A tale of two corporate ghosts returning to haunt their directors
Businesses don’t always make a profit. A myriad of circumstances—ill health, divorce, macroeconomic factors, trade policies (e.g., tariffs), a large debtor going under, fraudulent employees, mismanagement, or even simple bad luck—can lead to losses and mounting debts (liabilities) that a business cannot afford to pay.
When a company incurs debts it cannot pay, the Corporations Act prescribes mechanisms such as creditors’ voluntary liquidation (if members agree), appointing a voluntary administrator, or engaging a restructuring practitioner. Unfortunately, these processes come with significant costs.
This raises a natural question: What happens if I just abandon the company? Two outcomes are likely:
A creditor may approach the Court to wind up the company and appoint a liquidator.
ASIC may commence strike-off action due to unpaid annual registration fees.
This article examines two cases where ASIC’s strike-off action led to deregistration, nearly resulting in directors being held personally liable for approximately $350,000 in combined Director Penalty Notices (DPNs).
Deregistration and its consequences
Last year, two notable cases involved directors making urgent applications to court to reinstate deregistered companies. Company A, and Company B.
In both cases, the Deputy Commissioner of Taxation (ATO) had issued DPNs to the directors. Under these notices, directors had 21 days to comply or risk personal liability for their companies’ tax liabilities. Company A owed the ATO $180,000, while the Company B director faced a liability of $170,903.
However, compliance with the DPNs was impossible because the companies had already been deregistered, leaving no mechanism to appoint a liquidator, administrator, or restructuring practitioner. As a result, the directors filed urgent applications to reinstate their companies. Both the WA Supreme Court (Company B) and the Federal Court (Company A) approved the reinstatements, allowing the directors to appoint liquidators and comply with the DPNs. Despite the successful outcomes, these cases highlight substantial risks for directors who allow deregistration to occur.
Risks of allowing deregistration
Court may deny reinstatement: The Court must be satisfied that reinstatement is just. In Company A’s case, the company was deregistered only 11 days after receiving the DPN. In Company B’s case, the director argued he relied on professional advice to allow deregistration. Such factors can influence a Court’s decision.
Tight timeframes: Directors often discover DPNs at the last minute due to delayed mail, holidays, or relocation. With only 21 days to comply (from issuance), this tight deadline leaves little room for error.
Opposition from ASIC or ATO: While the ATO did not oppose reinstatement in Company B, there’s no guarantee this will always be the case. ASIC, while silent in these matters, could oppose similar applications in the future.
Breach of director duties: Directors have a statutory duty to prevent insolvent trading under Section 588G of the Corporations Act 2001. If a company is insolvent, there is an obligation to appoint an external administrator.
Financial and legal costs
Engaging a liquidator typically incurs a not-inconsequential cost. By neglecting to liquidate Company A and Company B proactively, the directors faced additional expenses on top of the cost of the liquidation:
Legal fees for urgent court applications.
Court filing fees.
Risks of unsuccessful applications or missing the 21-day window, leading to personal liability for DPNs.
While liquidation costs may seem burdensome, these cases illustrate that abandoning a company and risking deregistration can be far more costly and stressful.
Key takeaways
Abandoning a company might seem like an easy way out, but it can create a corporate ghost that comes back to haunt you. Directors should act decisively to address debts and engage a liquidator when necessary to avoid personal liability and other risks.
Additional resources
Learn more about Director Penalty Notices: Worrells Resource on DPNs
Detailed case study: Perrin v Australian Securities and Investments Commission [2024] WASC 38
