As the ATO continues to utilise Director Penalty Notices (DPN) as a way of recovering unpaid taxation liabilities against directors personally, it is important that small business owners understand the implications of a DPN and the options available to satisfy a DPN and in turn, avoid personal liability.
This article is part of a series that delves into different approaches to responding to a DPN, including voluntary administration, liquidation and small business restructuring. Here, we focus on how liquidation can be an effective strategy to satisfy a DPN and assist companies experiencing financial distress.
What is a Director Penalty Notice (DPN)?
A DPN is a tool the ATO uses to hold company directors personally liable for certain unpaid company taxes, including:
- Pay As You Go Withholding (PAYG);
- Goods and Services Tax (GST); and
- Superannuation Guarantee Charge (SGC).
Director Penalty Notices come in two forms: non-lockdown DPNs and lockdown DPNs. The options described in this article for avoiding personal liability - such as voluntary administration, liquidation, or small business restructuring - are only available to those who receive a non-lockdown DPN. If a lockdown DPN is issued (which occurs when certain tax obligations are not reported on time), directors cannot avoid personal liability without payment in full of the underlying debt. Directors should carefully read the notice and act promptly to determine which category applies before relying on these options. For clarity, this article’s content applies to non-lockdown DPNs only.
If the ATO issues a non-lockdown DPN, the director must act within 21 days to avoid personal liability for the debt. This can be done by either paying the debt in full or by taking one of the following actions:
- Undertaking a small business restructure;
- Placing the company into voluntary administration; or
- Entering liquidation.
Ignoring the DPN or failing to act within the 21-day period can lead to serious financial consequences.
Liquidation: A Strategic Approach to Satisfy a Director Penalty Notice
When a business cannot meet its financial obligations, a director may appoint a liquidator to the company. If a director wishes to avoid personal liability for the tax amount in a non-lockdown DPN the appointment must be within 21 days of the date of the DPN. Liquidation provides a structured pathway to settle debts by selling company assets and distributing the proceeds to pay creditors.
Liquidation can be an effective solution for dealing with a non-lockdown DPN or for addressing financial difficulties before a DPN is even issued.
After a company goes into liquidation, unsecured creditors are prohibited from continuing or commencing legal action against the company, unless permitted by the Courts. However, creditors can immediately enforce any recovery options against a director personally.
The Liquidation Process
1. Appointment of Liquidator
To begin the liquidation process, a company’s directors pass a resolution to appoint a liquidator who will take control of the company’s assets. The liquidator is responsible for collecting and selling the company’s assets to satisfy outstanding debts owed to creditors.
2. Protect Personal Liability
Once the liquidation process is underway, directors are protected from further personal liability associated with unpaid taxes (that were lodged on time), as the DPN conditions are satisfied.
3. Investigation and Recovery
As well as realising the company’s assets, the liquidator will investigate and seek to recover any potential funds from the following:
- unfair preference payments;
- uncommercial transactions;
- insolvent trading; and
- related party loans.
4. Distribution of Proceeds
If the liquidator is able to recover sufficient funds, these will be distributed to creditors according to statutory priorities, with secured creditors and priority creditors paid first (such as employees) followed by unsecured creditors.
5. Finalisation of Liquidation
Once all assets are sold, proceeds distributed, and statutory reporting is completed (including reports to ASIC), the liquidation process is finalised.\
Advantages of Liquidation
Opting for liquidation offers several benefits, particularly for directors facing a non-lockdown DPN:
- Protection from Personal Liability: Directors are protected from personal liability for unpaid tax debts (lodged on time) once liquidation begins.
- Clear Path for Resolving Debts: Liquidation provides a structured way to resolve company debts and ensure that creditors are treated fairly according to statutory priorities.
- Viable Option for Insolvent Companies: When the company is no longer financially viable and other options (like a small business restructure or voluntary administration) are not feasible, liquidation may be the most appropriate course of action.
Important Considerations
Although liquidation is often a viable option to satisfy a DPN, it is important that a director obtains advice on other personal liabilities that can result from the appointment of a liquidator:
- Insolvent trading: A director may be exposed to an insolvent trading claim for debts incurred while the company was unable to pay its debts.
- Breach of director duties: A director mat be pursued for damages arising from breaches of director duties.
- Voidable transactions: Related entities may also be exposed to transactions being voided if they were not in the best interest of the company at the time or preference payments received in the 6 months prior to liquidation.
It is therefore important that a director seeks legal advice upon receipt of a DPN to determine whether liquidation is a suitable option, or whether a voluntary administration or small business restructuring may be more suitable.
Takeaways and How an Insolvency Lawyer Can Assist in Satisfying a DPN
Liquidation can be an effective solution for satisfying a non-lockdown DPN and protecting directors from further personal liability. It provides a clear, structured approach to addressing company debts and resolving financial distress. However, directors must act promptly to avoid personal liability and ensure they choose the most appropriate course of action for their specific situation.
At BlueRock, our Melbourne-based insolvency lawyers provide tailored advice to help company directors navigate financial distress and address DPNs. Whether you are considering liquidation, voluntary administration, or a small business restructure, we’re here to assist with the complexities of insolvency.
If you’ve received a DPN or are experiencing financial difficulties, contact our lawyers today to explore your options. We’ll work with you to make informed decisions that protect both your business and personal future.
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