on the director's guarantee.

During the SBR process there is a moratorium (i.e. a stay) on creditors taking action against a director under a personal guarantee. This ends once a restructuring plan has been accepted, or the process period ends (i.e. plan is not accepted). Once a restructuring plan is in place, a creditor, whether an affected creditor under the plan or not, is free to pursue any personal guarantee provided by a director for the total amount owed by the company. Ideally a creditor would only pursue the director as guarantor for the anticipated shortfall (i.e. the debt owed less any anticipated distribution under the restructuring plan) however, this is not always the case. In this situation a director would ideally obtain advice and discuss the position with the creditor with a view to make arrangements to commence payments for any anticipated shortfall outside of the restructuring plan.

DPNs

If a director has received a DPN, their personal exposure will come down to whether the DPN has expired and whether the DPN was lockdown or non-lockdown. To discover the differences between a lockdown DPN and a non-lockdown DPN, check out this article by Ashley Sofra.

If a director has received a non-lockdown DPN and has taken the necessary steps to appoint a restructuring practitioner within the 21 day timeframe, their personal liability is remitted (cancelled). If however, it was a lockdown DPN or they have failed to act within the 21 days, the director is personally liable for the full amount of the company’s debt to the ATO. In this instance, if a restructuring plan is accepted and an amount is paid to the ATO which is less than the DPN, the director will remain personally liable for the balance.

The key message is that for a director to mitigate personal exposure to company tax debts, acting in a timely manner and seeking advice early is imperative.

If you have a client with an outstanding ATO debt or superannuation obligations, and/or has received a DPN, Worrells can assist by reviewing the company’s financial position and provide advice on the available options.