Directors of a deregistered company can be personally liable for old tax debts.
It costs money to liquidate an insolvent company. In many cases, the cost of appointing a liquidator to take the company through the formal liquidation process can be prohibitive for smaller companies in financial stress.
All too often, in an effort to save money, directors simply walk away from a failed business.
The company may have ceased trading a few years earlier and have no assets. It is often the case that debts remain unpaid, including the ATO. The directors think it would be more cost-effective not to pay annual review fees and let ASIC eventually deregister the company and evade the personal scrutiny that comes with an appointed liquidator. Many think that once the company is deregistered, the debt dies with the company. This way of thinking is flawed.
Some directors fail to appreciate that the ATO references outstanding tax debts to the company’s ABN and not the (deregistered) ACN. The ABN is not cancelled when ASIC deregisters a company. However, the ATO’s data matching procedure will show that an active ABN no longer has a registered ACN, triggering the ATO into action.
Out pops the skeleton in the closet holding a Director Penalty Notice (DPN).
A company’s deregistration does not extinguish the debt owed to the ATO. However, the fact that the company is deregistered means that the ATO cannot begin recovery proceedings unless the company is re-registered. This would mean a court application, which is not an appealing option when it can simply make a director personally liable by issuing a DPN.
As we will point out, the issue here is that a Non-Lockdown DPN will become a Lockdown because the director will not have the time to deal with it.
Quick Recap on DPNs:
There are 2 types of DPNS - “Non-Lockdown” or “Lockdown” DPN.
A “Lockdown” DPN, occurs because no statutory lodgments have been made for GST, PAYG or SGC within the time prescribed, and no payments have been made for those liabilities. The only way to remit the debt is for it to be paid.
A “Non-Lockdown” DPN does not lock down the debt altogether. It is issued when lodgements are up to date and lodged within the due date, but the liability in respect of those lodgements has not been paid. This means the directors can, within 21 days from the date of the issue of the DPN, cause the company to pay the debt or place the company into one of the 3 available forms of external administration.
And this is where the danger lies with deregistered companies.
So, what can be done?
Pay the debt.
Liquidate the company. However, because the company is deregistered, the directors can’t make decisions about it and, therefore, cannot pass a resolution to place the company into external administration. This is a massive problem.
ASIC may reinstate a company’s registration at the director's request if satisfied that the company should not have been deregistered. However, this takes time and it's hard to convince ASIC that it should not have been deregistered in the first place.
While option 3 is theoretically possible, practically, it is almost impossible. This causes a director to become personally liable for a debt that could have been remitted. The small “saving” by avoiding appointing a liquidator could end up costing the director hundreds of thousands of dollars.
Bottom line – if your company has outstanding tax debts, allowing deregistration, voluntary or otherwise, is often very risky.
If your client’s company is insolvent and considering this option, consult with de Jonge Read first. We can explore other cost-effective options with you to manage these risks and ensure your client achieves the best outcome.
-------------------------------------------------------------------------------------------------------------------------------Should you have clients or associates who are struggling with insurmountable debt, financial issues or need assistance in reviewing their business affairs in preparation for what’s around the corner, our expert team of Strategists are available to discuss potential options to help achieve the best possible outcomes based on their unique business and personal financial situation. Initial consultations are complementary and obligation free and include a written strategy customised for each client’s circumstances and goals.
Contact us now on p. 1300 765 080 | info@djra.com.au