News

Director Penalty Notices, Restucture, A Liquidator's Reach and the FEG Scheme

Director Penalty Notice Alert

Most readers will be familiar with the Director Penalty Notice (“DPN”) regime enforced by the ATO, however we are seeing an increased number of DPN’s issued after a company has entered external administration that are catching directors by surprise.

The ATO comment on their web site that … “we are likely to issue a director penalty notice to collect company debts where the company hasn’t engaged with us to resolve outstanding obligations”.

With this in mind, we thought we would revisit the key elements of the DPN regime.

To recover a director penalty from a director, the Commissioner will issue a DPN and wait until the 22nd day after issuing that notice before commencing proceedings.

A DPN will list the following options available to a director for discharging a penalty within 21 days of the notice being issued.

  • For unpaid PAYG withholding or SGC liability amounts that were reported within three months of the due date:
    • payment of the debt;
    • appointment of an administrator under section 436A, 436B or 436C of the Corporations Act 2001; or
    • having a liquidator appointed to wind up the company.
  • For unpaid amounts that were not reported within three months of the due date:
    • payment of the debt.

If these actions are not taken before the 22nd day after the DPN is given to the director, the penalty is not remitted and the director is liable for the penalty amount until it is paid in full.

Therefore, we remind directors that the best ways to avoid personal liability for their company’s PAYG or superannuation obligations are:

  • Pay the obligations on time, or if that is not possible;
  • Report the relevant obligation to the ATO; and
  • Engage with the ATO to negotiate a fair and achievable repayment plan.

Implementing Restructuring & Turnaround

As we reported in the June edition of client alert the Government is signalling a clear intent to legislate for processes that help businesses restructure and avoid insolvency.

The legislation to assist this is still some time from design, so we thought we would recap the basics of restructuring and turnaround.

Our restructuring process starts with a quantification of the extent of financial shortfall facing a business, pinpoints the causes of underperformance and thereafter provides a process to implement practical solutions for the restructuring of the business.

Whilst there are commercially sensitive elements of the process that should be kept confidential, it is our experience that most creditors respond well to open and honest communication.  Therefore an effective stakeholder management plan is a key step on the path to restructuring success. 

Successful restructuring relies on a genuine willingness on behalf of the directors to consider and recognise the causes of underperformance and a commitment to changing behaviours.  Simply relying on a cash flow injection will unlikely cure the company’s cash flow problems in the medium term.

Poor cash flow is most often the result of unprofitable trading, but it may also be the result of inappropriate financial structuring or the impact of a one-off/unexpected event.  Each of these causes will have different restructuring approaches to achieve the best outcome.

Our experience for most SME’s in need of restructuring is that a joint effort between the existing accounting firm and the restructuring adviser is needed. The restructuring adviser dispassionately assesses the causes of the cash flow problem, the extent of cash flow shortfall and the range of options to address the shortfall. Once the range of strategies are agreed, the restructuring adviser oversees stakeholder communications and implementation and the existing accounting firm manages cash flow modelling and the tax advisory function and implications.

The turnaround plan for an SME enterprise is more low key than for a large organisation, with many shared responsibilities.  It is simply not affordable to implement a traditional full service textbook style restructuring plan. 

We regularly remind readers that involving a restructuring or insolvency adviser as early as possible when financial problems are first identified is the best way to maximise the chances of a self-managed restructure.  Late engagement often results in less options and the need to resort to formal restructuring processes such as voluntary administration.  

The broad reach of a Liquidator 

We have read recently of a very interesting case in Queensland whereby a liquidator has succeeded in claiming possession of a property not in the name of the company he was the liquidator of, after proving that the property was acquired with funds taken from the company in a voidable transaction.

The matter was Ashala Model Agency Pty Ltd (in liq) & Anor v Featherstone & Anor [2016] QSC 121, and the broad facts were:

  • The company's shadow director caused the company to pay $460,000 to himself to clear a loan account which he had with the company;
  • The $460,000 was then used to purchase a property in the name of the main shareholder of the company;
  • The largest creditor of the company at the time was the Australian Taxation Office;
  • In making the transfer, the company was rendered insolvent with very few funds to meet the company's other creditors;
  • The shadow director argued that the transaction was not uncommercial as there was no detriment to the company because the payment had a neutral effect on the company's net asset position; and
  • The Court however found that the payment did constitute a voidable preference that resulted in one creditor receiving a repayment of his loan account at the expense of the company's other creditors who were set to receive no dividend.

The case is interesting in so far as most successful unfair preference claims result in the award of a judgement sum and in this case the Court ordered the property acquired with the proceeds of the loan payment be transferred to the company.  In addition, the case also highlights the very clear principle that a director (or shadow director in this case) cannot use their position to gain advantage over others.

Fair Entitlements Guarantee Recovery Programme

As most readers will know the Fair Entitlements Guarantee Scheme (“FEG”) provides financial assistance for the payment of unpaid employment entitlements to eligible employees who have lost their jobs due to the liquidation or bankruptcy of their employers.

The Government attempts to protect its exposure to loss by standing in the shoes of the employees they have paid and is therefore entitled to claim in the liquidation in priority over other unsecured creditors.

As a result of its advance, the Department of Employment (”Department”) is often a very significant creditor in liquidations and therefore has a keen interest in the outcome of investigations and recoveries that may improve their prospects of receiving a dividend return for their advances.

To support this, a program has been introduced that will provide liquidator funding for actions aimed at improving the recovery of amounts advanced under FEG.

Actions that the Department may consider funding include, but are not limited to:

  • voidable transaction claims, such as unfair preferences and uncommercial transactions;
  • insolvent trading claims;
  • transactions entered into with the intention to avoid employment entitlements; and
  • claims against receivers and secured creditors for failure to pay employment entitlements.

When determining whether to provide funding, the Department will have regard to:

  • the merits, prospects of success and risks of the proposed action;
  • the complexity of the proposed action and its likely duration;
  • the total costs that are likely to be incurred, compared to the admitted value of the Department's proof of debt and the scope for improved recovery;
  • the availability of favourable evidence;
  • whether the proposed defendant or defendants have sufficient assets to satisfy an adverse judgment; and
  • whether sufficient information has been provided, as part of the initial application or in response to a request for further information, to enable the Department to make its funding decision.

The capacity for liquidators to enter into a funding agreement with the Department to prosecute meritorious claims is a significant boost for liquidators; particularly those who are appointed to assetless matters where the lack of funding may have previously resulted in good claims going unprosecuted.

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