In nearly all company liquidations there are a number of risks for directors. There are ways to mitigate these risks prior to the company entering liquidation. However, it is important to get professional advice about the risks for directors in liquidation at the earliest time possible. Otherwise, there is often nothing that can be done.
Article by Neil Mitchell, Senior Manager at the Pearce & Heers Brisbane office.
This is the first part of our series covering Company Liquidation – Risk for Directors. The other parts can be accessed by the links below:
What are the most common risks for directors?
The most common risks for directors of insolvent companies or companies already in liquidation are:
- ATO Director Penalty Notices
- Director / Shareholder Loan Accounts
- Personal Guarantees
- QBCC Issues and Risks
- Insolvent Trading
- ASIC Director Banning
This article looks at the risks of ATO Director Penalty Notices, Director / Shareholder Loan Accounts and Personal Guarantees. Please follow the above links to our articles, which set out the other risks for directors.
ATO Director Penalty Notices
The ATO can issue a Director Penalty Notice for unpaid GST, PAYG Tax, or superannuation. We have previously written about how Director Penalty Notices apply and below is just a summary of relevant matters.
There are two types of Director Penalty Notices:
- 21 Day GST Director Penalty Notices apply where a company doesn’t pay GST, PAYG Tax or super but it lodges activity statements within three months of being due or SGC Statements for unpaid super within one month of the super being due for payment. If this happens the ATO can issue the notices, but directors can avoid liability of tax or super if it is paid or the company is placed in liquidation or voluntary administration within 21 days of the date of the Director Penalty Notice.
- Lockdown GST Director Penalty Notices apply if a company doesn’t pay GST, PAYG Tax or super and it also fails to lodge activity statements within three months of being due or SGC Statements for unpaid super within one month of the super being due for payment. If this happens the ATO can estimate a company’s liabilities (if necessary) and issue a Lockdown Director Penalty Notice making the director(s) automatically liable for the company’s debts. Placing a company in liquidation or voluntary administration does not avoid liability. These types of notices can be issued after a Liquidator or Administrator has been appointed.
What can you do to avoid Director Penalty Notice liability?
There are a few simple steps you can take to avoid or minimise the risk of Director Penalty Notice liability:
- Lodge a company’s BAS or SGC Statements within relevant periods so that you avoid the risk of Lockdown Director Penalty Notices.
- Keep your residential address as a director of a company up to date with the ASIC as Director Penalty Notices are issued to this address.
- Enter into a payment arrangement with the ATO, as the ATO can’t issue a Director Penalty Notice while a payment arrangement is in place.
- Prioritise paying your company’s superannuation.
- Get advice early from a qualified professional.
- Be careful if you are coming on board or resigning as a director – you can be liable for unpaid debts incurred prior to your appointment, whilst you were appointed or even if you have resigned as a director.
Director / Shareholder Loan Accounts
If a company is in liquidation, then a director or shareholder who owes a loan to the company is liable to repay the loan. And a Liquidator will take steps to recover the loan. This could include commencing legal action or even issuing bankruptcy proceedings.
The most common way that loan accounts arise is where payments to directors and/or shareholders are classified as a loan rather than wages or a dividend. Often a company is doing this because it can’t afford to pay wages to the director including PAYG Tax and super. This in itself is problematic and can mean the company has cashflow problems.
We are often asked if a loan just be written off? However, if a company is insolvent, any transaction that it writes off in a loan account may give rise to recovery claims by a Liquidator. Therefore, director or shareholder loan accounts can cause significant problems for those associated with a company. The best ways to deal with this issue are:
- If possible, don’t enter into transactions which will give rise to loan accounts. This may mean directors are paid wages or payments to shareholders are accounted for as dividends.
- If loan accounts arise, then closely monitor them to make sure they don’t give rise to future problems.
- If there are loan accounts on your company’s books, you should also be careful that your company doesn’t become insolvent. It is much more difficult to deal with a loan account if your company is insolvent.
- If your company is placed in liquidation and a Liquidator tries to recover a loan, make an offer of settlement on commercial terms. It may be that you won’t have to repay the loan in full, although this is very much determined on a case-by-case basis.
Our previous article here provides further information about the risks of loan accounts.
Many suppliers insist that the director(s) of a company sign a Personal Guarantee before they will begin supplying goods or services to the company. A personal guarantee makes the director(s) liable for the debts incurred by the company for goods or services provided. Not only that, the liability of guarantors is generally joint and several, meaning the debt is repayable in full, individually by all of those signing the Personal Guarantee. Finally, the guarantees may contain charging clauses giving security to the supplier of the guarantor’s personal property, generally their house.
In a worse case scenario, if you have signed personal guarantees and your company is placed in liquidation, you will have to personally pay any unpaid debts you have guaranteed.
So how do you mitigate exposure to personal guarantees? Follow the following tips:
- The easiest and most straightforward way is not to sign guarantees in the first place, but rather try and negotiate alternate terms.
- However, if a supplier insists on a guarantee, it may be possible to cap the amount of guarantee.
- If you can’t do either of the above, then keep a close eye on the guaranteed debts and try and avoid them getting out of control.
- And importantly, if you resign as a director, revoke any guarantees in writing, otherwise the guarantee may continue to make you liable for the debts the company is incurring.
Our previous article here provides further information about the risks of personal guarantees.
Contact us for Assistance
If any of the above risks apply to you and you would like advice on the potential consequences and the options available, please contact Pearce & Heers at our Brisbane or Gold Coast offices for an for an initial, obligation-free consultation.