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Company Liquidation Director Liabilities

Can A Director Resign When A Company Is In Liquidation

The short answer: No! And even if you resigned in the period leading up to the liquidation, you will still be held responsible for your conduct whilst you were the director.

Who Is A Director?

While this may seem like a simple question, the answer may surprise you.

A director is not just a person formally appointed to that role. The Corporations Act 2001 states that a person may be a director if they act in that role, even if they are not formally appointed. A person may also be deemed a director if the appointed directors of the company or key staff act in accordance with their wishes or instructions.

If you were not formally appointed as a director you may be unable to technically resign from the role. This means that you may still be held personally liable as a deemed director even if you were never formally appointed.

Should A Director Resign During Liquidation?

While it may seem tempting to resign from your position as director, there is often little benefit.

When a company enters liquidation the director loses all decision making powers and is essentially relieved of their director responsibilities. At the point a liquidator is appointed, they immediately gain control of all company affairs and assets. The powers of a liquidator are further explained in Section 477 of the Corporations Act and include;

  • Collect and protect assets of a company;
  • Trade the business of a company;
  • Sell the assets of a company;
  • Investigate the financial affairs and any transactions of the company;
  • Undertake any legal recoveries or claims.

Even if a director was to resign during the liquidation process, which they cannot do, they would still be required to assist the liquidator as deemed necessary. This includes supplying supporting documents such as the company’s books and records.

Further to this, simply resigning as a director will not exempt you from being included in the company investigation. As part of the liquidation process, the appointed liquidator must undertake a detailed investigation into the company’s financial dealings including reasons for failure and the conduct of the directors and any shadow directors. Your actions during your time as director will be investigated and reviewed to identify whether any illegal activity or breach of director duties took place.

The law requires directors to maintain proper books and records and also:

  • Take active steps to question and confirm the financial position and solvency of the company;
  • Regularly review the company’s financial situation;
  • Seek advice from qualified professions is a problem is suspected;
  • Act in a timely manner to address any solvency issues.

If a director is found to have acted illegally such as insolvent trading or breached their director duties during their period with the company: they may be personally liable for the debts of the company, be imprisoned for up to 10 years, or be fined. Directors may also be disqualified from managing future corporations under Section 206B of the Corporations Act if:

  • The person is convicted on indictment of an offence that;
    • Concerns the making or participation in making decisions that affect the whole or a substantial part of the business of a corporation or its financial standing
  • Is convicted of an offence that:
    • Is a contravention of the Corporations act and is punishable by imprisonment for a period greater than 12 months; or
    • Involves dishonesty and is punishable by imprisonment for at least 3 months
  • The person is an undischarged bankrupt
  • The person has executed a Deed of Arrangement under Part X of the Bankruptcy Act which terms have not been fully complied with.

Resigning during liquidation will not help the director as it is their actions prior to the liquidation that are investigated.

What Are The Effects Of Liquidation On A Director?

While being the director of a company facing liquidation is not an enviable position, it may not be as bad as you fear. Many directors fear that they will be personally liable for the debts of the company and may lose their home and other personal assets. For this reason, many directors will either avoid liquidation or are tempted to resign during the process.

While there is the possibility of personal liability and loss of personal assets, as long as the director has acted lawfully and fulfilled their duties, this will be unlikely. A director may also be personally liable if they have signed a personal guarantee to a creditor. Personal guarantees allow a creditor to place a direct claim on the guarantor and potentially, their personal assets. If a director fully understands their duties and performs them in accordance with the Corporations Act and has not agreed to any personal guarantees, they should have little to worry about in relation to personal liability.

With personal liability off the table, the next worrisome thought for directors is that they will be unable to hold this title again in a new company. This is incorrect. While there are rules in place regarding the ability to be a director in the future, it is possible to be a company director again immediately. For more information on these rules and further information regarding directing a company after liquidation, click here.

Explore these related articles for more information:

Can you be a Director after Company Liquidation

What Happens To A Director When A Company Goes Into Liquidation

Categories
Company Liquidation Director Liabilities

What Happens To A Director When A Company Goes Into Liquidation

Being the director of a company experiencing financial difficulties can be scary and unknown. All too often, company directors continue to amass company debt as they view entering liquidation as a personal failure and are terrified of being personally liable for any debts incurred by the company. While in most cases the director is not financially liable for these debts, there is the potential for personal assets to be seized.

As the director you have a duty to act in the best interests of your company, its creditors and its shareholders. The extent to which liquidation affects a company’s director will depend on their practices prior to the liquidation. If upon investigation you have acted wrongfully or unlawfully, you may be personally liable for any debts incurred on the company’s behalf. While there is the possibility of personal liability and loss of personal assets, being the director of a company in liquidation may not be as bad as you fear.

As a director of a company facing financial difficulties, it is essential to understand the potential consequences of entering into liquidation.

Loss Of Director Powers

Once a registered liquidator has been appointed and the directors and members resolutions have been passed, the company has officially entered liquidation. At this point, the decision-making powers of a director are immediately suspended. From this point forward, the appointed liquidator will be directly responsible for all affairs of the company including all the company’s assets as laid out in Section 477 of the Corporations Act.

Despite losing their powers, directors may still be personally liable for any debts incurred by the company if they breached their directors duty, entered a personal guarantee loan or operated unlawfully. Directors may also be required to assist the liquidator as deemed necessary throughout the liquidation process by supplying them with supporting documents, like books and records. Additionally, the director must have a verifiable explanation for every financial move the company has made up to and including the point of liquidation.

Personal Guarantee To Secured Creditors

While in most cases a directors personal assets are protected during the liquidation process, any loans taken with a personal guarantee may result in personal liability. A personal guarantee to creditors is a loan taken out where a person (usually the company director) agrees to take personal liability for the business debts in the event the company can not pay. If the company is unable to repay this loan, the creditor has a direct claim on the guarantor and potentially their personal assets. Even if your company is liquidated you may still be personally liable for its debts. The best way to prevent this from happening is never to sign a loan with a personal guarantee, however tempting it may be.

This is the only type of creditor that may claim to collect their debts once a company has entered liquidation. As a result, liquidation may actually prevent a company and its director from further losses.

Another form of personal liability for directors is if a home equity loan was taken out for the business against the value of your home. These secured loans on your home means that you may still be personally liable to repay the company debts after it is liquidated.

Don’t leave your personal assets up to chance! Contact the Insolvency Experts today to ensure the protection of your personal assets.

Insolvent Trading

If your company is insolvent, your legal duty is to your creditors.

Insolvent trading is the practice of continuing trading as usual and incurring further debt once the company is insolvent. That is, where the company cannot pay its debts as and when they fall due for payment. Insolvent trading is illegal and can occur both intentionally and unintentionally. While internationally engaging in insolvent trading may seem more severe, by unintentionally trading insolvent the director is committing a serious miscarriage of their duties and can still be financially liable. Unfortunately, even if no insolvent trading has occurred, if a director has not kept financial books and records for the 7 year period required, they will have no defence if they are hit with a claim of insolvent trading. Keeping books and records up to date is mandatory. Additionally, directors must take an active role in reviewing a company’s financial records. They must question any inconsistencies and seek professional help if they are unsure of how to proceed.

Breaches Of Directors Duties

As mentioned previously, as the director of a company you have a duty to act in the best interests of your business, its creditors and its shareholders. Failure to do so can result in being personally liable for any debts incurred on behalf of the company.

As a director you are expected to regularly review the finances of the company and take steps to resolve any issues that may arise in a timely manner. Breaches of director duties can involve: insolvent and fraudulent trading, and many other breaches of the Corporations Act.

Insolvent Trading
This occurs when a director continues to trade a company when they know, or should have known that there was no reasonable prospect of the company repaying its debts as and when they fell due for payment. If a director is suspected of insolvent trading they must be able to prove that they took every step possible to minimise loss to the creditors. If the Court determines that insolvent trading has occurred, they can order the director to be personally liable for the company debts with no financial limit. If the claim for losses is high enough, the director may have to file for personal bankruptcy.

Fraudulent Trading
This form of trading involves a director having operated a business with the intention to defraud creditors or any other fraudulent purpose. Examples of fraudulent trading include: entering contracts where you do not have the sufficient funds to complete the undertaking, giving inaccurate information with the intent to deceive and taking deposits for orders you know you are unable to fill. If the Court proves that fraudulent trading has occurred the director may be
personally liable to the debts of the company. Directors may also be imprisoned for up to 10 years, receive a fine, or both.

Misfeasance
This is where a breach of legal fiduciary duties of a director have taken place. Examples of this include: misappropriation of company funds and money improperly drawn from a company. If  this is the case, the Court can order directors to repay and restore these funds or contribute without financial limit to the company debt.

Liquidation may not be the only way out for your company. Voluntary administration is essentially a last-ditch effort to save a company from liquidation by offering creditors a higher return than what they would get if the company was liquidated. Find out if your company may be recoverable through voluntary administration today with help from the Insolvency Experts.

When met with extreme financial difficulty, it is important to understand exactly what options are available to you and what you may be personally liable for. All of these outcomes are possible for all types of company liquidation including creditors voluntary liquidation, voluntary administration and corporate insolvencies. If a director fully understands their duties and performs them in accordance with the Corporations Act, they should have little to worry about in relation to personal liability.

Contact the Insolvency Experts today to receive free expert advice and help you make an informed decision of what is best for you and your company moving forward.

Speak directly to an expert! 24 hours a day, 7 days a week.

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Company Liquidation Director Liabilities

How Does Liquidation Affect A Director’s Assets?

How Does Liquidation Affect A Director’s Assets | The Insolvency Experts

When all else fails and a business finds themselves on the brink of insolvency, the director of a company may have no choice but to seek professional advice on completing a liquidation. Insolvency simply means that a business can no longer pay its company debts as and when due to payment – a feeling all too familiar for many business owners.

Types of Company Liquidation

There are three essential types of liquidation that a business may fall into during insolvency:

  • Creditors Voluntary Liquidation — This sort of liquidation occurs when insolvent companies’ shareholders initiate it. A liquidator can take control very quickly, and handle the entire process without much difficulty. The directors will still need to assist in some respects, but they will maintain no control over the company’s goings-on.
  • Members Voluntary Liquidation — The director of a company and its shareholders initiate this sort of liquidation; all members of the business must agree upon the terms of this type. Again, the director will need to offer the appointed liquidator some assistance here and confirm the company has sufficient assets to meet all liabilities in full.
  • Court Liquidation — This is certainly the worst type of liquidation in which a company can find itself. It happens when a creditor or shareholder applies and receives a court order; at that point, the court will appoint a liquidator and the process will be handled with or without the director’s assistance. This can prove very unconformable for a director personally. Also, where a company is compelled into liquidation, it is more likely that claims of insolvent trading may be made.

The Insolvency Experts offers information sheets on the different types of insolvency, so both directors and shareholders can get a grip on which type of liquidation best serves them once they have reached insolvency.

The Insolvency Experts is comprised of qualified professionals that have operated within the insolvency industry for over 50 years; it’s a great resource for directors who want to ensure that they’ve done everything possible to comply with regulations concerning their positions.

In addition to serving as a resource about different types of liquidation, the Insolvency Experts can also offer directors guidance on how they might be able to change the course of their company when it appears that it’s headed toward insolvency.

How Different Types of Liquidation Affect Directors

Much of how liquidation affects a company’s director depends on that director’s practices prior to the liquidation, namely whether the director upheld their legal duties. While we’ll dive deeper into that topic, later on, let’s first take a look at how directors can expect each type of liquidation to play out.
During any type of creditors voluntary liquidation, directors are expected to assist the liquidator and insolvency practitioner in any reasonable way necessary. Although the liquidator has actually taken control of the company at this point, the director is still required to supply them with all necessary supporting documents, like books and records.

Additionally, the director must be able to list any liabilities and assets that the company has at the time of insolvency, and explain the company trading and any uses of its funds. These points become extremely critical when assessing the director’s personal liability; this is because a director has to have a verifiable explanation for every move the company has made, since they’re expected to maintain current knowledge of the company’s financial status.

At this point, directors can expect secured creditors (meaning those that have a secured claim to the business’ assets) to collect on their debts or assets if possible. Fortunately, this is the only type of creditor that can collect once a business enters insolvency. In this way, liquidation can save a company (and indeed, its director) from further losses. Basically, a business has to know when to say when and just fold, or they could end up in a far more dire situation.

Still, there is another option if a business has not yet entered a state of irreparable insolvency: voluntary administration. This is a sort of good faith agreement wherein a voluntary administrator, usually with the assistance of the director, will take control of a company and its trading habits for around a month to try and turn things around.

During this period, directors draft a proposal to be sent to creditors; the proposal will offer a higher return to the creditors than what they would see should the company be liquidated. Essentially, voluntary administration is a last-ditch effort to save a company from liquidation. It buys the company some time to drum up the money they owe, and it’s incentivized with extra capital to creditors.

If creditors agree to the proposal, directors simply have to make sure that they find a way to hold up their end of the agreement; this promise can prove difficult to keep, but it can save the business for the time being. In some cases, creditors either won’t agree to the proposal, or the proposal won’t be completed as outlined. At that point, liquidation is simply inevitable.

Directors Duties When Solvency Comes in Question

It’s no surprise that directors are left to explain things when a company enters a state of insolvency. Of course, the most basic of these duties is to simply maintain accurate books and records so that they are able to stay aware of the company’s financial situation at all times.

Beyond that, directors must also take an active role in mitigating any potential questions about a company’s solvency. They need to question inconsistencies, and seek the help of qualified professionals when they’re unsure of how to proceed.

While these duties might go without saying for some directors, others let their responsibilities slip (whether accidentally or intentionally) and find themselves in a slippery situation.

When Directors Become Personally Liable

Under the Corporations Act, directors are expected to be diligent and careful as they act in good faith toward a proper purpose for the company. Naturally, this means that if a director acts in a way that is self-serving or somehow harmful to the company, they have violated their role and their duties, leaving them vulnerable to liability.

One of the simplest ways that a director can fail to uphold their duties is if they do not keep 7 years of accurate records as is required by law. While this is obviously poor practice for a director in general, it becomes especially dangerous if a claim of insolvent trading is made.

Insolvent trading is the practice of incurring further debt and continuing trading as usual when the director knows that the company is insolvent and unable to pay its debts. The problem is, even if no insolvent trading occurred, a director has no defence against the claim if they haven’t kept accurate records for the required period of time.
Unfortunately, without the necessary documents to back the director up, their assets can be claimed in this sort of battle. If the claim alleges high enough losses, the director may even have to file for personal bankruptcy.

While simply failing to keep detailed records is one thing, intentionally engaging in insolvent trading is another altogether. If a director is aware that a company isn’t solvent, yet continues trading as usual, they’re committing a serious miscarriage of their duties, and can certainly be held personally liable.

With the potential for personal assets to be seized, directors need to be especially mindful of their companies’ financial situations. If there’s any question of solvency whatsoever, a director should gather adequate documentation to prove that they had reason to believe that the business was still financially viable.

This way, the director may be protected from personal liability, even if the company does eventually become insolvent and claims of insolvent trading are made. For extra diligence, it’s a good idea for the director to reach out to an industry professional that can assist them with verifying a business’ current solvency, and can show that the director acted in good faith.

Complying with Regulations

So long as a director fully understands their duties and has performed them to the specifications described in the Corporations Act, they shouldn’t have much of anything to worry about when it comes to personal liability for their company’s insolvency.

Still, there are instances in which a director has unwittingly failed to meet one of these duties completely, and they are blindsided with an attempt to go after their personal assets. Rather than leave anything up to chance, a director should make a habit of consulting a service like The Insolvency Experts so they can enjoy peace of mind that they’re performing their jobs satisfactorily.

A director that operates with integrity shouldn’t have a hard time avoiding the potential personal burden of insolvency, but it’s impossible to be too careful in these situations. Rather than leave anything up to chance, contact us to ensure compliance, and thus ensure the protection of personal assets.

If you need help, call The Insolvency Experts on 1300 767 525

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Director Liabilities

PERSONAL LIABILITY FOR GST STARTS 1 APRIL

Like PAYG, non-payment of GST will attract personal liability for Directors under the Director Penalty Regime in 2 ways:

Unavoidable liability

  • Fail to lodge Business Activity Statements (BAS) and Income Activity Statements (IAS) within 3 months of the due date for lodgement.
  • Lock down Director Penalty Notice will attach Personal Liability to a Director immediately and regardless of the appointment of a liquidator, the liability will be unavoidable.

Avoidable liability

  • Lodge BAS and IAS within 3 months of due date for lodgement but not remit payment
  • Personal Liability for Company tax liability will be avoidable if a Director Penalty Notice is acted on within the 21 day period allowed.

This change to the Law passed both houses of Parliament on 17 February 2020 under the Treasury Laws Amendment (Combating Illegal Phoenix) Bill 2020

Other Significant Changes in the Bill

1. Introduction of the Creditor-Defeating Disposition s588FBDB (the Phoenixing Provisions)

  • Enables ASIC, at its discretion, to void phoenix transactions upon request by a Company liquidator, if such a transaction occurred when a company was insolvent and it occurred during the 12 months immediately preceding the date of liquidation.
  • ASIC may then order the return of the property subject of the disposition to the insolvent Company.
  • ASIC may order the person to pay an amount that in ASIC’s opinion, represents some or all of the benefits that person received directly, or indirectly, because of the transaction.
  • In making these types of orders, ASIC must have regard for the conduct of the company and its officers, the circumstances, nature and terms of the disposition, the relationship between the company and the person and any other relevant matter.
  • The Court may set aside the ASIC order if application is made within 60 days of the order issued or if the Court is satisfied the order should not have been made.
  • The new amendments also expand Director and Officers Duties to Prevent Creditor-Defeating Dispositions s.588GAB and also not to procure or encourage such transactions – which appears to be aimed at (un)licensed advisors S588GAC

2. No Backdating of Director Resignations s203AA
Director resignations will take effect

  • If ASIC is notified within 28 days that the person stopped being a director
  • Otherwise, the day written notice is lodged with ASIC.
  • Resignation of a Director has no effect if the Company has no other Directors s203AB. Similarly, if a resolution is passed that leaves a Company without directors, it too is void. S203CA

Do you have any questions about these changes? Feel free to call us on 1300 767 525.

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Director Liabilities

Accessory Liability

Both the Corporations Act and the Fair Work Act provide for accessory liability. Section 79 of the Corporations Act states:

Section 79 Involvement in contraventions

A person is involved in a contravention if, and only if, the person:

  1. has aided, abetted, counselled or procured the contravention; or
  2. has induced, whether by threats or promises or otherwise, the contravention; or
  3. has been in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to, the contravention; or
  4. has conspired with others to effect the contravention.

Liability for a specified breach is then imposed through the particular contravention. An example is the Corporations Act s 182(1), which prohibits company directors, officers and employees from making improper use of their position to gain an advantage for themselves or someone else, or cause detriment to the corporation. This is the clearest section under which fraudulent phoenix activity is proscribed.

According to s 182(2), ‘[a] person who is involved in a contravention of subsection (1) contravenes this subsection’. The civil penalty provisions of pt 9.4B then contain the relevant consequences for those in contravention. Injunctions can also be sought under s 1324(1) of the Act against those who aid, abet, counsel, procure, induce, conspire or are ‘in any way, directly or indirectly, knowingly concerned in, or party to, the contravention by a person of this Act’.

ASIC MEDIA RELEASE 5 March 2019

Former company director and two pre-insolvency advisers charged with breaching director duties and money laundering

Mr Richard Ludwig of Broadbeach Waters Queensland, Mr Stephen O’Neill of Port Melbourne, Victoria and Mr John Narramore, of Main Beach Queensland, have appeared in the Brisbane Magistrates Court on charges that include breaching director duties and dealing in the proceeds of crime.

The charges follow an ASIC investigation into the affairs of Cap Coast Telecoms Pty Ltd and its former director, Richard Ludwig.

It is alleged that Mr Ludwig sought advice from Messers O’Neill and  Narramore of pre-insolvency firm SME’s R Us, following a dispute he was having with a creditor of the company.

It is alleged that Messers O’Neill and Narramore facilitated Mr Ludwig to illegally remove a total of $743,050 of company money between October 2014 and January 2015 to accounts in their control. It is alleged that the three men acted jointly to remove the money before the company was wound up in liquidation.

Following the removal of the company money, it is alleged that a large portion of the money was redirected back to Mr Ludwig and that Messers  O’Neill and Narramore retained a portion of the money.

Mr Ludwig has been charged with ten counts of breaching his director duties and one count of dealing in the proceeds of crime worth $100,000 or more, while Mr O’Neill and Mr Narramore have been charged with one count each of dealing in the proceeds of crime worth $100,000 or more.

The matter was heard on 1 March 2019. All three men were bailed to return to the Brisbane Magistrates Court on 3 May 2019.

The matter was referred to ASIC by Mark Hutchins of Cor Cordis who is the liquidator of Cap Coast Telecoms Pty Ltd.

The matter is being prosecuted by the Commonwealth Director of Public Prosecutions.

Background

Breaching director duties is an offence under the Corporations Act and carries a penalty of 2000 penalty units or imprisonment for five years or both.

Dealing with the proceeds of crime is an offence under the Criminal Code (Clth) 1995 and carries a penalty of 1200 penalty units or imprisonment for 20 years or both.

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Director Liabilities

Director Identification Numbers Looking Likely

Company directors will be compelled to register for a lifetime ID number or face penalties including a year in prison under a Commonwealth plan to fight phoenixing activity.

Support for company ‘director identification numbers’, known as DINs, has long been held by both sides of politics and the small business community. However, it’s only this week that consultation opened on draft legislation for the scheme.

The policy would compel all company directors to register with the Commonwealth. Their identities will be verified by a registrar who would create a unique identifier that will stay with the director for life, even if they move onto other companies.

The DIN scheme was born out of recommendations from the Black Economy Taskforce, which put the value of the ‘black economy’, or cash that flies under the radar of the tax office and regulators, at $50 billion.

The director ID is designed to fight illegal phoenix activity — the practice of liquidating a business and transitioning assets to a new entity so a company can avoid having to pay tax and debt liabilities.

Illegal phoenixing is said to cost between $2.8 billion and $5.3 billion a year, with small business suppliers saying they are often left unpaid when it happens.

A hotline was established in July for the public to “dob in” dodgy directors.

It’s a plan that’s been welcomed by subcontractors in particular, who say they are “always the ones who miss out” while company directors walk away “unscathed” even if they have committed phoenixing.

“Normally subcontractors have done the work, they’ve put in the time, the materials, all of the expense… and then they sit around waiting to get paid,” the Australian Subcontractor Association’s Paul Williams says.

“Businesses go broke every day, and quite often it’s not due to the directors of the business. But there’s certainly an element that will take advantage of phoenixing activities, and if the ID number can stop that, that’s a good thing.”

Australian Small Business and Family Enterprise Ombudsman Kate Carnell have praised the government’s work on fighting phoenixing given the impact it can have on independent contractors. “Currently, if there is any money left, secured creditors come first, the employees are paid wages owing out of the federal government’s FEG (Fair Entitlement Guarantee) and the subbies are left with nothing,” she said on the issue in a statement earlier this year.

But others have less faith in the scheme.

“We say that DINs are useless in reigning in illegal phoenix activity. They may have some impact on repeat offenders but have no effect on first-time offenders. One offence is usually all that is required,” says the head of the Subcontractors Alliance, Les Williams.

Instead, Williams says regulation in the building space, in particular, has been lacking, with enforcement from ASIC and the criminal authorities in the past not being enough of a deterrent.

Failing to apply for a number will result in criminal penalties of more than $12,000 or civil fines of up to $200,000 for an individual.

Deliberately trying to undermine the system, including applying for multiple numbers or misrepresenting a director ID number, result in a possible 12-month prison term.

Fines of up to $1 million apply to body corporates involved in misrepresenting or applying for multiple numbers.

Consultation on the draft legislation will be open until October 26th.

Source: Emma Koehn – Sydney Morning Herald

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Director Liabilities

Personal Liability for Unpaid GST raised with introduction of Director Identification Number

The Government will soon introduce a unique Director Identification Number (“DIN”) to combat illegal phoenix activity and to curb the activities of pre-insolvency advisors who will also be targeted and potentially held liable for their advice.

As part of the reforms, the Government is consulting on widening the scope of directors personal liability to include GST liabilities as part of the Director Penalty provisions.

It is likely that personal liability for unpaid GST will operate in a similar way to current Director Penalty Notices that currently affect only unpaid PAYG and Superannuation. That is;

  • If a Director does not report by lodging a BAS return within 3 months of the due date for lodgement, there will be an automatic personal liability for a Company’s unpaid GST debt as well as its unpaid PAYG and Super debts.
  • Where a Director does report within the 3 month window, they will be able to avoid personal liability for the various company tax debts provided the Company is placed into liquidation within 21 days of the date on the Director Penalty Notice.

The Government’s consulting on Personal liability for directors with unreported and unpaid Company GST debts is a significant development that all directors must be made aware of.

As we discover more, we will keep you informed.


Media release from The Hon Kelly O’Dwyer MP

(Go here to view complete, unedited release)

A comprehensive package of reforms to address illegal phoenixing

The Turnbull Government is taking action to crack down on illegal phoenixing activity that costs the economy up to $3.2 billion per year to ensure those involved face tougher penalties, the Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP, announced today.

Phoenixing – the stripping and transfer of assets from one company to another by individuals or entities to avoid paying liabilities – has been a problem for successive governments over many decades. It hurts all Australians, including employees, creditors, competing businesses and taxpayers.

The Government’s comprehensive package of reforms will include the introduction of a Director Identification Number (DIN) and a range of other measures to both deter and penalise phoenix activity.

The DIN will identify directors with a unique number but will also interface with other government agencies and databases to allow regulators to map the relationships between individuals and entities and individuals and other people.

In addition to the DIN, the Government will consult on implementing a range of other measures to deter and disrupt the core behaviours of phoenix operators, including non-directors such as facilitators and advisers. These include:

  • Specific phoenixing offences to better enable regulators to take decisive action against those who engage in this illegal activity;
  • The establishment of a dedicated phoenix hotline to provide the public with a single point of contact for reporting illegal phoenix activity;
  • The extension of the penalties that apply to those who promote tax avoidance schemes to capture advisers who assist phoenix operators;
  • Stronger powers for the ATO to recover a security deposit from suspected phoenix operators, which can be used to cover outstanding tax liabilities, should they arise;
  • Making directors personally liable for GST liabilities as part of extended director penalty provisions;
  • Preventing directors from backdating their resignations to avoid personal liability or from resigning and leaving a company with no directors; and
  • Prohibiting related entities to the phoenix operator from appointing a liquidator.

The Government will also consult on how best to identify high risk individuals who will be subject to new preventative and early intervention tools, including:

  • a next-cab-off-the-rank system for appointing liquidators;
  • allowing the ATO to retain tax refunds; and
  • allowing the ATO to commence immediate recovery action following the issuance of a Director Penalty Notice.

Consultation on the non-DIN measures will commence in the coming weeks.

These reforms complement and build on other Government action to combat crime and fraud in the economy, including:

  • instituting the Phoenix, Black Economy and Serious Financial Crime Taskforces;
  • strengthening disciplinary rules for insolvency practitioners;
  • legislating to improve information sharing between key regulatory agencies;
  • reviewing and enhancing ASIC’s powers and enforcement tools;
  • consulting on law reform initiatives to curb the excessive drain on the taxpayer funded Fair Entitlement Guarantee scheme, which covers employees’ entitlements left outstanding as a result of failed business enterprises;
  • improving the collection of GST on property transactions from 1 July 2018; and
  • consulting on a register of beneficial ownership of companies to be made available to key regulators for enforcement purposes.

“The Government is committed to ensuring individuals who engage in illegal phoenixing activity are held to account and that the regulators are equipped to take stronger action to both deter and penalise phoenixing activity for the benefit of all Australians,” Minister O’Dwyer said.

Image: Pixabay

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Director Liabilities

Phoenix Promoter has assets frozen and Provisional Liquidator appointed

For the last few months, we have been updating you about raids undertaken by the ASIC and the Federal Police in relation to an alleged Phoenix Company promoter.

Recently, the Court ordered that the assets of the phoenixer be frozen and a Provisional Liquidator appointed to companies under his effective control that appears to have included an accounting and legal practice.

You can read more here (http://murrayslegal.com.au/blog/2017/05/01/freezing-orders-against-alleged-phoenixers/) and also the Court judgment which is linked to the story.

In short, in making its orders, the Court found there to be a  strong prima facie case that:

  1. the corporate defendants are systematically avoiding compliance with their taxation obligations, including failing to file income tax returns, pay income tax, report their goods and services tax (“GST”) and PAYG withholding amounts and pay their GST and PAYG withholding amounts;
  2. the corporate defendants are collectively operating a business of defrauding creditors involving “phoenix” activities for their clients;
  3. the corporate defendants are controlled by Mr Whiteman, who is the de facto director of all of them;
  4. the persons registered as the directors are “puppets”; and,
  5. two of the corporate defendants, A & S Services and AHW Solicitors, are phoenix companies themselves.
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Director Liabilities

Personal Liability for Company Debt

At law, a company is a separate and distinct legal entity from its owners and controllers. As such, the company is responsible for the payment of its debts.

A director has no personal liability for company debt however, the protection of a company structure is often signed away to suppliers who insist on a personal guarantee before agreeing to provide goods or services on credit.

Directors have no personal liability for a company debt unless the director gives up the legal separation. This can occur by doing one of the following:

  • Signing a personal guarantee that promises to pay a company debt if the company can’t pay
  • Failing to comply with a Director Penalty Notice issued by the Tax Office in respect of unpaid PAYG and superannuation.
  • trading while insolvent

Personal Guarantees

By signing a personal guarantee, the director has agreed to pay the company’s obligations from his/her own assets in the event the company cannot meet its obligations.

Signing a personal guarantee is an enforceable promise that exposes your personal assets

A personal guarantee is legally enforceable and means the company’s creditor may attack a directors’ personal assets.

Personal guarantees are often sought to secure debts for;

  • Supply accounts
  • Company credit cards
  • Hire Purchase or Leasing contracts

Because personal guarantees expose a directors assets, they should be avoided wherever possible.

Suppliers will often ask for a personal guarantee but directors should refuse. If certain supplies are only available from a few sources, it may not be possible to avoid a personal guarantee.

In these cases, a director should consider providing a limited personal guarantee up to a specific amount strattera weight loss. If a supplier ultimately allows the debt to increase beyond the agreed amount, the amount over the specified limited will generally not be recoverable under the personal guarantee.

Unfortunately, banks and finance companies, have very sophisticated paperwork and it is usually not possible to avoiding a personal guarantee when dealing with such institutions.

What is the best advice on personal guarantees

The best advice is to read and understand every document before signing it. If this involves seeking legal advice – do so. The small amount spent now will save you money and protect your personal assets in the long run.

A Double Standard – but in your best interest

 

Never ever sign a personal guarantee where it can be avoided. But always insist on a personal guarantee from a director if you are asked to provide credit by a company.

 

Director Penalty Notice

A Director Penalty Notice can lead to personal liability for a company debt, specifically in relation to unpaid PAYG and unpaid superannuation

A Director Penalty Notice works in 2 ways

First, where all BAS & Super returns are up to date, with all having been lodged within 3 months of the due date, a director receiving a Director Penalty Notice will have 21 days in which to do one of the following and avoid personal liability for company debt.

Compliance involves doing one of three things.

  1. Pay the debt in full
  2. Appoint a Voluntary Administrator
  3. Appoint a Liquidator.

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

Second, If all or some BAS & Super returns have been lodged more than 3 months after the due date for lodgement, a director will become automatically personally liable for the company tax debts – no avoidance of personal liability is possible.

If a director has not lodged a return or any returns, the ATO can issue an estimate of the debt and follow that with a Director Penalty Notice that will find the director personally liable for company debt.

Insolvent Trading

A director must not allow a company to trade and incur debts when it is insolvent.

A company is insolvent when it is unable to pay its debts as and when they fall due for payment.

If a director allows a new debt to be incurred knowing the company is insolvent, the director may be guilty of insolvent trading. If this occurs, a director may become personally liable for the repayment of the debts he allowed the company to incur.

Liquidators or an individual creditor with the permission of the liquidator, may bring may commence a claim for insolvent trading against a director personally.

There are always options

Directors need to understand that no matter how dire the financial situation,  liquidation is not the only solution. It is only one of many alternatives that are available to you. 

In this regard, The Insolvency Experts will help you investigate and understand all your options to ensure you select the best step for you and your family’s financial survival.