Directors who are dealing with financial difficulties of their company often bury their head in the sand. That is however, the last thing a director should be doing. As we have previously written, directors can be personally liable for company debts as a result of:
- Personal guarantees that have been provided for debts of the company;
- An insolvency trading claim brought by liquidators of their company under the Corporations Act 2001; and
- The most common, but not necessarily the most understood way, as a result of the ATO’s director penalty notice regime.
The ATO has largely held off issuing director penalty notices during the COVID-19 pandemic but this has recently changed. It is understood that the ATO has been issuing up to 200 director penalty notices on a weekly basis and this number is expected to rise in the next 12 months.
Essentially, the director penalty notice is a tool for the ATO to recover certain tax debts owed by companies from directors personally. It is one of the most powerful tools in the ATO’s arsenal and directors need to be aware of the risks if their companies have substantial tax debts.
Example of the risks of director penalty notices – inaction of a director
A director was referred to us, whose company had incurred significant PAYG Tax and GST debts. Prior to contacting us, the director had decided to shut down the business and stop trading without dealing with the debts of the company. The ASIC then subsequently deregistered the company as it was not paying required ASIC fees.
The director subsequently received a director penalty notice from the ATO, requesting that the company’s tax debts be paid, or the company placed in external administration within 21 days, or he would be made personally liable.
Under normal circumstances, provided all statutory lodgements were made on time, directors can place their company under liquidation, voluntary administration or appoint a small business restructuring practitioner within 21 days to avoid personal liability.
Unfortunately for this director, the company was already deregistered by that time and he did not have time to re-register to the company to take advantage of the protections afforded by external administrations. The director actually came to see us more than 21 days after the date the director penalty notice was issued, which in any event was too late.
That meant that the director became liable for the company’s tax debts and had to declare bankruptcy as he could not afford to pay the debts.
Contact us for assistance
The above scenario unfortunately is not uncommon. Many directors choose to ignore the financial problems faced by their companies and choose simply to stop trading without tying loose ends.
If your company is facing financial difficulty and is not able to keep up with its tax obligations, contact us at our Brisbane or Gold Coast office for a free consult. Our team will be able to provide you with solutions to best deal with your problems, ensuring that you avoid any future complications.
