Insolvency & Restructuring Archives » Rostron Carlyle Rojas Lawyers

March 26, 2020April 6, 2020

Update to ATO Director Penalty Notices (DPN) and what this means for you as a Director

In September 2019, our article – What is a director penalty notice and what does it mean for you as a director?, touched on when a director(s) may become personally liable for two types of tax debts of a limited company namely, Pay As You Go (PAYG) and Superannuation Guarantee Charge (SGC) liabilities.

Fast forward to 2020, and the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 (the Bill) has been passed to include penalties for unpaid Goods and Services Tax (GST), Wine Equalisation Tax (WET) and Luxury Car Tax (LCT). The Bill provides that any assessed net amount or GST instalment will necessarily include any applicable LCT and WET.

The new provisions to include director penalties for GST apply from 1 April 2020.

So how does the Bill affect you under the Director Penalty Notice regime and what can you do about it?

1. SGC and PAYG (Pay As You Go) Liabilities

With respect to Super Guarantee Charge (SGC) liabilities, for a director penalty to be eligible to be remitted without payment, the unpaid amounts of superannuation must have been reported by lodgement of the SGC statement by the due date.

For the Pay As You Go amounts that a company must withhold from wage payments made to employees for remission to the ATO (Australian Tax Office), the PAYG withholding must be reported within 3 months of the due date for a director penalty to be eligible to be remitted without payment.

If the SGC statement was not reported by the due date, or the PAYG withholding was not reported within 3 months of the due date, the ATO can issue a ‘lockdown’ Director Penalty Notice and a director can only avoid liability under the DPN (Director Penalty Notice) by arranging for those liabilities to be paid. Appointing a liquidator or voluntary administrator to a company will not avoid liability for lockdown Director Penalty Notice amounts, and the ATO can:

• Issue lockdown DPNs after a company is placed in liquidation or voluntary administration; and
• If necessary, base lockdown DPNs on estimates of a company’s superannuation or PAYG liability.

However, if the SGC was reported by the due date and the PAYG withholding was reported within 3 months of the due date, then a director can avoid personal liability by appointing a liquidator or voluntary administrator to a company. This must be done either before a DPN is issued or within 21 days of the date of the DPN.

2. (Goods and Services Tax) GST Liabilities

With respect to GST liabilities, if a company has failed to pay Goods and Services Tax and also failed to lodge its Business Activity Statements (BAS) within three months of being due, the directors will automatically become personally liable for unpaid GST. Accordingly, the ATO (Australian Tax Office) may issue a lockdown Director Penalty Notice for the Goods and Services Tax liability.

However, if a director is in the position where:

1. the company has failed to pay GST (Goods and Services Tax);
2. the ATO has issued a 21 day Director Penalty Notice; but
3. the company lodged its BAS within three months of the due date,

the director will have 21 days from the date of the notice to exercise one of three options to avoid personal liability. The options are:

1. paying the GST to the ATO;
2. placing the company into liquidation; or
3. placing the company in voluntary administration.

Exercising one of the above options within 21 days will allow a director to avoid personal liability and the debt remains with the company.

What you should watch out for

Ideally, to avoid DPN liability, a company or its director(s) must pay PAYG, superannuation, GST, Wine Equalisation Tax and LCT liabilities on time.

If you are a new director be wary that you can be made liable for historic GST, PAYG and SGC where these remain unpaid 30 days after your appointment. Therefore, when being newly appointed as a director, be careful to ensure you are not inheriting those liabilities.

Summary of notice periods to avoid liability

Coronavirus

In consideration of the current impacts of COVID-19 (Coronavirus), it is unclear whether the ATO will extend the due dates discussed above.

However, the Coronavirus Economic Response Package Omnibus Bill 2020, now Act No 22 of 2020 following its assent on 24 March 2020, may exempt those affected by COVID-19 from these obligations.

Schedule 8 of the Coronavirus Economic Response Package Omnibus Bill 2020 provides flexibility by establishing temporary means through which individuals who are unable to meet their obligations under the Corporations Act or the Corporations Regulations (due to COVID-19) can access regulatory relief for a maximum of six months. In particular, the Treasurer may determine:
• Exemptions from obligations; and
• Modifications of obligations to enable compliance.

As the Coronavirus situation continues to rapidly evolve, the aforesaid due dates may be subject to change, notwithstanding the new Coronavirus legislation. As always, we will continue to keep you updated. If you require any further information on this in the meantime, do not hesitate to contact us.

March 25, 2020April 3, 2020

The Advantages of Holding a Deed Of Company Arrangement (DOCA)

A Deed of Company Arrangement, or DOCA, is an arrangement between a company which has entered into administration and the company’s creditors.

DOCAs are a form of company restructuring provided for under Part 5.3A of the Corporations Act 2001 (Cth) (“the Act”) the other alternatives being liquidation and returning the company to the directors.

The Administration Process- DOCA

Phase 1 – Appointment of voluntary administrator

A decision to appoint a voluntary administrator for a company is made by either:

The directors (by resolution of the board and in writing); or
A secured creditor (with a security interest in all or substantially all of the company’s property); or
A liquidator/provisional liquidator.

The period of voluntary administration commences on the appointment of the voluntary administrator.

Phase 2 – 1st Meeting of Creditors
The voluntary administration must convene the first meeting of creditors within eight (8) business days of being appointed (unless the court allows for an extension of time).
At least five business days’ notice of the meeting must be given to creditors.
Creditors are entitled to vote at this meeting to:

Replace the administrator
Where a creditor intends to replace the administrator, they must approach a registered liquidator before the meeting and get a written consent from that person that they would be prepared to act as voluntary administrator.

Create a committee of inspection
Creditors may elect members to same to assist and advise the voluntary administrator, monitor the voluntary administrator, approve certain steps in the administration and give directions to same. Note: the voluntary administrator must have regard to but is not always required to comply with such directions.

Phase 3- Investigation and Report
The voluntary administrator investigates and reports to creditors on alternatives.

Phase 4 – 2nd Creditors Meeting
The 2nd creditors meeting must be convened within 25 business days after being appointed (or 30 business days were the appointment is around Christmas/Easter), unless the court allows an extension of time.
At least five business days’ notice of the meeting must be provided to creditors.
Creditors are entitled to vote at this meeting to:

Return the company to the control of the directors
Accept a Deed of Company arrangement.
Note: the DOCA must be signed by the company within 15 business days following the meeting, unless the court allows for an extension of time
Place the company into liquidation effective immediately. (Administrator becomes company liquidator).

Deeds of Company Arrangement

DOCAs are conceived as a flexible, simple and expedient scheme of arrangement and is regarded as the most common mechanism for company restructuring of distressed entities.

What is a holding DOCA?

A “holding DOCA” is not a term provided for in the Act, however the Australian Securities and Investment Commission – Regulatory Guide 82 provides the following description of a Holding DOCA (Deed Of Company Arrangement):

“holding DOCAs are typically used as a means of providing more time for a voluntary administrator (or the directors or third parties) to develop proposals for restructuring or otherwise resuscitating the company, thereby avoiding the need for the voluntary administrator to seek an extension from the court of the convening period for the second creditors’ meeting under s439A. Typically, holding DOCAs do not contain any concrete provisions on the future of the company or any immediate benefits for creditors”

What are the benefits of a Holding DOCA?

Holding DOCAs can be an effective tool for companies facing solvency difficulties to deal with creditors while avoiding the hardships of liquidation. Key benefits include:

The terms of a holding DOCA can be highly flexible.

Holding DOCAs may provide for a successful restoration of a company to solvency;
The holding DOCA may enable the company’s business to continue from which suppliers may benefit;
It may provide a greater return to creditors than if the company is wound up; and
The restructuring of the company’s debts may result in higher return to unsecured creditors.

Are “Holding DOCAs” valid?

While holding DOCAs are not a long-term solution to an organisation’s solvency issues, they can be an effective and valid means to allowing a company to avoid liquidation.

Case example: Mighty River International Limited v Hughes and anor (as deed administrators of Mesa Minerals Ltd)

In this matter, the High Court considered the validity of holding DOCAs as a means to continuing an administration. Ultimately, the Court determined that the use of a ‘holding’ DOCA could be valid in certain circumstances.

Background:
Mesa Minerals Limited (subject to deed of company arrangement) (“Mesa”) is a listed mining company. Mighty River International Limited (“Mighty River”) was a shareholder and a creditor of Mesa.

The directors of Mesa entered into a resolution to appoint voluntary administrators (“Vas”) to Mesa. The VAs subsequently issued a report to creditors under s 439A of the Act which recommended that is was not in the best interests of creditors to end administrator or to enter the company into liquidation.

The VAs recommended that creditors resolve to execute a DOCA which:

did not exclude the possibility of winding up Mesa in the future where this arrangement is ultimately determined to be in creditors’ best interests; and
allowed the VAs an opportunity to explore a restructuring and/or recapitalisation of Mesa which may provide a more beneficial outcome for creditors as opposed to an immediate winding up.

Terms of the Holding DOCA

A DOCA was entered into which contained terms providing as follows:

An ongoing moratorium on creditors’ claims during which no creditors could pursue claims against Mesa.
Contemplated that VAs would further investigate any claims that Mesa had against third parties; and seek proposals for restructuring with a view to having Mesa’s shares continue trading on the ASX (with report on possible variations to the company structure to be provided to creditors within six months).
Subject to variation of the DOCA, there would be no property available for distribution to creditors.

Challenge to Validity of Terms of the Deed Of Company Arrangement (DOCA)

Mighty River challenged the DOCA on the following three grounds:

The terms of the DOCA were contrary to the objective and provisions of Part 5.3A of the Act specifically by aiming to circumvent the requirement in s439A(6) for a Court order to extend the period during which the second creditors’ meeting must be convened.
The DOCA failed to identity property available for distribution to creditors contrary to the provisions under s444A(4) of the Act.
The DOCA was void since the VAs failed to form the opinion required by s438A(b) of the Act being that the DOCA was in the best interest of company creditors (and the then existing provisions of s439A(4) accompanying reports and statements to set out required opinion – now repealed provision).

The decIsion
While their Honours disapproved of the term ‘holding’ DOCA since the term does not appear in the Act and obscures proper analysis of the terms for validity, they nonetheless held the ‘holding’ DOCA was properly constituted and valid under Part 5.3A of the Act and fulfilled the formal requirements of same.

Their Honours also found that an instrument conferring and creating genuine rights and duties is permitted to incidentally extend time for VAs investigations pending a subsequent variation to the DOCA.
It was also held that the moratorium on creditors’ claims was not contrary to the objectives of the Act since:

The DOCA increased the chance for company survival or otherwise provided a greater return to creditors than one that would result from the immediate liquidation of the company.
Preceding the enactment of Part 5.3A of the Act, moratorium-only schemes of arrangement were considered valid and by consideration of the purpose of DOCAs (intended to provide greater flexibility to management of company affairs) DOCAs with similar moratorium terms were also permissible.
The interests of creditors are not compromised by extending the prescribed period of time within which the administrator is to convene a meeting of creditors to make decisions about the affairs of a company

With respect to the failure to specify any property for distribution to creditors, it was held that s 444A(4)(b) of the Act required a DOCA to specify the property, if any, to be available to pay creditors’ claims and that the intended flexibility of DOCAs would be undermined should the provision for distribution of property (even of nominal value) be required.
The Court also noted that there are numerous examples of DOCAs that involve no property of the company being made available for distribution, yet they continue to be consistent with the intended flexibility of approach to DOCAs. Such examples include:

A deed of company arrangement may provide for a debt for equity swap.
Creditors’ claims may be replaced with rights as beneficiaries of a creditors’ trust, with the trust funded by third parties.
Shares transfers may bolster a DOCA where shares of the company’s members are transferred to creditors.
The inclusion of a deed of moratorium, which allows the company to trade out of solvency difficulties.

Ultimately, the ‘holding’ DOCA was upheld as valid.

How can we help?
If you are a company director or major creditor of a company suffering solvency issues, you may be able to access the benefits of a holding DOCA for the short term operation and administration of your organisation.

Contact our Insolvency team today to discuss your options.

ACT NOW and ACT FAST and contact us on
QLD
07 3009 8444
[email protected]

NSW
(02) 9307 8900 or send us an email to [email protected]

March 25, 2020March 11, 2020

Company Liquidation – Are you staring down that financial gun barrel?

Are you a company struggling to pay your debts? Are you considering turning it all in? If so, a creditor’s voluntary liquidation (CVL) is a process that will allow a company’s shareholders to voluntarily wind up the company.

So, what is CVL?

A CVL is the winding up a company by a special resolution of the company’s shareholders to appoint a liquidator, usually when the company is (or may be) insolvent.

What does the liquidator do?

Upon the winding up of a company, a liquidator has several duties, including but not limited to:

assessing and realising the company’s assets for distribution amongst the company’s creditors;
conducting investigations of the following matters:
when the company became insolvent and whether any debts were incurred after that date;
whether the director committed any offences;
whether there are any payments to particular creditors that are preferential and other transactions that may be recoverable; and
providing reports to creditors and obtaining relevant approvals from creditors; such as approval for their recommendations and costs to be paid from recoveries made in the liquidation;
providing reports to the Australian Securities and Investments Commission (ASIC) regarding any misconduct of a director prior to liquidation.

Once the liquidator has completed their investigations and realised that all assets can reasonably be obtained and sold, it will then lodge the necessary documents with ASIC to deregister the company.

What are the effects of a liquidation?

The consequences of liquidation include:

the management and control of the company vesting in the liquidator;
creditors of the company losing the ability to commence a claim for monies owed;
in most cases, the dissolution of the company.

What are the Director’s Duties and Obligations of an Insolvent Company?

Upon the appointment of a liquidator, a director (and any officers of a company) must:

deliver to the liquidator all books and records that relate to the company (other than those to which an officer is entitled to retain);
give the liquidator information about the company’s business, property, affairs and financial circumstances;
provide the liquidator with any further information or documents it requests; and
attend meetings of the company’s creditors or members as the liquidator reasonably requires.

The duties and obligations of a director of an insolvent company are contained in the Corporations Act 2001 (Cth) (Act). Notably, the powers of a director cease on the appointment of a liquidator, and the liquidator takes control of the company’s operations.

So, what happens when a director is operating a company while insolvent?

If a director allows a company to incur debts while insolvent prior to entering into CVL, the director may become personally liable for those debts.

Also, if a claim is made against a director alleging that the company was trading whilst insolvent, and as a consequence the creditor(s) suffered a loss, the director may be held personally liable when the company goes into liquidation.

Subsequently, if the liquidator determines a breach of the Act by a director, they will lodge a report with ASIC. ASIC will review the matter and if deemed appropriate, take action to prosecute the director, including potentially disqualifying a director from managing a corporation.

What happens if a director has provided a Personal Guarantee?

A personal guarantee is a document signed by a director that guarantees the debt incurred by the company. A director who has provided a personal guarantee will be liable for the company’s debt or commitment if the company does not meet its obligations.

If the company becomes insolvent, and the company’s assets are unable to meet the debts, then the focus will turn towards any personal guarantees the director/s has provided.

What now?

If you are a company struggling to pay your debts and thinking of turning it all in, call Rostron Carlyle Rojas Lawyers to discuss. Contact our insolvency lawyers immediately to discuss your options in a judgement-free consult with the experts.

This article is written by way of general comment and any reader wishing to act on information contained in this article should first contact Rostron Carlyle Rojas Lawyers for properly considered legal advice which takes into account your specific situation.

March 23, 2020March 23, 2020

Cabinet Speech – Sunday 22 March 2020

The Cabinet met again on Sunday 22 March 2020 to announce a further stimulus package along with changes to regulation of corporations under the Corporations Act.

Proposed changes to the Corporations Act will seek to loosen regulation of the insolvency laws. Key changes being:
● The response time for Statutory Demands is to be extended from 21 days to 6 months
● The minimum for corporate insolvency to be raised from $2,000 to $20,000
● The response time for answering a bankruptcy notice will be extended 6 months
● The minimum threshold for personal bankruptcy to be raised from $5,000 to $20,000
● Temporary relief from directors’ personal liability for trading while insolvent
● Treasurer to have an instrument-making power, meaning the Treasurer can make ad hoc decisions on a case by case basis to provide relief to distress corporations

For more details, see the linked Fact Sheet published by the Treasury.

A large economic stimulus package has been announced which allows for those most effected by the effects of COVID-19 to access monies they otherwise may not have been able to. This includes:
● Early access to up to $10,000 of Superannuation entitlement. This is likely to be made available to those who have lost their jobs, SMEs and sole traders.
● Additional monies for Jobseekers through government benefits
● Interest free loans for businesses

For more detail, see the linked Fact Sheet published by the Treasury.

PM Scott Morrison pleaded with Australians to cut off all non-essential travel. He defined essential travel as ‘travel that is essential to your daily life’. This includes travel for work purposes, health purposes and normal daily activities such as shopping for food. There are no strict enforceable measures restricting travel within Australia on a Federal level yet. The Cabinet are simply asking Australians to be pragmatic and understanding that it is not just themselves that they must consider, but also those who they may come into contact with that we also must be mindful of.

February 26, 2020February 28, 2020

Insolvency 101 – What every business owner should know

Your introductory guide to insolvency and what to do if you believe you are trading insolvent

Insolvency is the inability to pay bills as they become due. While the term ‘insolvent’ can apply to both companies and individuals, personal insolvency is more commonly referred to as ‘bankruptcy’ and is a vastly different process than company insolvency.

As a company director or owner, you have a legal obligation to run the business a certain way, including ensuring that creditors are paid in full and on time.

Your obligations as director/owner and the potential consequences

Knowingly trading insolvent is an offence and could cause you to become personally liable for the company’s debt. When in doubt, seek help early from financial and legal professionals. The worst thing you can do is to do nothing at all.

If you are the director/owner of an insolvent company, the potential consequences include:

Loss of employment for yourself and the employees due to the company’s closure
Struggling to secure employment in the future due to your record as the director of an insolvent company
Loss of personal assets (including your house)
Monetary fines or, in cases where director duty has been severely breached, criminal charges or jail time
Personal insolvency/bankruptcy

Generally speaking, if a company is set up and has been operated correctly, you will not be personally liable for company debts. Exemptions to this are where you have knowingly traded insolvent, you have breached your duty as a director, you gave a personal guarantee in order to secure capital or you have engaged in illegal activity.

The warning signs – how do I know when my company is insolvent?

With the potential consequences at stake, it’s vitally important that as a company director/owner, you know the warning signs of insolvency and understand when it’s time to ask for help.

Insolvency, or at least the path towards insolvency, can include cash flow problems, being unable to pay creditor bills within the outlined payment terms, needing to refinance in order to pay bills or letters from solicitors or debt collectors demanding payment for outstanding invoices.

how do I know when my company is insolvent — How do I know when my company is insolvent?

When you are insolvent

If your company is found to be insolvent, there are several potential outcomes:

Voluntary Administration
Liquidation
Receivership

Voluntary administration

In the instance of voluntary administration, the directors of a company enlist the assistance of insolvency lawyers, rather than being forced into liquidation by an unhappy creditor.

Following an in-depth investigation into the company set-up, financials and operations, a voluntary administrator will recommend either going into liquidation (more on this to come) or coming to an agreement with creditors in which the payment term is extended so as to allow the company to trade out of its insolvency.

Liquidation

Liquidation can be either recommended by a voluntary administrator or forced upon a company by a liquidator, usually acting on behalf of the group of creditors as a whole.

A liquidator will collate your assets and liquidate them (that is, to sell the physical asset and turn the asset into cash). These funds will then be dispersed amongst known creditors, paying off as much of the total debt as possible.

At the conclusion of this process, the company will be deregistered and will cease to exist.

Receivership

Receivership is a situation where money is owed to a secured creditor (generally a bank), that creditor can elect a receiver to operate on their behalf. The receiver will either liquidate the company assets or take control of the company operations so as to trade the business in the hope of repaying debts owed.

A key difference between liquidation and receivership is that a liquidator acts on behalf of all creditors, whereas a receiver acts only on behalf of the secured creditor. A receiver will first ensure that money owed to the secured creditor is paid before paying out other creditors.

What now?

Whether you are a company director trying to avoid insolvency or have found your company to be insolvent, the worst thing you can do is to do nothing at all. Contact our insolvency lawyers immediately to discuss your options in a judgement-free consult with the experts.

The Rostron Carlyle Rojas team of Insolvency Lawyers are the experts on your side. Speak to them today and start the journey out of insolvency.

Recommended for you: Insolvency- The Ultimate Guide

October 31, 2019January 30, 2020

What’s the difference between Receivership, Administration, Liquidation and how does it affect creditors?

An insolvency practitioner’s appointment to a debtor is generally a worrisome thing to creditors as it is deemed to mark the company’s death with no return on any outstanding debts. While this is true that such an appointment is an indication of serious financial trouble. It is important to understand the differences between receivership, administration and liquidation and how they affect creditors dealing with a financially unstable company.

What is Receivership?

Simplified scenario: It mainly concerns the bank or secured creditors
Receivership is when a secured creditor such as a bank appoints a trustee to act as a custodian of company’s assets or business operations. This is done to make sure the bank or secured creditor gets paid.

Hence, a receiver operates only for the advantage of the secured creditor for whom it was designated and not all creditors (although they are subject to specific duties).

In most cases a receiver will be appointed under the provisions of a security instrument (such as a fixed and floating charge, or ‘all present and after- acquired property’), which specifies the powers of the receiver. A court order is not usually needed for a receiver’s appointment.

Depending on the type of the security instrument, a receiver may be appointed to simply realise and sell the secured assets, or to also take control of the company’s assets or business operations from the directors thus acting as (a receiver and manager).

Granted, receivership is not a good sign for unsecured creditors. But, it does not necessarily mean the company is folding or winding up. However, it is not uncommon at a practical level for an administrator or liquidator to be appointed immediately to represent the interests of unsecured creditors while the business is in receivership.

What is Voluntary Administration?

Simply put: The company can be saved
Voluntary administration is a process in which an insolvent company or company near insolvency is placed in the hands of an independent person who can evaluate all available options and produce the best result for a business owner and creditors.

Liquidation

Simply put: The business is winding up or has come to an end
Once a company has been placed in voluntary liquidation or compulsory liquidation the most likely outcome is the winding up of the business.

Receiving an interest or right in a property? Don’t get caught out when signing on the dotted line!

It is common practice for a creditor to require a debtor to consent to passing an interest or right in the debtor’s real property (also known as real estate) as security for the provision of credit, goods or services.

The provision of this security can be made by way of contract (guarantee or agreement) or deed. The failure to correctly execute the document can render the document void and severely impact the legal enforceability of the clauses contained therein. Each state has their own requirements when drafting and executing these documents. It is therefore imperative that you (or your legal representatives) are aware of the governing requirements in the respective state.

This article will discuss:

the main differences between deeds and agreements; and
execution requirements of deeds and agreements in each state, particularly in relation to passing a legal interest or right in property.

What is a deed?

Generally, a deed is a written document that outlines the commitment or promise of a party to perform a specific task. Deeds are commonly used to confirm, or affirm, the owner’s right and interest in the property.

What is the difference between a deed and a contract?

Deeds and contracts are both ways in which a ‘deal’ can be committed to writing. Similar in nature, deeds and contracts are commonly mistaken as being an interchangeable term for the same document.
The principal rules of contract law confirm that in order for a contract to be binding, a contract must have:
• Offer and acceptance;
• An intention to legally bound; and
• Consideration.
In simple terms, consideration is the benefit that each party receives, or expects to receive, when entering into a contract. Often monetary, consideration can also be a promise to perform a specific act, or refrain from doing something.

For example, John agrees to sell his house to Michael for $350,000. Michael’s payment serves as consideration for John’s promise to sell the house to him. John’s consideration is his promise to sell Michael the house.

Unlike a contract, there is no requirement for consideration to render the parties bound to the terms of a deed. The lack of consideration in a deed is overcome by the intention of the executing party of a deed upon signing of the deed.

For example, a third-party who agrees to guarantee a bank loan may sign a deed if they are not receiving any benefit of that loan.

What is the execution and witnessing requirements in each state?

“Signed, sealed and delivered” is more than the song title of a 1970’s Stevie Wonder chart-topper. These are the elements commonly recognised as constituting the requirements to execute a deed.
However, it is not necessarily the case in each state, particularly in relation to passing an interest or legal right in property.

Queensland
The Property Law Act 1974 (QLD) governs the requirements necessary to hold a valid interest over land (the Act).

Section 11 of the Act requires that an interest in land must be in writing and it must be signed by the grantor. Section 45 of the Act confirms that in order for a deed (that provides an interest in land) to be valid, it must be witnessed by a third-party.

Section 56 of the Act further specifies that a guarantee must be in writing and must be signed. There is no provision within the Act that requires a guarantee to be witnessed.

New South Wales
The Conveyancing Act 1919 (NSW) confirms that no assurances of land shall be valid to pass an interest at law unless made by deed. Deeds are required to be in writing, signed and witnessed in accordance with the provisions of the Act.

South Australia
Similar to the provisions in New South Wales, the Law of Property Act 1936 (SA) confirms that passing of an interest in land is void unless made by deed. Deeds are required to be in writing, signed and witnessed in accordance with the provisions of the Act.

Western Australia
Section 33 of the Property Law Act 1969 (WA) confirms that the transfer of interest in land in Western Australia is not valid unless made by deed. A deed under this Act is required to be in writing, signed by the grantor and witnessed by a third party.

Tasmania
Section 60 of the Conveyancing and Law of Property Act 1884 (TAS) confirms that the transfer of interest in land in Tasmania is void unless made by deed. A deed under this Act is required to be in writing, signed by the grantor, witnessed by a third party.

Northern Territory
The Law of Property Act 2000 (NT) confirms that the conveyances of land or interest in land in the Northern Territory is not valid unless made by deed or in writing signed by the grantor.

Further and similar to Queensland provisions, the Act specifically mentions that a guarantee must be in writing and signed.

Section 47 of this Act confirms that a deed is considered to be duly executed if it signed and attested by at least one witness who is not a party to the instrument. However, the Act does not specify whether a guarantee must be witnessed.

Victoria
The Property Law Act 1958 (VIC) confirms that conveyances of land or interest in land in Victoria are void unless made by deed. The Victorian legislation requires the deed to be in writing and signed. However, there is no requirement in the provisions that requires the deed to be witnessed.

Australian Capital Territory
The Civil Law (Property) Act 2006 (ACT) confirms that interest in land cannot be created or disposed of by a person except in writing. Unlike the provisions of the other states, a deed is not specifically required to convey an interest in land in the Australian Capital Territory.

In accordance with the provisions of the ACT legislation, the instrument providing the interest in the land must be in writing and signed. In all cases, regardless of its contents, a deed is required to be signed, sealed and witnessed to be valid in accordance with the provisions of the legislation.

It is important to know what you are signing, and how to correctly execute the document before putting pen to paper. This is particularly true when executing deeds or agreements that pass interest or rights in property because a poorly or incorrectly executed document will extinguish a party’s entitlement to that right or land.

The above information is general in nature and does not constitute legal advice, should you have any queries regarding execution of or enforcement of a deed or agreement, feel free to contact our office.

October 10, 2019

Insolvency- The Ultimate Guide

Personal and Corporate Insolvency

Insolvency is one of our key areas of practice. Our insolvency lawyers are experienced in all aspects of personal and corporate insolvency.

We have a close working relationship with a number of insolvency firms throughout Australia, and as such, are able to provide our clients with a ‘complete package’ of both legal and financial insolvency-related assistance.
We understand that personal or corporate insolvency financial issues are complex, and insist that all possible insolvency options are explored to ensure the best outcomes for our clients. When debt is closing in, the chance to consider multiple possible resolutions can provide peace of mind and a renewed opportunity for financial stability and avert current insolvency, or future insolvency.

We can assist with the following pre-insolvency and post-insolvency related matters:

• Administrations and Deeds of Company Arrangement;
• Liquidations;
• Receiverships;
• ASIC Investigations;
• Recovery of debts via corporate insolvency and bankruptcy mechanisms;
• Reconstruction and personal insolvency arrangements; and
• Bankruptcies.

Frequently asked questions on insolvency:

• Liquidations;
• Administrations;
• Bankruptcy;
• Statutory Demands.

Liquidations

What is liquidation?

Liquidation refers to the insolvency process by which a company is brought to an end or ‘wound up’. It involves redistributing the assets and property of the company, usually to its creditors. It usually occurs when the company has become insolvent, meaning it can no longer pay its debts as they fall due. An independent person known as a ‘liquidator’ will be appointed to oversee this process to ensure that the interest of the creditors, directors and members are treated fairly. Liquidation can be either a voluntary or compulsory insolvency process. Liquidation ends when the company is dissolved by court order on the application of the liquidator or the company is struck off the register of companies by ASIC.

What is voluntary liquidation?

Voluntary liquidation is an insolvency process which occurs when the company, through a resolution of its directors and sometimes its members, chooses to enter into liquidation. This may be because it has become insolvent and the members of the company wish to bring the company to an end. In a voluntary liquidation, a liquidator is usually chosen by the company; however, the creditors have the right to change the liquidator in the course of the insolvency process. Voluntary liquidation can occur in one of two ways, being either through a creditors’ voluntary winding up or a voluntary administration.

A voluntary winding up is a type of insolvency which occurs where the directors and members decide to place the company in liquidation and a liquidator oversees the process of redistributing the assets and property of the company in order to bring it to an end.

A voluntary administration is a type of insolvency which occurs where the directors resolve to appoint a voluntary administrator to the company. The voluntary administrator will take control of the company,conduct investigations into the company’s affairs, and comment as to the solvency (or insolvency) of the company. They will then provide options for the company’s future. These options may include:

1. Entering a deed of company arrangement;
2. Placing the company in liquidation;
3. Ending the administration and handing the company back to the directors.

A deed of company arrangement is an agreement between the company and its creditors to satisfy the company’s debts.
Voluntary administration allows the company time to consider its future and options for moving forward whereas voluntary liquidation is purely aimed at bringing the company to an end.

What is a compulsory liquidation or court appointed liquidation?

Compulsory liquidation or court appointed liquidation occurs when the court orders that the company be wound up in insolvency. In this instance, one or more of the company’s creditors applies to the court for the company to be wound up. This is because the company has become insolvent. In this instance, the court usually appoints the liquidator nominated by the creditor/s.

What is the legal definition insolvency?

Pursuant to section 95A of the Corporations Act 2001 “A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable.” When a person is not solvent, they are insolvent. Insolvency occurs when a company can’t pay all of its debts as and when they fall due. A company will be considered insolvent even if they have an asset surplus (an ‘asset rich, cash poor’ scenario), if they are unable to quickly liquidate those assets. A company will be deemed to be insolvent when it fails to comply with certain requirements set down in legislation, the most common of these being the failure to comply with a statutory demand from a creditor. A statutory demand is a demand in the appropriate form (Form 509H) served by a creditor on a debtor company requiring the company to satisfy the debt within 21 days.

What is insolvent trading?

Insolvent trading occurs when a director allows the company to incur debts when the company is insolvent. Directors have a duty to prevent insolvent trading and therefore can be held personally liable in certain circumstances for debts that were incurred from the date of insolvency to the date of liquidation of the company.

What does it mean to file for insolvency?

A person can file for personal insolvency (i.e. bankruptcy) by filing the following documents with the Official Receiver of the Australian Financial Security Authority (AFSA) (the regulatory body for personal insolvency in Australia):

• Statement of Affairs; and
• Debtor’s Petition.

AFSA will review the documents ensuring that all relevant sections are completed. If all the documents are in order, the insolvency process of bankruptcy begins. This is explored further below.

A company can file for insolvency through the voluntary liquidation or voluntary administration process. For a voluntary liquidation, this usually involves a meeting with its directors and members to determine that the company is to be placed into voluntary liquidation, and that a liquidator should be appointed to the company. The liquidator will then lodge the appropriate forms with the Australian Securities and Investments Commission (ASIC) (the regulatory body for corporate insolvency in Australia).
For a voluntary administration, this usually involves the directors of the company signing an instrument to appoint a voluntary administrator to the company.

How do you declare insolvency?

For corporate insolvency, a director can declare insolvency of their company through the voluntary liquidation or voluntary administration process.

For personal insolvency, a person can declare insolvency by filing their Statement of Affairs and Debtor’s Petition with the Official Receiver of the Australian Financial Security Authority.

How do you prove insolvency?

For corporate insolvency, there are two common methods to prove insolvency of a company.

The first method is the presumption of insolvency found in section 588E(4) of the Corporations Act 2001 (Cth) (Act), Directors have an obligation under section 286 of the Act to keep adequate accounting records that at the very least could “enable true and fair financial statements to be prepared and audited:” In the event that directors have not kept sufficient books and records, a liquidator is able to rely on section 588E(4) of the Act, which enables a liquidator to presume that the company was insolvent through the period in which section 286 of the Act remained breached. The burden is on the directors or creditors to prove that the company was solvent at the relevant time.

The second method is establishing the indicators of insolvency as set out in the case of ASIC v Plymin, Elliott & Harrison [2003] VSC 123. The indicates of insolvency are:

1. The company is experiencing continuing losses;
2. The company’s liquidity ratio is below 1;
3. The company is subject to overdue Commonwealth and State taxes;
4. The company has evidence of poor relationship with its Bank, including the inability to borrow further funds from it;
5. The company does not have access to alternative finance;
6. The company has an inability to be able to raise further equity capital;
7. The company’s suppliers place the company on cancellation of debt, or otherwise demanding special payments before resuming supply;
8. The company’s creditors are unpaid outside of the trading terms;
9. Issuing of post-dated cheques by the company;
10. Issuing of dishonoured cheques by the company;
11. The company is required to enter into special arrangements with selected creditors;
12. The company becomes the recipient of solicitors’ letters, summons, judgments or warrants issued against it;
13. Payments to creditors of rounded sums which are not reconcilable to specific invoices; and
14. The company has an inability to produce timely and accurate financial information to display the company’s trading performance and financial position, and make reliable forecasts.
See article here for more details.

What are the consequences of insolvency?

The consequences of corporate insolvency can be summarised as below:
1. The directors ceased their role in the company;
2. The liquidator realises any assets of the company for the benefit of creditors;
3. The liquidator investigates the affairs of the company, and reports any breaches of duties by the directors to ASIC;
4. The liquidator makes a dividend distribution to creditors if sufficient funds have been realized in the liquidation; and
5. The liquidator deregisters the company once their duties and obligations are fulfilled.

There are also consequences for a director as a result of insolvency. This is explored further below.

The consequences of personal insolvency can be summarised as below:

1. A trustee is appointed to manage bankrupt’s estate;
2. If the bankrupt earns over a set amount, they are required to make compulsory payments to the trustee in bankruptcy;
3. Not all debts are released from bankruptcy (e.g. court imposed penalties and fines, child support & maintenance, HECS and etc);
4. A bankrupt is required to ask permission from the trustee in bankruptcy to travel overseas;
5. The bankrupt’s name will appear on the National Personal Insolvency Index;
6. If applying for credit, the bankrupt must inform the credit provider if the amount sought is over a certain limit;
7. The trustee may sell the bankrupt’s assets; and
8. The bankrupt loses the right to take or continue legal action (with some exceptions).

Is liquidation the same as insolvency?

Liquidation is a type of corporate insolvency. See the section on Court Liquidation.

What is administration in insolvency?

Administration is a type of corporate insolvency. See the section on Voluntary Administration.

How does a liquidation end?

A liquidation can end by:
1. The company being de-registered;
2. The liquidator appointing an administrator who then arranges a Deed of Company Arrangement;
3. The Court ordering the stay or termination of the winding up.

An administrator might be appointed in circumstances where the liquidator believes that creditors may be given a greater return. This means that the company may be able to continue trading where the liquidator believes the company has prospects of carrying on its business successfully.

What powers do liquidators have?

The liquidator’s powers include:
1. Investigating the affairs of the company;
2. Identifying transactions that are considered void;
3. Examine the directors and others under oath in a public examination;
4. Realizing the assets of the company;
5. Conducting and selling any business of the company;
6. Admitting debts and paying dividends.

What are my rights and options as a creditor?

Creditors are able to apply to the court for an order in relation to a court appointed liquidation in the event that the company is insolvent.

In all types of voluntary liquidation, creditors are able to appoint alternative liquidators or administrators. The creditors are able to vote to appoint an alternative at the first creditor’s meeting which is held within 8 business days of the appointment of the voluntary administrator. If a creditor is seeking to appoint an alternative liquidator, they should secure the alternative liquidator’s consent prior to the meeting. The resolution will be passed if a majority of creditor present at the meeting vote in favour of the resolution.

Where the company’s assets are realized and they are insufficient to pay creditors, creditors will be paid a dividend or percentage of the amount due and owing. Debts of the company are generally paid in order of priority as follows:

1. The costs and expenses of the liquidation (including the liquidators’ fees);
2. The costs of the petitioning creditor;
3. Outstanding employee entitlements;
4. Unsecured creditors; and
5. Members.

Each ‘class’ of creditors must be paid in full before the next class can receive a payment or dividend.

What rights do I have if I am a secured creditor?

A secured creditor’s rights include:

1. appointing a receiver to realize some or all of the secured assets (even after liquidation commences);
2. requesting that the liquidator deal with the secured assets and account for the proceeds;
3. voting at creditors’ meetings for the amount of the debt which exceeds the value of their secured assets;
4. receiving dividends for the amount of the debt which exceeds the value of their secured assets.

A secured creditor will generally need to submit a proof of debt form to the liquidator for the amount of the debt which exceeds the value of their secured assets. This will allow them to receive dividends in a similar way to unsecured creditors.

What rights do I have if I am an unsecured creditor?

An unsecured creditor’s rights include:
1. receiving dividends;
2. attending creditors’ meetings
3. receiving written reports from the liquidator;
4. inspecting certain books of the liquidator;
5. informing the liquidator of matters about the company within the unsecured creditor’s knowledge; and
6. complaining to ASIC or the court about the liquidator’s conduct.
An unsecured creditor must submit a proof of debt form to the liquidator proving their debt in order to be paid a dividend. The proof of debt form should be accompanied by supporting documentation such as invoices. The proof of debt will either be admitted by the liquidator or it will be rejected and the unsecured creditor notified within a period of 7 days. If you cannot reach a resolution with the liquidator in relation to your proof of debt, you may be able to appeal to the court. You should seek legal advice as soon as possible as an unsecured creditor will only have 14 days to appeal to the court.

What are my options as a director?

In the event that the company becomes insolvent, the director should immediately arrange for the company to enter voluntary liquidation or voluntary administration. Voluntary administration may allow for the company to get back on its feet.

Directors should be aware that there are a number of ways that directors can be held personally liable for company debts including where there was insolvent trading, unreasonable director related transactions and personal guarantees. These are the pitfalls of a company entering into insolvency.

What are my rights and options as a member?

Members have a right to receive any surplus after the company’s assets have been realized and creditors and the expenses of liquidation have been paid. This does not occur frequently in insolvency.

Voluntary Administration

What is a voluntary administration and how does it work?

A voluntary administration generally occurs where the directors resolve to appoint a voluntary administrator to the company. A voluntary administrator can also be appointed by secured creditors or a liquidator in some circumstances.

The first creditors’ meeting is called by the administrator within 8 business days of appointment. At this meeting, two issues are decided. Firstly, whether the creditors wish to appoint a different administrator. Secondly, whether they wish to form a committee of creditors and who will make up the committee.

The administrator will take control of the company, conduct investigations and report to the creditors and the Australian Securities and Investment Commission. After the investigations take place, the second meeting of creditors’ will take place. The administrator will provide a report with options for the company’s future. These options may include:

1. Entering a deed of company arrangement;
2. Placing the company in liquidation;
3. Ending the administration and handing the company back to the directors.

Once the company enters voluntary administration, a moratorium comes into effect which prevents the company from being sued by creditors without the written consent of the administrator or the leave of the court, with some exceptions. During this period, guarantees given by a director of the company are unenforceable.

What is a deed of company arrangement and how does it work?

A deed of company arrangement (“DOCA’) is an agreement between the company and its creditors to satisfy the company’s debts. The terms of the DOCA are as agreed, however, generally it allows the company to continue operating and may maximize the return for creditors.

Creditors are able to vote on a DOCA at the second meeting of creditors, generally held 15 to 25 days after the appointment of the administrator. The company must execute the DOCA within 15 days of the creditors’ voting for the proposal to enter a DOCA. Failure to comply within the time period would automatically put the company into liquidation.

It is important to note that all unsecured creditors are bound by the DOCA, even in the event that they did not vote for it. Secured creditors are not bound if they did not vote for the DOCA, unless the court orders that they be bound. The deed administrator appointed under the DOCA is responsible for monitoring the company and compliance with the DOCA.

What are the benefits of entering voluntary administration?

Entering voluntary administration can provide a solution for companies to:

1. avoid insolvent trading;
2. come to an arrangement with creditors in relation to the company’s debts;
3. give the company ‘breathing room’ which may allow it to get back on its feet;
4. maximize the returns to creditors.

What are my rights as an unsecured creditor?

An unsecured creditor’s rights include:

1. lodging a proof of debt;
2. attending creditors’ meetings; and
3. voting at creditors’ meetings (if a proof of debt form has been lodged).

What are my rights as a secured creditor?

A secured creditor’s rights include:
1. lodging a proof of debt;
2. attending creditor’s meetings;
3. exercising their rights over their security within 13 business days; and
4. voting at creditor’s meetings (for the full amount of the debt).

Bankruptcy

What is bankruptcy?

Bankruptcy is an insolvency process where a trustee is appointed to administer an insolvent person’s estate. A person is insolvent if they are unable to pay their debts as and when they fall due.

How long does bankruptcy last?

Generally bankruptcy lasts three years from the date that the bankrupt files their Statement of Affairs, unless the trustee objects. A Statement of Affairs is a document completed by the bankrupt which discloses the bankrupt’s personal and financial information including their assets and debts. At the end of the bankruptcy the bankrupt is ‘discharged’.

Is bankruptcy the right option for me?

Bankruptcy can provide a solution to debt problems for both the debtor and the creditors. The debtor is released from their debts at the end of the bankruptcy and can start afresh. Creditors have the benefit of an independent person (the trustee) administering the debtor’s estate and receiving some payment for the unpaid debts.

How does someone become bankrupt?

A person may make themselves bankrupt by filing a debtor’s petition and Statement of Affairs with the Official Receiver. The Official Receiver will then issue an estate number to the bankrupt.

A creditor may apply to the Federal Circuit Court to make a person bankrupt. Generally, the creditor must have obtained a judgment on their debt and have served a bankruptcy notice on the debtor. The debtor then must pay the debt before the expiry of the bankruptcy notice. If the debtor fails to pay the debt before the expiry of the bankruptcy notice the creditor may file a creditor’s petition with the Court seeking a sequestration order, which will bankrupt the debtor. It is important to note that the Statement of Affairs must be completed by the bankrupt before the three years will begin to ‘run’ so it is essential that the bankrupt files this as quickly as possible.

What are the consequences of being made bankrupt?

There are a number of restrictions and obligations placed on a bankrupt person including:
1. The bankrupt must surrender their passport and seek permission for any overseas travel;
2. The bankrupt must make all financial records available;
3. The bankrupt must make all their divisible assets available to the trustee;
4. The bankrupt can’t act as a company officer;
5. The bankrupt can’t trade under a registered business name without disclosing that they are a bankrupt;
6. The bankrupt can’t incur credit over a set amount without disclosing to the lender that they are bankrupt.
A bankrupt’s assets will be realized by the trustee. Any asset that is able to be realized and divided among creditors is referred to as divisible assets. Divisible assets include:
1. All property owned a the time of bankruptcy or acquired during the bankruptcy;
2. Any rights or powers over property that existed at the date of bankruptcy or during the bankruptcy;
3. Any rights to exercise powers over property.

Examples of divisible assets may include:
1. Real estate including the family home;
2. Contents of bank accounts;

The bankrupt’s assets which cannot be realized may include:
1. Necessary clothing and household items;
2. Tools of trade up to an indexed amount;
3. Motor vehicle up to an indexed amount;
4. Sentimental property;
5. Superannuation payments;
6. Life assurance or endowment policies;
7. Certain damages and compensation payments.

Sentimental property must have sentimental value and be an award for sporting, cultural, military or academic achievement. This does not include monetary awards. The creditors must also resolve that the property is sentimental. Engagement and wedding rings are not considered sentimental property.

A bankrupt is still able to earn an income up to a certain amount. Any income in excess of this amount must be paid into the estate.

What are the duties of the trustee?

The trustee will:
1. Find and realize the assets of the bankrupt;
2. Conduct investigations into the financial affairs of the bankrupt;
3. Make any recovery of assets necessary;
4. Report to creditors;
5. Report offences; and
6. Distribute surplus funds to creditors, usually by way of dividends.

The assets and property of the bankrupt immediately ‘vest’ in the trustee once bankruptcy occurs. This means that the trustee automatically gains rights and control over the assets and property and does not have to take any special action.

How are creditors affected when a person becomes bankrupt?

Secured and unsecured creditors of the bankrupt are affected in different ways. If a creditor is ‘secured’ it means that they have a charge over a debtor’s asset; a common example of a secured creditor is a bank with a mortgage over the family home. A creditor is ‘unsecured’ if they do not hold a right to or charge over any of the debtor’s assets; a common example of an unsecured creditor is a bank who has issued a credit card to a customer.

Unsecured creditors exchange their right to bring a claim for a right to prove their debt in the bankrupt estate in return for a dividend. This means that the unsecured creditor gives up their right to bring a claim for the full amount of the debt owed by the bankrupt for the right to be paid a dividend by the trustee once all assets of the bankrupt have been realized.

Secured creditor’s rights generally remain the same. They can enforce their rights by having their secured asset sold or realized. They are then able to prove in the estate for the shortfall or difference between the amount recovered from the security and the original amount of their debt.

Creditors are able to vote to change the trustee.

What are void transactions and preferential payments?

Void transactions include undervalued transactions, transfers which were intended to defeat the debtor’s creditors and transfers where the consideration was paid to a third party within five years of the commencement of the bankruptcy. There are some exemptions including maintenance agreements or orders made in the Family Court or payment of tax pursuant to Commonwealth or State law. The trustee is able to void these transactions and recover the asset. It will then be available for distribution among the creditors.

Preferential payments are when a creditor of the bankrupt received an advantage over other creditors when compared to what they would have received in the bankruptcy. The payment has to have occurred when the bankrupt was insolvent and within a certain time frame of the bankruptcy. The trustee is able to void these preferential payments and recover the payment in order to make a more fair and equitable distribution among the creditors.

Is there an alternative to bankruptcy?

Yes. A personal insolvency agreement (also known as a Part X agreement) allows a debtor to come to an agreement with their creditors in relation to their debts without being made bankrupt. In this process, a trustee is appointed by the debtor signing an authority under section 188, a Statement of Affairs is prepared by the debtor and a draft personal insolvency agreement must be provided to the trustee. A meeting of creditors is then held to decide whether the creditors will accept the proposal. Debtors should be aware that signing a section 188 authority is an act of bankruptcy and creditors may choose not to accept the proposal and bankrupt the debtor instead.

What is a section 73 proposal?

A section 73 proposal can be used to annul a bankruptcy. The bankrupt proposes an alternative arrangement for paying the debts to creditors.
An annulment has the effect of voiding the bankruptcy from the beginning. It is as if it never occurred.

What is a Part IX debt agreement?

A Part IX debt agreement is an agreement between the debtor and their creditor’s which provides for a sustainable plan for the debtor to pay off their debts.

Creditor’s Statutory Demands

What is a statutory demand?

A statutory demand is a demand in the appropriate form served by a creditor on a debtor requiring the debtor to satisfy or secure the debt within 21 days.

How do I issue a statutory demand?

A statutory demand must be made in the correct form pursuant to section 459C of the Corporations Act.
A statutory demand must:
1. Be in the prescribed form (Form 509H);
2. Be for a debt that is due and payable;
3. Be for an amount which is no less than $2,000.00 (the current statutory minimum);
4. State the debtor company name and its registered office; and
5. Specify where the debt can be paid.
A statutory demand must be accompanied by an affidavit in support of the debt or a judgment of the Court.

What should I do if I am served with a statutory demand?

It is important to note that the debt is required to be paid within 21 days of being served with the statutory demand; otherwise the creditor gains the presumption that the company is insolvent and can apply for a winding up order. Accordingly, the debt should be paid immediately in accordance with the statutory demand.

There is also the option to resist the statutory demand. This involves filing an application with a supporting affidavit to the court within the 21 day period.

A statutory demand may be set aside on the basis that:
1. The amount owed is less than the statutory minimum;
2. Where there is a defect in the statutory demand that would cause substantial injustice to the debtor;
3. Some other reason which may include the debt being for an inflated or incorrect amount.

What happens if the debtor doesn’t comply with a statutory demand?

The creditor can apply to the court for a winding up order on the presumption that the company is insolvent. However, this presumption of insolvency applies only where the winding up order is made within 3 months.

If you would like further information regarding the voluntary liquidation insolvency process, please contact the Insolvency Lawyers at Rostron Carlyle Rojas on (07) 3009 8444 or email us at [email protected]

September 9, 2019

What is a director penalty notice and what does it mean for you as a Director?

Most directors and professionals in Australia know very little about director penalty notices, yet this notice can result in personal liabilities from their limited liability company. Yes, you read right. As a director you can end up attracting a personal liability from your limited liability company. This guide will help you understand what exactly a director penalty notice is and how you best handle it.

What is a director penalty notice?

Why does the director penalty notice matter to directors?

Which law supports the Director Penalty Notice?

How do I know if I am liable to the director penalty notice and what can I do about it?

What can I do to avoid personal liability?

Does the Australian Tax Office (ATO) always issue a director penalty notice and do it mean automatic bankruptcy for me?

What is a director penalty notice?

A Director Penalty Notice (DPN) is a Notice that the Australian Tax Office (ATO) can send to a director or directors that can make that director or directors personally liable for two types of tax debts of a limited liability company namely, Pay As You Go (PAYG) and Superannuation Guarantee Charge (SGC) liabilities.

Why does the director penalty notice matter to directors?

The Director Penalty Notice exposes a director to a personal liability that they might not be aware of, since it allows the Australian Taxation Office to pursue directors personally for Pay As You Go (PAYG) tax and superannuation guarantee charges owed by their company.

Which law supports the Director Penalty Notice?

The DPN is under Division 269 to Schedule 1 of the Taxation Administration Act 1953 (Cth). This is the Act that allows the ATO to directly pursue directors for PAYG and superannuation liabilities of a company.

How do I know if I am liable to the director penalty notice and what can I do about it?

If you have you lodged your Pay As You Go returns within three months of the due dates of these documents, or your superannuation guarantee charge statements within 28 days of the end of each quarter, then you fall under Category 1.

Category 1
If you have complied with the above lodgement timeframes but the PAYG and/or superannuation remains unpaid, then you may receive a director penalty notice at your personal address as is recorded with the Australian Securities and Investments Commission (ASIC) for the company.

In some cases, the registered tax agent for your company may receive the director penalty notice on your behalf. Note: this does not transfer the liability to the tax agent. It merely means the tax agent is responsible for forwarding the Directory Penalty Notice to the directors. Thus it is essential that directors maintain ASIC records with up to date addresses so that crucial documents such as DPNs are sent to correct addresses.

Upon receiving the director penalty notice, you have 21 days from the date of the notice to exercise one of three options to avoid personal liabilities. The options are:
• Pay the required amounts of PAYG and superannuation Tax to the Australian Tax Office by due dates.
• Place the company under voluntary administration or,
• Liquidate the company
Exercising one of the above options within 21 days, will allow you to avoid personal liability and the debt remains with the company.

Category 2
If you have not lodged your Pay As You Go returns within three months of these documents’ due dates, or your superannuation guarantee charge statements within 28 days of the end of each quarter (and these liabilities remain unpaid), then you and any other directors concerned automatically become personally liable for unpaid PAYG tax and superannuation tax.

What can I do to avoid personal liability?

Pay your PAYG and superannuation liabilities.

If you are presently unable to pay, then the next option is make sure you lodge your PAYG tax returns within three months of their lodgement date, and superannuation guarantee charge statements within 28 days of the end of each quarter. This will allow you to receive the director penalty notice in the mail and 21 days to take action and avoid personal liability.

Does the Australian Tax Office (ATO) always issue a director penalty notice and do it mean automatic bankruptcy for me?

Short answer- No. However, several factors have to be considered:

Director penalty notices are issued at the discretionary the Australian Tax Office.

There is no cut and dry rule that encapsulates the tax office’s discretion to issue DPN. It is often the case that DPNs are issued to companies or directors with a history of defaulting on tax payments. The size and age of the tax debt are also influential factors in the issuing of a DPN.

In addition to this director or directors personal financial status is an important factor that is considered when determining if the Director Penalty Notice is to be pursued.

As it would be fruitless to pursue claims against directors with no assets as this will only mean unjustified costs for the tax office.
Over and above there is no definitive answer that is why it is advisable to seek professional advice in these circumstances.

Visit our services page to find out all that our Insolvency Lawyers can do for you. Or contact us right way for further assistance on Director’s Penalty Notices.

July 19, 2019

Personal liability of a director for failure to keep financial records

In the matter of Substance Technologies Pty Ltd [2019] NSWSC 612, the Court considered a liquidator’s application with respect to whether a director is personally liable to pay the sum of $170,000 for debts incurred whilst the company was insolvent, largely on the basis that the director failed to keep / produce financial records.

If a company fails to keep, and retain for 7 years, suitable financial records, it can be assumed to be insolvent for the purposes of an insolvent trading claim.

Director Personal liability case study- Facts

• Since its incorporation until late 2013, Substance Technologies Pty Ltd (In Liquidation) (Company) traded a scrap metal yard.

• From at least 2009, the Company rarely made a profit. By 30 June 2013, the Company had accumulated losses of $374,373 and taxation debt in the sum of $13,929.36.

• In early 2014, the Company purchased scrap metal from Ausgrid for the sum of $78,463, to which the Company failed to pay.

• On 2 January 2015, Christopher Thaler resigned as sole director of the Company, and Andrew Thaler (his son), replaced him as sole director.

• During Andrew’s directorship of the Company, Ausgrid entered judgment for the debt and the Company was subsequently placed into liquidation on 27 June 2016.

• The liquidator issued 3 demands to Andrew for the Company’s books and records, to which he did not comply.

Defendant’s arguments concerning personal liability case

The Court considered a number of arguments put forward by the Defendant, summarised as follows:

Defendant’s argument The Court’s findings
1. The debts no longer exist as they were written off If a bad debt proves to be recoverable, in whole or in part, then the creditor remains entitled to payment and to adjust its accounts to reverse the write-off and recognise the income. This is consistent with accounting standards.
2. Taxes are not debts incurred Taxes are debts incurred by the taxpayer for the purposes of insolvent trading.
3. The obligation to keep financial records was satisfied The obligation to keep financial records…is twofold: firstly, to keep records which record the company’s transactions and financial performance sufficient to enable financial statements to be prepared; and, secondly, to retain those records for seven years.
4. The financial records were not produced relying on the privilege against self-incrimination The directors’ privilege against self-incrimination has been abrogated by section 530A of the Corporations Act, requiring officers to help a liquidator carrying out their duties.
5. The company was not insolvent – the ATO debt could be paid and tax losses were an asset Christopher alleged that funds could have been loaned from his spouse – no such loan was made. Further, it was held that accumulated tax losses were not an asset of the Company as it could not be sold to pay off liabilities of the Company.
6. Both directors said they did not suspect insolvency Upon review the Company’s bank statements, the outstanding tax liabilities and financial statements, a “a director would have been left in no doubt that the company was insolvent
7. The company would pay the Ausgrid debt from profits on sale of the scrap metal There is no evidence that the company expected to earn such profits before the invoices were due for payment, nor that the company had other means of paying the invoices.

Outcome- Director personal liability

Both the former director (Christopher Thaler) and the current director (Andrew Thaler) were liable for the debts incurred by the Company, whilst it was trading insolvent, during the times they held directorship of the Company.

It is an important lesson for all directors of a company that you are required to keep financial records of a company for 7 years to comply with section 286(2) of the Corporations Act 2001 (Cth) (Act). A director may be held personally liable for failure to produce financial records to a liquidator, as section 588E(4) of the Act makes clear that the presumption of insolvency arises from the failure to keep records.

If you are a director of a company, or know someone who is, and want to know more, please contact the Insolvency Lawyers at Rostron Carlyle Rojas Lawyers on (07) 3009 8444 or email us at [email protected]