There are a number of ways a company director can become personally liable for the debts of his or her company. The most common way is when a director gives a personal guarantee to a creditor.
When a company is placed into liquidation, a director can become liable to the liquidator for debts incurred whilst the company was insolvent, commonly known as Insolvent Trading, or if the director has entered into an uncommercial transaction with the company i.e. a transaction that a reasonable person in the place of the company would not have entered into, taking into account the benefits and detriments to the company.
A director may also become liable to the ATO if a liquidator successfully recovers a preference payment from the ATO. Directors may be liable to indemnify the ATO against any loss or damage resulting from an order that requires the ATO to repay an amount it received from the company as a voidable transaction.
Typically payments made to the ATO that are at risk of being ordered to be repaid are payments made by the company under a payment arrangement in place with the ATO prior to the company being placed into liquidation. If these payments are repaid to the liquidator by the ATO, the ATO can seek to recover the amounts repaid form the directors.
Directors can also become personally liable to the ATO if a director fails to comply with a Director Penalty Notice ("DPN").
DPNs are served by the ATO on directors where their company owes the ATO group tax that should have been withheld from wages and remitted to the ATO.
Once a director receives a DPN, the director may become personally liable for their company's unpaid tax debt.
To avoid personal liability, the recipient of the DPN must do one of the following within 21 days of the notice being issued:
- Pay the tax in full;
- Agree to repay the debt under Section 222ALA of the Income Tax Assessment Act 1936;
- Appoint a voluntary administrator; or
- Appoint a liquidator and begin to wind up the company.
The government has recently changed the DPN regime: the 21 day notice period of a DPN now commences on the date it is posted by the ATO, not the date it is received by the director.
The DPN will clearly state the dollar amount of the tax debt owed by the director's company.
If you are a director it is important to be aware that if you receive a Director Penalty Notice and do not undertake one of the four options within the 21 days allocated, you can become personally liable for the tax debt of the company.
What this essentially means is that the ATO can then commence action against you rather than the company to collect the outstanding debt. You may find the ATO garnisheeing your bank accounts and taking your property and your house to satisfy the debt.
If you receive a DPN, ACT FAST!