04 Nov 2020

Insolvency law changes shift rights of all creditors, bar the ATO

Beware the DPN!

The recent extension of relief around insolvency laws to 31 December 2020, included extending the “green light” for directors to trade insolvently without the risk of becoming personally liable for debts incurred. The protection is subject to conditions, including that the company must be placed into voluntary administration or liquidation on or before 31 December 2020—otherwise the protection falls away (this limitation is not well understood).

Putting aside any policy argument around the extension, one thing that does not sit well is the government has not been prepared to also release directors from personal liability for unpaid PAYG, GST, WET and LCT[1] imposed under the director penalty regime. (It is hard to argue against the reasoning of personal liability remaining for unpaid superannuation.)

This personal liability is imposed on directors automatically, by operation of law, as soon as the debt is not paid by the due date. And that personal liability is piling up as directors trade their companies while insolvent. Many directors will be under the illusion they are escaping personal liability for all debts they are incurring—which is simply not the case.

It seems the government is happy to expose ordinary creditors to the risk of unpaid debts incurred, yet the government itself continues to attach personal liability to directors for government revenue that is unpaid.

Think about this for a moment—while personal liability for unpaid PAYG and superannuation has been long established, personal liability for GST, WET & LCT only commenced from 1 April 2020—right at the onset of the virus-induced recession! And yet, there has been no suggestion around relief or deferral of these laws. While you may argue the Australian Taxation Office (ATO) doesn’t have discretion over whether it becomes a creditor, or that directors can remit their personal liability in certain circumstances—in my view, it is more about the government’s willingness to maintain all rights available to the ATO (protecting government revenue) while sacrificing ordinary creditors’ rights.

Another point to ponder: a few days after announcing the extension, the government announced significant reforms to the insolvency framework to support small business restructuring and to streamline the liquidation process. The reforms are the most substantive changes to Australia’s insolvency landscape in 30 years and include a 'debtor-in-possession' restructuring model for small business.

What we will be experiencing is a seismic shift to a more ‘debtor-friendly’ system. Time will tell whether this is in the interests of creditors who have lost money.

It does beg the question however—will directors be relieved from their personal liability for these unpaid taxes imposed under the director penalty regime, as an adjunct to the shift to a more ‘debtor-friendly’ system?

Unlikely I say. The government will maintain its powers to protect government revenue, and push as much risk as possible to other creditors. Maintaining laws which impose personal liability on directors for unpaid taxes conflicts with the governments new attitude of designing laws to protect the debtor. Government hypocrisy reigns supreme!

[1] Pay as you go withholding (PAYG); goods and services tax (GST); wine equalisation tax (WET); luxury car tax (LCT).

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