We are seeing many directors just walking away from failed corporate businesses with tax debts. This occurrence is not new, just more profound post COVID than in the past.

We are finding directors have paid out secured creditors and creditors holding personal guarantees, thinking they have no further personal exposure. The directors of the belief that the ASIC will just deregister the company, thereby avoiding winding up costs and any potential scrutiny and director liability that may arise if a liquidator was appointed.

Certain directors may take a commercial view that smaller creditors will not pursue the company into liquidation due to the associated costs and uncertainty of any financial return if they do so. This flawed approach is even being promoted by some pre-insolvency advisors who take their fees upfront and leave the directors believing they have wrapped things up without further risk.

As an example, She’ll-Be-Right Pty Ltd has the following circumstances:

• It ceased trading some years earlier.
• It has no remaining assets. (ignoring for now, what happened to its assets, as that creates other concerns).
• There are various smaller creditors having debts of less than $10,000 each.
• The ATO is a creditor for such things as unpaid PAYG, GST, SGC plus potentially various outstanding returns, as well as penalties and interest.
• There are no creditors that may pursue the directors under personal guarantees.

The directors walk away, the ASIC continues to issue its annual fees which remain unpaid and eventually the ASIC deregisters the company. The smaller creditors write off their debts as they are either too costly to pursue or they run into difficulties as the company has been deregistered.

While the directors believe they avoided personal liability and their problems are behind them, the reality is that they have created themselves a sleeping issue and have prodded the ATO into action.

The matter that is overlooked by these directors and pre-insolvency advisers is the ATO does not link outstanding tax debts to the company’s (deregistered) ACN. Rather it links them to the company’s ABN. That is NOT cancelled when the ASIC deregisters a company. However, the ATO’s data matching will pick up that an active ABN which no longer has a registered ACN will trigger the ATO into action.

The ATO, as part of its debt collection practices may issue director(s) penalty notices (DPN’s), much to the surprise of the company’s previous directors. The effect and types of DPN’s are discussed in our other articles, but in short, they seek to make directors liable for unpaid PAYG, GST, Superannuation and other taxes.

The usual options available to avoid personal liability for a DPN are made more complex where the company has been deregistered as time is of the essence, that is the directors must take certain actions within 21 days of the notice.

Revisiting our previous articles, to avoid personal liability for a (non-lockdown) DPN director(s) can:

1. Cause the company to pay the debt. However, this is not possible if it has no assets and is deregistered.
2. Seek to appoint a voluntary administrator, liquidator or small business restructuring practitioner to the Company. However, these are no longer possible as the company is deregistered.

In order to reinstate the Company so that any of the options in 2 (above) can occur, the directors can:

1. Apply to re-register the company through ASIC and pay any outstanding ASIC fees per s. 601AH(1A) of the Corporations Act, which will certainly take longer than 21 days meaning the directors will become personally liable. (ASIC Regulatory Guide 83 permits ASIC to register (reinstate) a company previously deregistered subject to certain conditions).
2. Apply to the Court under an urgent application which will be costly as there will be legal fees and court application costs that will need to be paid personally by the directors. (ASIC Regulatory Guide 83 states: “Regardless of whether ASIC can reinstate a company, an application may be made to a court for reinstatement. This is referred to as a ‘court reinstatement’.”).

The better alternative to achieve a certain outcome.

Directors should seek professional advice from a registered insolvency practitioner setting out their options so they may make an informed decision about how to properly deal with the company’s debts.

Rodgers Reidy, as business recovery specialists, have the expertise and experience to review each company’s unique circumstances and advise the options available, recommending the best way forward. We are here to assist on a free, no-obligation basis to discuss your particular issues and options.