DPN, ASIC delisting and personal liability of a director – Insolvency/Bankruptcy

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The least resilient (but certainly the most treacherous) path for leaders struggling with their company’s financial difficulties is to be in a state of denial. The common misconception that corporate structure will always shield them from personal liability works in favor of denial.

However, many readers are well aware that corporate debts can become personal debts of the manager under certain circumstances, thus 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 corporate debt.

The debts of the company generally fall on the directors personally by:

  • Give personal guarantees on the company’s debts.

  • Insolvent business.

  • Receive claims from the liquidator, including:
    • Director loan (debit) accounts that the director owes to the company.

    • Statutory indemnity of an administrator at the Australian Taxation Office (ATO) for any successful preferential payment.

    • Exposure resulting from voidable transaction claims.

    • Exposure resulting from entering into an agreement or transaction to avoid employee rights.

    • Breaches of the duties of directors.


  • Committing corporate torts through certain laws that may make a director personally liable (eg, environmental protection torts, certain legal building insurance claims).

  • Receive a Director Penalty Notice (DPN) which the ATO can issue.

While it’s important to carefully consider all of the above, DPNs are often the biggest surprise for administrators. This is currently a particularly important topic as the ATO has recently woken up from its COVID slumber and is emitting around 30-40 DPNs per day. And this number is set to increase.

We’ve written extensively about DPNs, but a recent case in Worrells Melbourne highlighted the importance of prompt action when a business is insolvent. A manager, Mr. X, came to us for advice on an unlocked DPN for $430,000. The DPN regime makes the directors (jointly and severally) personally liable for a company’s tax debts for the PAYG, the “net GST” (GST, LCT, WET1), and the debts of the retirement pension guarantee charge (SGC). Two types of DPN can be issued: non-locking and locking. As the names suggest, there are options for administrators in the lock-free DPN scenario,2 which include payment of the full amount and three insolvency appointments – small business restructuring, voluntary administration and liquidation. Administrators can benefit from a non-confinement DPN relating to debts arising from tax declarations filed within the prescribed deadlines.3

The clock on these options is one to be exercised
within 21 days of the date of the DPN notification. This is essential as it is not the date of receipt of the notice that is relevant, and the ATO is not required to ensure that the Director is aware of or has actually received the DPN. A DPN is sent to the address listed on the Australian Securities and Investments Commission (ASIC) record for each director.

And Mr X?

Luckily, Mr. X kept his ASIC file up to date and sought our advice within days of receiving this unlocked DPN. But in the face of the company’s financial problems, he left the company inactive for some time and as a result, ASIC took delisting action and delisted it.

This series of events complicated matters considerably since Mr. X was unable to re-register the company within the 21-day DPN deadline and then put it into liquidation. The $430,000 DPN penalty is locked in as Mr. X’s personal liability and his only option now is personal bankruptcy as he does not have sufficient funds to pay the DPN.

A key lesson here for directors in mitigating personal exposure to corporate tax debt is to face the circumstances knowing that there is support to help you get appropriate advice to help turn your situation or guide you through the insolvency process. In addition, if it is not too late, and whether or not the company is able to pay its tax debts, directors must ensure that the company’s tax returns are filed on time, to avoid DPN lockout.

Footnotes

1 Luxury Car Tax (LCT), Wine Equalization Tax (WET)

2 Conversely, the only option under a non-lockdown DPN is to pay the entire debt

3 The prescribed deadlines for business activity declarations and staggered activity declarations must be filed within three months of the scheduled filing date. For statements of the retirement pension guarantee charge (SGC), they must be submitted within one month and 28 days after the end of the SGC quarter.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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