The DPN regime was introduced to prevent companies and their directors from avoiding their PAYG and SGC liabilities. The laws administering the DPN regime have over the past been strengthened to reduce the occurrence of phoenix activities which were prevalent under previous laws. The ATO’s recovery options are now broader and linked to the company’s reporting obligations.
It is now easier for directors to be held personally liable for these debts. Directors in receipt of a DPN face personal liability and should act immediately.
Directors should ensure their financial management systems allow for PAYG and SGC contingencies and their company reporting requirements are regularly reviewed and maintained. This may require the assistance of a professional to ensure that personal liability, penalties and interest, wherever possible, are avoided.
A DPN is a Notice that the ATO can send a director that can make that director personally liable for two types of tax debts of a company – Pay As You Go (PAYG) and Superannuation Guarantee Charge (SGC) liabilities.
The DPN regime is set out in Division 269 of Schedule 1 of the Taxation Administration Act 1953. There are two types of Director Penalty Notices. The first is the traditional Director Penalty Notice which gives a director 21 days to take certain actions to avoid personal liability. The second type of DPN, often referred to as a “Lockdown DPN”, can make a director automatically personally liable for PAYG and SGC if company tax returns are not lodged on time – there is no opportunity to avoid
that liability once the DPN is served on the director.
The options available to directors for avoiding personal liability of a company’s unpaid PAYG or SGC liability will depend on the circumstances under which the DPN issues. If the unpaid amounts of PAYG or SGC are reported within three months of their due date, a director has 21 days from the date of the DPN to have the director penalties remitted (cancelled) by:
If the unpaid amounts of PAYG or SGC are reported more than three months after their due date, or are unreported, then the only option available for remitting the penalty is by paying the liability.
In such cases, a director cannot avoid personal liability for those amounts by placing the company into administration or liquidation. The only option available where the ATO has commenced proceedings to recover a company’s liability that is unpaid and unreported after three months, is for a director to cause the company to pay the debt or to pay it personally.
Failure to report a PAYG or SGC obligation may result in the ATO making an estimate of the unpaid and overdue amount to which the DPN regime will apply. A company may enter into an arrangement with the ATO to pay the debt in which case the ATO will not commence personal recovery action against a director, however, the ATO may use a director’s personal tax credits to offset the company debt.
How can Helm Advisory Help?
Directors in receipt of a DPN should seek urgent advice on their available options to avoid personal liability or to lodge a defence. If handled properly, early intervention by a qualified restructuring advisor may completely avoid the need to appoint an external administrator in future. If you need any guidance or assistance please contact one of the Helm Advisory Specialists on 02 9194 4000.
A Court Liquidation is a type of administration that requires an application to the Court by creditors, company members or other interested parties to wind up a company due to unpaid debts. A liquidator is appointed by the Court to administer the insolvency process in order to realise the company’s assets and disburse funds to creditors in accordance with established priorities.
The responsibility of the liquidator is to investigate the company’s affairs and report any offences and other relevant matters to creditors and ASIC. A court liquidation allows for a systematic approach to winding up a company and bringing its affairs to an end.
What causes a Court Liquidation?
What are the expected outcomes of a Court Liquidation?
How can Helm Advisory Help?
If you are a director and you think you might need to liquidate your company, then you need to establish if the company is solvent or insolvent. If it is insolvent, then you will need a Creditors Voluntary Liquidation and if it is solvent you will need a Members Voluntary Liquidation.
In our view, directors should be seeking external advice from a restructuring advisor well before they contemplate the need for the appointment of an external administrator. If handled properly, early intervention by a qualified restructuring advisor may completely avoid the need to appoint an
external administrator in future.
If you need any guidance or assistance with a corporate restructuring, or insolvency matter, please contact one of the Helm Advisory Specialists on 02 9194 4000.
Creditors Voluntary Liquidation (commonly known as CVL) is the most commonly used type of Liquidation appointment. It is easy, low cost and initiated by the directors and shareholders. It starts with the directors and shareholders resolving that the company is insolvent, or likely to become
insolvent and can no longer satisfy its debts. A Creditors’ Voluntary Liquidation allows for the winding up of a company’s affairs without the need for Court intervention. This type of insolvency provides for an orderly realisation and distribution of a company’s assets among its creditors and
investigations as to why the company failed.
What causes a Creditors voluntary Liquidation?
What are the expected outcomes of a Creditors Voluntary Liquidation?
How can Helm Advisory Help?
If you are a director and you think you might need to liquidate your company, then you need to establish if the company is solvent or insolvent. If it is insolvent, then you will need a Creditors Voluntary Liquidation and if it is solvent you will need a Members Voluntary Liquidation.
In our view, directors should be seeking external advice from a restructuring advisor well before they contemplate the need for the appointment of an external administrator. If handled properly, early intervention by a qualified restructuring advisor may completely avoid the need to appoint an
external administrator in future.
If you need any guidance or assistance with a corporate restructuring, or insolvency matter, please contact one of the Helm Advisory Specialists on 02 9194 4000.
Understanding the overall Insolvency framework can assist advisors to guide their clients through complex Insolvency processes and lessen any financial and emotional impact on stakeholders such as directors, employees and creditors. Helm Advisory have a team of specialists can make the complex processes surrounding insolvency easy to understand by taking a practical, understandable approach.
There are four common types of Appointments of formal Insolvency appointments that are used when a company is in financial trouble are:
Here is a brief overview of the formal insolvency appointments available when a company is or suspected to be insolvent:
Liquidation is the term used to describe the process of winding up the company’s affairs including the realisation of company assets, the ceasing of trade, distribution of proceeds to creditors and distributing the surplus (if any) to its shareholders.
The three common types of liquidation are:
Creditors’ Voluntary Liquidation
Creditors Voluntary Liquidation (CVL) is the most commonly used type of Liquidation appointment. It is easy, low cost and initiated by the directors and shareholders. It starts with the directors resolving that the company is insolvent and the directors then, with the help of a Liquidator, call an Extraordinary General Meeting for the shareholders to pass a Special Resolution to wind up the company. Learn more >
Court Liquidation
A Court Liquidation is a type of administration that requires an application to the Court by creditors, company members or other interested parties to wind up a company due to unpaid debts. A liquidator is appointed by the Court to administer the insolvency process in order to realise the company’s assets and disburse funds to creditors in accordance with established priorities. They differ from a CVL in that they can be ordered whether the company’s directors agree or not, so they are not voluntary. Learn more >
Members’ Voluntary Liquidation
Members Voluntary Liquidation (MVL) is only available to solvent companies. The primary reason for a liquidator being appointed to a solvent company is to return capital to shareholders and finalise the company’s affairs. In a practical sense, the affairs of the company must be wound up, including the disposal of all assets, and payment of all liabilities.
Voluntary Administration
Directors may appoint a voluntary administrator to take control of the company to navigate a way out of insolvency by seeing if the company and its business can be saved. If it is possible to ‘trade out’ of the difficulties, the voluntary administrator will steer the company through that process.
The administrator, who assumes the powers of the company’s directors (which are suspended as a result of the administration), will review the company’s position and provide a report to creditors on the property, business, affairs and financial circumstances of the company as well as a recommendation as to the most appropriate strategies for the company to take.
Depending on the outcome of those investigations, there are three options:
1) end the voluntary administration and return the company to the control of the directors;
2) if the company is able to regain its momentum, to recommend and approve a deed of company arrangement (“DOCA”) to allow the company to pay all or part of its debts and maximize creditor returns, or
3) wind up the company and appoint a liquidator.
The court and/or creditors also have the power to appoint an administrator, for example, a secured creditor holding security over most of the company’s assets may decide to appoint an external administrator to govern the company’s affairs.
Director Penalty Notices
Understanding the overall Insolvency framework can assist advisors to guide their clients through complex Insolvency processes and lessen any financial and emotional impact on stakeholders such as directors, employees and creditors. Helm Advisory have a team of specialists can make the complex processes surrounding insolvency easy to understand by taking a practical, understandable approach. Learn more >
Summary
Various stakeholders will have a different perspective on the company’s Insolvency situation. Creditors will want their debts paid as soon as possible, directors will likely become concerned with any personal exposure to liability, and employees may wish to profit their employment entitlements. Seeking the advice of an insolvency professional will help key players navigate the unpredictable storm of the company’s financial distress.
Directors should be on the alert for the following warning signs of insolvency, which have been identified by the Australian Securities and Investments Commission.
The following checklist can help identify if your Company or Client’s are in need of advice should the Company tick any THREE or four concerns.
In addition, if a director receives a s222AOE penalty notice from the ATO, (also known as a Director Penalty Notice) for their company’s unpaid tax, the director should immediately seek professional advice. Failure to take appropriate steps within 21 days may result in the Commissioner of Taxation taking recovery action against the director personally. If a company has a tax debt then it is just that – however, if some of that debt is for staff PAYG deductions or Superannuation then the ATO can make those amounts the director’s personal debt. The ATO makes a director liable by simply sending a Notice by mail – no Court action or Lawyers are required!
The Australian Securities and Investments Commission, recommends that directors consult an appropriately qualified specialist insolvency accountant or lawyer, or a registered liquidator about their company’s financial situation as soon as possible if they suspect that the company cannot pay debts when they are due.
In our view, directors should be seeking external advice from a restructuring advisor well before they contemplate the need for the appointment of an external administrator. If handled properly, early intervention by a qualified restructuring advisor may completely avoid the need to appoint an external administrator in future. If you need any guidance or assistance with a corporate restructuring, or insolvency matter, please contact one of the Helm Advisory Specialists on 02 9194 4000.