Director liability and inability to act early don’t go well together.
The path with least resistance (but most definitely the most paved with trouble) for directors contending with their company’s financial troubles is to be in a state of denial. The common misconception that the company structure will always protect them from personal liability works to being in denial’s favour.
Many readers, however, are well aware company debts may become the director’s personal debts in certain circumstances, thereby piercing the corporate veil. Early intervention with appropriate and timely advice can preserve the corporate veil and reduce or avoid a director’s personal exposure to a company’s debts.
Company debts commonly attach to directors personally through:
Giving personal guarantees over company debts.
Trading insolvently.
Receiving liquidator claims, including:
Director (debit) loan accounts the director owes to the company.
A director’s statutory indemnity to the Australian Taxation Office (ATO) for any successful preference payments.
Exposure resulting from voidable transaction claims.
Exposure resulting from entering into an agreement or transaction to avoid employee entitlements.
Directors’ duties breaches.
Committing company offences through certain legislation that can make a director personally liable (e.g. environmental protection offences, certain statutory building insurance claims).
Receiving a director penalty notice (DPN) the ATO can issue.
While proper consideration of all of the items above is important, DPNs often come as the biggest surprise to directors. This is currently an especially important topic as the ATO has recently awoken from its COVID slumber and is issuing some 30-40 DPNs daily. And that number is set to increase.
We have written plenty about DPNs, however a recent matter in Worrells Melbourne highlighted the importance of early action when a company is insolvent. A director, Mr X, came to us for advice about a non-lockdown DPN for $430,000. The DPN regime makes directors (jointly and severally) personally liable for a company’s tax debts for PAYG, “net GST” (GST, LCT, WET[1]), and superannuation guarantee charge (SGC) debts. Two types of DPN can be issued: non-lockdown, and lockdown. As the names suggest, there’s options for directors in the non-lockdown DPN scenario,[2] which include paying the amount in full and three insolvency appointments—small business restructuring, voluntary administration, and liquidation. Directors can receive a non-lockdown DPN in relation to debts arising from tax lodgements lodged within the prescribed timeframes.[3]
The clock on these options is that one must be exercised within 21 days of the date of the DPN notice. This is critical as it’s not the date the notice is received that is relevant, and the ATO is not required to ensure the director is aware of or actually received the DPN. A DPN is sent to the address on the Australian Securities and Investments Commission (ASIC) record for each director.
What about Mr X?
Luckily Mr X kept his ASIC record up to date and sought advice from us within a few days of receiving this non-lockdown DPN. But in the face of company financial problems, he let the company sit dormant for some time and as a result ASIC took strike-off action and deregistered it.
This series of events substantially complicated matters as Mr X could not re-register the company within the DPN 21-day timeframe to then place it into liquidation. The $430,000 DPN penalty locked down as a personal liability of Mr X and the only option now available to him is personal bankruptcy, as he does not have sufficient funds to pay the DPN.
A key lesson here for directors to mitigate personal exposure to company tax debts is to face the circumstances in the knowledge that there’s support for you to get appropriate advice to help you turn your situation around or guide you through the insolvency processes. Additionally, if it’s not too late, and regardless of whether the company can pay its tax debts, directors must ensure the company’s tax lodgements are lodged within the prescribed timeframes, to avoid a lockdown DPN.
If you have any questions regarding DPNs or this type of situation, please contact your local Worrells office.
[1] Luxury car tax (LCT), wine equalisation tax (WET)
[2] Conversely, the only option under a non-lockdown DPN is to pay the debt in full
[3] The prescribed timeframes for business activity statements and instalment activity statements—must be lodged within three months of the due lodgement date. For Superannuation Guarantee Charge (SGC) statements—must be lodged within one month and 28 days after the end of the SGC quarter.
