Former director receives director penalty notice, avoids personal liability

The Federal Court's recent decision in Hall v CAP Security Services Pty Ltd [2023] FCA 1237 highlights an interesting and practical solution for former directors who receive a director penalty notice after their directorship has ended.

Director penalty notices (DPNs)

The Australian Taxation Office (ATO) can issue a DPN to the director of a company where the company has failed to comply with certain reporting obligations and payments under the Taxation Administration Act 1953 (Cth). The effect of receiving a DPN is that a director will be personally liable for the relevant tax or superannuation debts of the company unless, within 21 days of the DPN being issued by the ATO, they:

• rectify the non-compliance of the company;
• put the company into voluntary administration;
• put the company into liquidation; or
• appoint a small business restructuring practitioner.

As such, failing to comply with a DPN can have serious legal consequences for directors. For former directors who are no longer managing a company, receiving a DPN can cause additional issues and stress due to the individual's limited ability to take any of the steps listed above, particularly in circumstances where the current managers of the company are not cooperative.

How can a former director respond to a DPN?

The first step is to seek urgent advice from your accountant and lawyer. In Hall, a former director of CAP Security Services Pty Ltd (Mr Hall) successfully dealt with a DPN in respect of the company's unpaid GST liabilities in the sum of $208,574 by making an urgent application to the Federal Court seeking to wind up the company.

The steps taken by Mr Hall in successfully making this application are useful to note for those in similar circumstances and their professional advisers.

1. Obtain standing to make an application for winding up

Under the Corporations Act 2001, only certain persons and entities have the right to make an application to the Court to wind up a company, such as creditors, shareholders and directors.

Since Mr Hall did not have standing to make an application for winding up as a former director of the company, he became a creditor of the company by immediately making payment of $5,000 of the company's GST liability to the ATO.

2. Make an urgent application for winding up in insolvency, or on other grounds

In Hall, Mr Hall made an urgent application for CAP Security Services to be wound up on two separate grounds: in insolvency, and on just and equitable grounds. Mr Hall was successful on both these grounds, because:

• on the evidence, CAP Security Services was insolvent; and
• it was just and equitable to wind up CAP Security Services due to a lack of confidence in the management of the affairs of the company, and the public interest in preventing an insolvent company to continue trading.

In light of the above, the Court ordered that CAP Security Services be wound up and Mr Hall was able to avoid the consequences of the DPN expiring without the company being put into liquidation.

Key takeaways

Former directors who receive a DPN in respect of a company's tax or superannuation liabilities are often placed in a difficult situation, especially where the current management of the company is not cooperative.

However, in such a situation, a former director may take action to avoid personal liability by making an urgent application for the company to be wound up, provided that they obtain standing and are able to prove a ground for making the application.

For more information on how to respond to a director penalty notice, please contact Lander & Rogers' expert insolvency & restructuring team.