Insolvency for directors and business owners

It is not uncommon for businesses to experience cash-flow issues. Often arising unexpectedly, factors such as additional or accumulated expenses, short-term forecasting, and slow-paying customers can render a business technically insolvent and prevent it from paying debts on time.

Knowing your business' financial position and understanding your obligations as a director or business owner is critical to protecting you and your business.

Trading issues can be circumvented and better managed by recognising the early signs of a cash-flow crunch. Typical signs include:

  • interrupted cash flow from a delay in receivables
  • overdue payment to suppliers or creditors
  • issues with the Australian Taxation Office (ATO)
  • strained relationships with suppliers and financial institutions
  • the inability to provide accurate financial data upon request
  • financial or personal issues overwhelming the business' operations

If you observe one or more of these signs, engage a professional advisor for support to investigate and remediate potential or actual trading issues that could leave you and your business exposed.

Directors' duties

Directors of Australian companies are charged with the responsibility of overseeing the affairs of a business, with substantial financial, criminal, and adverse professional consequences for insolvent trading and breaches of directors' duties.

Australia's increasingly complex regulatory environment means company directors are under more scrutiny than ever before. Seeking legal advice from an insolvency legal expert is a crucial step to understand your duties and personal risks that can arise in the event of restructuring and insolvency.

Personal exposure

In some cases, a director's personal assets can be exposed, even where steps have been taken to protect them. The early engagement of an insolvency legal specialist who knows how such protections have been tested can minimise personal exposure to costly disputes with liquidators, regulators, and other stakeholders.

Director penalty notices (DPN)

A company has statutory obligations to pay goods and services tax (GST), pay-as-you-go withholding (PAYGW), and the superannuation guarantee charge (SGC). A director has legal responsibility for the company's financial affairs, and when a company fails to meet its reporting and payment obligations, the Australian Taxation Office (ATO) can impose director penalties for these amounts.

The ATO will seek to recover the outstanding amounts from the company and may issue a director penalty notice (DPN) to each director. Receiving a DPN can make directors personally liable for GST, PAYGW, or SGC, with limited options to remit the penalty.

Understanding your personal rights and obligations is critical. Engage an experienced legal specialist who will outline your duties and the options available to you, and assist with responding to a DPN.

Frequently asked questions

Insolvency occurs when an individual or company is unable to pay all its debts as and when they are due and payable.

Insolvent trading occurs when a company continues to trade and/or incur debts despite being unable to pay all its debts as and when they are due and payable. Before new debts are incurred, directors and business owners must consider whether the company is solvent. Failure to do so can put directors at risk of personal liability for insolvent trading.

There are serious consequences for insolvent trading. A liquidator may commence proceedings against directors to recover the debts incurred by the business. A director may also be subject to criminal charges if dishonesty was a factor in insolvent trading. In fact, ASIC has successfully prosecuted directors for incurring debts when a company is insolvent.

Defences are available to directors for insolvent trading but do not always apply—this requires specialist legal advice.

A director is responsible for the oversight and affairs of a company, and must be able to steer and monitor its management. Importantly, directors must have an up-to-date understanding of the company's financial position. Signing off on the accounts is not enough; a director must have reasonable understanding of a company's financial position.

A director penalty notice is a notice from the Australian Taxation Office (ATO) issued to a director when the company has unreported and/or unpaid pay-as-you-go withholding (PAYGW), goods and services tax (GST) or superannuation guarantee charge (SGC) debts.

There are two types of DPN.

  1. A standard director penalty notice: a director may avoid personal liability for debts under a standard DPN by undertaking one of the following three actions within 21 days of issue of a DPN: i. Paying the company debts ii. Placing the company into voluntary administration or a small business restructuring process iii. Placing the company into liquidation.

  2. Lockdown director penalty notice: a director cannot avoid personal liability under a lockdown DPN by putting the company into liquidation or administration; although this may still be a sensible course of action. Instead, a director must pay the company's debts or consider bankruptcy options.