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Practice Note: 03/05/2023

Conflict Between the Taxation Legislation and Corporations Act

Businesspeople often trade using a company as part of their asset protection strategy. In this Newsletter, we highlight an anomaly or conflict between the Taxation Legislation and Corporations Act which could cause company directors personal financial exposure. This is something that all directors should be aware of.

The circumstance we are talking about is where the company has been unable to pay its taxes but has adhered to the required lodgement timelines of the ATO. If the director subsequently receives a Director Penalty Notice (DPN) from the ATO, the Taxation Legislation enables a director to avoid personal liability from the DPN by putting the company into Administration, Liquidation, or appointing a Small Business Restructuring Practitioner within 21 days.

The Trap

A potential trap occurs where the director receives a DPN and places the company into liquidation for the director to avoid personal liability under the Taxation Legislation, as it may give the director a false hope if the company has been trading whilst insolvent. Under the insolvent trading provisions of the Corporations Act, if the company was traded whilst insolvent, the director could be personally liable for the company’s debts.

When a company goes into liquidation the liquidator will consider the insolvent trading provisions of the Corporations Act and investigate the company’s books and records to identify a point in time from when the company was not able to pay its debts as and when they fell due. If the liquidator identifies that the company was not able to pay its debts at the time the tax debt was due, then the liquidator may seek payment of the tax debt from the director. If this happens the director may be personally liable not just for the tax debt, but all debts subsequently incurred by the company which remain unpaid.

‘Reporting and not paying the company’s tax debt could be evidence for a liquidator’s insolvent trading claim against the director’.

Takeaway

When a company is unable to pay its tax debt or a cashflow problem is identified, it is not enough for a director to only consider actions he or she can take for personal protection under the Taxation Legislation. The director should also consider actions he or she can take for personal protection from the insolvent trading provisions of the Corporations Act if the company is subsequently placed into liquidation.

Comment

When a company first experiences cash flow problems, timely action by the director is relevant for the director to avoid personal liability and for the company’s cash flow problems to be fixed.

TIP

Company directors should always obtain specific advice relevant to the company’s financial circumstances when insolvency issues are identified.

Our Recommendation

Persons who have complied with the ATO reporting requirements and are able to avoid personal liability from a DPN should obtain specific advice on available options and the director’s personal financial exposure from placing the company into liquidation.

Directors should also explore the benefits and negatives of proposing a Deed of Company Arrangement or appointing a Small Business Restructuring Practitioner for the director to avoid personal liability for the company’s ATO debt and liabilities incurred to creditors.

Our article: The Pros and Cons of Creditors Voluntary Liquidation.

Director Facing Personal Liability

A potential problem for directors whose company has been placed into liquidation is that whilst they expect to receive an insolvent trading claim from the liquidator, it might take some time before an insolvent trading claim emerges. For example, it could be 12 months. This can leave the director hanging and make it difficult for directors who want to tidy up their financial affairs and get on with life.

If a director is faced with significant personal exposure from personal guarantees, DPN, and a potential liquidator’s insolvent trading claim, it may be relevant for the director to consider bankruptcy immediately after the company is placed into liquidation. The director’s bankruptcy will capture personal guarantee debts, DPN debt, and the liquidator’s future insolvent trading claim. The director does not need to wait until the liquidator’s claim is received before seeking the protection of bankruptcy. This has the potential to take years off the directors’ financial recovery timeline.

Questions

If you have questions on a company director’s personal exposure for the company’s tax debt, please call Alan Nicholls on 1300 060 122.

Nicholls & Co

Nicholls & Co are personal insolvency specialists. Personal Insolvency is our sole area of practice. We have been in practice since 1987 and service all States and Territories of Australia.

Further Reading

For further information on bankruptcy, we recommend the following articles:

Assistance

For your questions on bankruptcy and how it can help the insolvent person to reset for the future call 1300 060 122 or email helpdesk@nichollsco.com.au.

ABC Radio

Alan Nicholls’ interview on ABC Radio, provides insight into the Nicholls & Co approach when we assist people to get past their severe financial problems. It can be accessed here. Copyright@2023 Nicholls Resources Pty Ltd. All rights reserved. Liability limited by a scheme approved under the Professional Standards Legislation.

This newsletter is provided as general information only and is not advice. All client’s situations are different and independent advice should always be obtained. If you have any questions on bankruptcy, you are welcome to give us a call 1300 060 122 or email helpdesk@nichollsco.com.au.