In the Media

Combating Illegal Phoenixing – by Personal Liability for GST


The Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 was reintroduced into Federal Parliament on 4 July 2019.

According to the Explanatory Memorandum, the intended laws will:

  1. introduce new phoenixing offences that;

a) prohibit creditor-defeating dispositions of company property,

b) penalise those who engage in or facilitate such dispositions (directors, officers, facilitating advisers),

c) allow liquidators and ASIC new recovery options.

2. ensure directors are held accountable for misconduct by preventing improper backdating of resignations or ceasing to be a director when this would leave the company with no directors.

3. allow the Commissioner to collect estimates of anticipated GST liabilities and make company directors personally liable for their company’s GST liabilities in certain circumstances.

4. authorise the Commissioner to retain tax refunds where a taxpayer has failed to lodge a return or provide other information to the Commissioner that may affect the amount the Commissioner refunds so as to ensure taxpayers satisfy their tax obligations and pay outstanding amounts of tax before being entitled to a tax refund.

While Illegal Phoenixing and the rise of unscrupulous pre-insolvency advisers and facilitators who promote such behaviour warrants strengthened Insolvency Laws, the Bill vastly increases the ATO’s powers  and this will affect all Australian businesses.

Specifically, point 3 will result in the most significant increase in the ATO’s recovery powers in over 25 years.

The Bill expands the Director Penalty Regime to include personal liability for unpaid GST, not just PAYG or super.

Of course, a director that causes their company to correctly report its liability within the 3 month window will still be able to have the Director Penalty remitted by paying or entering insolvency within 21 days of receiving a Director Penalty Notice.

The proposed law has been slammed as “shocking”, “unfair” and a “vicious attack” on the business community

Company Liquidation

Who is liable when a company goes into liquidation

When a business is struggling, the question most often asked by directors who are considering Company liquidation, is whether they will be held personally liable to pay its debts.

Ordinarily, the purpose of having a company is to separate business risks and company debts from a directors’ personal assets.

A company is a separate legal entity and as such, a director has no personal liability for business debts the company is unable to pay unless the director does one of the following:

  • sign Personal Guarantees to secure payment of a company debt;
  • incur a debt knowing the company is insolvent; or
  • fail to comply with a Director Penalty Notice issued by the Australian Taxation Office.

In order to avoid personal liability for a business debt, directors are encouraged to actively avoid signing personal guarantees.

While in many cases, such as dealing with banks and sophisticated finance companies, it will not be possible to avoiding a personal guarantee, the same does not apply when it comes to supply accounts and rent of premises. In these cases, a director should refuse to provide a guarantee.

If supplies are unable to be obtained on credit from any source, a director should limit the amount they personally guarantee –  up to a specific amount they are comfortable with. 

If over time the supplier allows the debt to increase beyond the specific amount, that is their risk and not likely to fall within the limited guarantee.

The issue with personal liability for a business debt is that it can lead to the loss of personal assets and the bankruptcy of a director. As such, if you are going to have a company, do not easily give up the protection that structure provides.

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Directors can also be held personally liable for unpaid company ATO tax debts

The ATO can hold a director personally liable for certain unpaid company tax debts including:

  • unpaid PAYG withholding
  • unpaid superannuation guarantee payments

Presently, the ATO does not hold directors personally liable for unpaid GST.

What is a director penalty notice ?

A Director Penalty Notice must be issued by the ATO if it is to be in a position to recover unpaid tax from a company director personally. The Notice works in two distinct ways – see below.

The notice may be issued to the director in two different places. Firstly, to the home address of the director as it appears on the ASIC register or to the company’s tax agent address. If these addresses are not maintained by the director and the notice is not received and not complied with because of the directors failure, the penalty will stand.

The penalty in the notice is equal to the amount of the outstanding debt owed by the company for unpaid PAYG and unpaid super.

A person may comply with a Director Penalty Notice if they achieved one of the options allowed within 21 days of the date on the notice:

If compliance with the Notice is not achieved within 21 days, the director becomes personally liable for the tax debt of the company.

What is a Director Penalty Notice and when is it issued?

A Director Penalty Notice will usually be issued if a company is significantly behind in remitting its returns and/or payments, or following a long history of failed payment arrangements, broken promises etc.

What is a Director Penalty Notice and how does it work – It works in 2 very different ways

First, where all BAS & Super returns are up to date, with all having been lodged within 3 months of the due date, even though there may be amounts outstanding for PAYG and superannuation, a director will be granted a period of grace in which to comply with the Director Penalty notice and thereby avoid personal liability for a company tax debt.

The grace period allowed is 21 days but this only applies where all lodgements had been made within 3 months of the due date and where one of the 3 options above has been achieved.

Again, if compliance is achieved within 21 days, the director will avoid personal liability for the stated company tax debts.

Second, If BAS & Super returns have been lodged more than 3 months after the due date, a director will be immediately personally liable for the company tax debts. No avoidance of personal liability is possible.

This means if the company cannot pay its tax debt, the director must pay. 

If a director has not lodged returns, the ATO can either audit the company to calculate a debt or simply issue an estimate of what it believes the debt is and then issue a Director Penalty Notice based on those estimates.

If you are more than 3 months late in lodging your returns, there is no escaping personal liability for the amounts shown in a Director Penalty notice.

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Company Liquidation

What happens when you liquidate a company

A liquidator is appointed, generally because it can’t pay its debts. At the time of appointment, the liquidator  becomes the proper officer of the company. At the same time, the company directors powers are immediately suspended.

The powers of the liquidator are laid out in Section 477 of the Corporations Act. A liquidator must be a registered and licensed insolvency practitioner by the Australian Securities and Investments Commission.

Subject to this section, when a company is insolvent, a liquidator will take control of all the affairs of the company, including all the company’s assets, its business and undertakings as part of the liquidation process. In this regard, the liquidator has the power and authority of the Corporation Act to continue to trade on (if it is in the best interest of the unsecured creditors to do so) or to sell the assets as part of the winding up of the company.

Ultimately, however, the role of the liquidator is to collect and realise the company’s assets for the purpose of distributing the sale proceeds to proven creditors to whom the company owes debts.

Apart from the control, collection and sale of company assets, the liquidator must also undertake a detailed investigation into the reasons for failure of the company and the conduct of the directors.

In this regard, the Liquidator will seek to recover the books and records of the company from the directors.

The liquidators will generally concentrate their investigations on whether the company was allowed to trade while insolvent, or how company funds or assets were used by directors. The liquidators will also examine preferential or uncommercial payments as well as unreasonable director related transactions.

At the conclusion of these investigations, the liquidator will report findings to both the creditors and the ASIC. 

A Liquidator may commence legal claims against a director or other parties on behalf of a company for the benefit of its creditors. In particular, claims are commonly made for insolvent trading, voidable transactions, director loan accounts and other unreasonable director related transaction.

The list below is some of the duties performed by a liquidator;

  • To protect and realise the assets of the insolvent company for the benefit of the creditors.
  • To investigate the affairs of the insolvent company and report any wrong doings such as insolvent trading or any other breaches of the Corporations Act by the directors to the Australian Securities and Investments Commission (“ASIC”).
  • To commence any legal claims in the name of the company. Such actions often involve legal proceedings against directors for unreasonable director related transactions, the recovery of director loan accounts, insolvent trading or breaches of directors duties
  • To distribute any surplus funds, after payment of the liquidators fees and expenses, to the employees and then creditors in accordance with Section 556 of the Corporations Act.

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A Creditors Voluntary Liquidation is for insolvent companies and despite its name is actually instigated by the directors and shareholders of the company who appoint a liquidator.

Once a liquidator is selected, the process of placing a company into liquidation involves;

  1. Minutes of a Meeting of Directors – the directors need to resolve the company is insolvent. They then call a meeting of the shareholders who deal with the insolvency of the company by appointing of a liquidator.
  2. Consent to Short Notice – normally it takes 21 days to call the meeting of shareholders however this period may be waived if 95% of shareholders sign a Consent to Short Notice. This means if the consent form is signed the meeting of shareholders may be held immediately.
  3. Minutes of Meeting of Shareholders – this is the meeting at which a Liquidator is appointed and when the company is actually placed into Liquidation.
  4. Once the company is in Liquidation, the Liquidator is required to write to all creditors advising of the liquidation. A meeting of creditors may also be held shortly after appointment.
  5. The liquidator will provide all creditors with;
    1. Notification of the appointment together with a short report on the company.
    2. Notice of any Meeting of Creditors including the time, date and place it will be held
    3. A Summary of Affairs – effectively a balance sheet position of the company at the date of liquidation together with
    4. A listing of all creditors names, addresses and amounts owed
    5. ASIC information sheets – being guides for creditors and details of a Liquidator’s remuneration.

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