Resources & FAQ

In Australia an individual becomes bankrupt but a company goes into liquidation or voluntary administration when it is insolvent and cannot pay its debts.

Bankruptcy is the terminology used for individuals and although it is a similar process to external administrations like Creditors Voluntary Liquidation or Voluntary Administration, those particular processes are used for companies.

Menzies Advisory deals with corporate insolvency and can help directors whose companies cannot pay their debts.   If you need to resolve your personal debts, we can refer you to a reputable Bankruptcy Trustee.

The Australian Tax Office (ATO) is able to send a Director Penalty Notice to a company director which if enforced, makes the director personally liable for two company tax debt types. Company directors can become liable for GST, Pay As You Go tax (PAYG) and Superannuation Guarantee Charges (SGC) through a Director Penalty Notice. This article offers directors a comprehensive overview of what circumstances lead to a Director Penalty Notice and what to do when one is issued.

Australian laws tightened in 2012, making it easier for a director to become personally liable for company tax debts. This was intended to change the approach company directors took towards tax debts and encourage responsible actions. The scope of the Director Penalty Laws was widened, as was the personal liability of directors. Legal action under a Director Penalty Notice cannot be taken against your company if you keep your Business Activity Statement (BAS) returns up to date and lodge them on time. You also need to keep your Employee Superannuation lodgements up to date.  Payments of your company’s BAS and your Employee Superannuation must also be kept up to date.  Failure to do all of this, however, may result in the ATO issuing a Director Penalty Notice.

Director Penalty Notices can take two forms. A ‘traditional’ Director Penalty Notice provides the director with 21 days in which they can take action to avoid the forthcoming personal liability. A ‘lockdown’ Director Penalty Notice, however, automatically makes the director personally liable for any PAYG or SGC in the event of company returns not being lodged on time. Once a ‘lockdown’ Director Penalty Notice has been served, the director cannot avoid the subsequent liability.

In the event of a traditional or 21-day Director Penalty Notice, the director has four options:

• Pay the company debt

• Put the company into Liquidation

• Put the company into Voluntary Administration

• Create a payment arrangement with the ATO

As soon as a director receives a traditional or 21-day Director Penalty Notice, they should contact Menzies Advisory to discuss their best options moving forward.

A lockdown Director Penalty Notice now covers a wider remit within which a director can assume personal liability. This includes:

• The Superannuation payable to employees (under the Superannuation Guarantee law)

• Directors becoming automatically personally liable when PAYG and SGC debts go unpaid and/or unreported for three months

• The GST payable to the ATO

• Restricted access to PAYG and withholding credits

• Backdating personal liability on behalf of the director for GST, PAYG liabilities and Superannuation commitments when they go unpaid and/or unreported for three months beyond their due date.

The ATO will estimate the amount of tax owed by a company in the absence of lodged returns before issuing the Director Penalty Notice. A newly appointed company director is not personally liable for company debt until 30 days has passed. A director who has suffered from an illness which prevented their participation in company management may defend themselves against the notice, as too can a director who can prove they took all reasonable steps intended to ensure the company’s compliance with taxation obligations. You cannot ignore a Director Penalty Notice and should it go to the wrong address in the event of the director moving house but failing to update the ATO, you are still liable.

If you have received a Director Penalty Notice, either traditional or lockdown, contact Menzies Advisory immediately for comprehensive, confidential advice on how to proceed.

This answer to this question is usually straight forward. The first decision point is to determine whether or not your company is able to pay its debts as they fall due. If the company cannot pay its debts or bills when they are due to be paid, the company would be insolvent and the appointment of an external administrator in the form of a Liquidator or Voluntary Administrator would be appropriate.

If you or your fellow directors decide to go down the path of external administration, there are usually two alternatives available: 1. A voluntary liquidation which is called a Creditors Voluntary Liquidation, notwithstanding the fact that it is the shareholders of the company that actually appoint the voluntary Liquidator by a resolution at a meeting of the company’s shareholders; or 2. A voluntary administration which can be achieved by a resolution of the company’s director(s). It is important to note that if your company is unable to pay its debts as they fall due and the creditors are not being paid, it is possible for a creditor to initiate a compulsory liquidation of your company. This process occurs when a Statutory Demand expires after 21 days from it’s date of issue. Once a Statutory Demand has expired without being settled, the creditors lawyers are then able to apply to the Courts for an order to wind your company up in a court appointed, compulsory liquidation. If you have received a Statutory Demand and the 21 days has not yet expired, you are still able to appoint a voluntary administrator or voluntary liquidator but once the 21 days has expired and a wind up application is commenced, it is very difficult to reverse this process without full payment of the debt along with associated legal expenses incurred by the other side. Once a liquidator or voluntary administrator are appointed to your company, the process is taken out of the hands of the directors of the company and the appointed person will oversee this process until finalization of the liquidation or the administration.

Menzies Advisory assesses each situation on its own merits. In some cases, it is possible for the recovery of the company’s assets to cover the cost of the liquidation or administration. In other situations, it may be necessary for the director or any other nominated party to contribute to the costs of the liquidation or administration process. If your company is solvent, the costs for that type of liquidation start at $3,000 plus GST and disbursements. If your company is insolvent, this will cost more. A simple insolvent liquidation starts at $5,000 plus GST and disbursements. If the best alternative is for your company to appoint a Voluntary Administrator, the eventual cost here will depend on the nature of the appointment and whether the director is proposing a Deed of Company Arrangement. It is not possible to quote a standard figure for these types of external administration as each situation has its own unique characteristics which are impossible to quote on realistically. Menzies Advisory does not charge you for the first, second or any consultation prior to any subsequent external administration unless specific pre insolvency reports are required by the client. We are able to assess your financial position and advise on future alternatives without it costing you anything. Our procedures are such that these consultations will not affect our independence to be externally appointed to your company later on in the process.

If your company is solvent, the members’ voluntary liquidation process provides a comprehensive and compliant finalisation of your company’s affairs. After this process is completed, your company will be legally deregistered with all remaining funds returned to its shareholders. If your company is insolvent, it is important to have it legally wound up. This will avoid potential personal liability of the director(s) and will also provide the director with a second chance (subject to various compliance rules and regulations) to run a business without fear of prosecution from regulatory bodies. The second chance philosophy underpins the Australian legislation and is intended for those who are genuinely insolvent and not trying to manipulate the system. Once your company is in liquidation, all phone calls and correspondence will be directed to the liquidator’s office, thus relieving the stressful grind of dealing with creditors who cannot be paid. Menzies Advisory does not charge you for the first, second or any consultation prior to any subsequent external administration unless specific pre insolvency reports are required by the client. We are able to assess your financial position and advise on future alternatives without it costing you anything. Our procedures are such that these consultations will not affect our independence to be externally appointed to your company later on in the process.

A director’s obligations to a liquidator or an external administrator include but may not be limited to:

• Providing a report of the company’s affairs;
• Providing books and records of the company;
• Attending meeting(s) of creditors;
• Providing other specific information requested by the liquidator or external administrator.

In any appointment, the objectives of the insolvency practitioner will be to preserve and realise the company’s assets and to distribute any surplus to creditors. All appointments as Liquidator or Voluntary Administrator are underpinned by the independence of the registered liquidator taking the appointment. The practitioner who takes the appointment must not only be independent and without conflict of interest or duty, he or she must be seen to be independent and without conflict of interest or duty. Investigations must be carried out according to statutory requirements and the code of professional practice provided by the industry’s professional bodies. ASIC is provided with reports of the findings of the external administration’s investigations and usually provides clearances to the administration to be finalised after various declarations have been provided by the liquidator or administrator.

Most directors whose companies are subject to external administrations, will escape being banned from managing other corporations. However, if you have been involved in two or more liquidations within a certain time period, ASIC may seek to have you banned from managing corporations for a period of time. If the company has traded whilst it was insolvent, a liquidator is obliged to consider issuing insolvent trading proceedings against directors in certain circumstances. Directors should always seek their own legal advice if they are being sued for insolvent trading. As well as for insolvent trading, mentioned above, a director can become personally liable for company debts in the following circumstances:

• If the director provided a personal guarantee with respect to credit provided by suppliers;
• If the director receives a Director Penalty Notice from the Australian Taxation Office with respect to PAYG or Superannuation not lodged or paid.

A director’s own personal credit file will record the event when a company goes into liquidation. Directors seeking to clarify their position on this point should seek their own legal advice from suitably qualified professionals.

The Fair Entitlements Guarantee (FEG) scheme is operated by the Federal Government in Australia. The scheme provides for certain employee entitlements to be paid if the company is placed into liquidation. FEG is not catered for in Voluntary Administration (VA) unless the company is placed into liquidation after the VA period is ended. Employee entitlements covered by FEG include:

• Unpaid wages with a ceiling or limit up to 13 weeks;
• Unpaid annual leave and long service leave;
• Payment in lieu of notice;
• Redundancy pay if the company has more than 15 employees.