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6/03/2020
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Exposing the Myths
Surrounding
Personal & Corporate
Insolvencies
Scott Andersen & Ivan Glavas
Worrells Solvency & Forensic Accountants
Disclaimer
All material contained in this paper is written by way of
general comment. No material (including the use of dad jokes)
should be accepted as authorative advice and any reader wishing to
act upon material contained in this paper should first contact Worrells
for properly considered professional advice, which take into account
specific situations.
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MYTH 1“if we don’t lodge returns with the ATO, they
won’t know what the company owes…so how
can I be exposed?”
THE DIRECTOR
PENALTY REGIME
DIRECTOR PENALTY REGIME
• Regime currently imposes personal liability on directors for unpaid
PAYG and Super – ABOUT TO BE EXPANDED TO GST, WET
AND LCT
• Director Penalty Notice itself does not impose personal liability –
personal liability is automatic by operation of law when debt not
paid by due date
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DIRECTOR PENALTY REGIME
• Prescribed timeframe for lodgement before a director penalty is
locked-down:
PAYG
• Within 3 months of lodgement day
SUPERANNUATION
• Lodgement day for SGC Return
CHANGES SINCE 2019:
Treasury Laws Amendment (2018 Measures No. 4) Act 2019:
• Commenced 1 March 2019
• Removed 3 month lodgement window for Superannuation before a
director penalty is locked-down
Treasury Laws Amendment (Combatting Illegal Phoenixing) Bill
2019
• Passed by the Senate on 5 Feb 2020, commencement date is from
1 April 2020
• Expanding director penalties to GST, WET & LCT
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TYPES OF DIRECTOR PENALTY NOTICES (DPNS)…
NON – LOCKDOWN
• Issued to directors that have lodged within the prescribed
timeframe.
• Gives directors 21 days to take certain actions, which result in the
penalty being “remitted”.
NON-LOCKDOWN EXAMPLE:
Example:
• Company trading poorly, ATO debt accumulating
• Directors do not pay PAYG and Super, but lodge within prescribed
timeframe
• DPN issued – options within 21 days:
➢ Pay
➢ Place company into administration or
liquidation and remit penalty
If no action within 21 days of ATO issuing DPN:
• Director penalty permanently locks-down; and
• ATO can commence recovery action against
the director(s)
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TYPES OF DIRECTOR PENALTY NOTICES (DPNS)…
LOCKDOWN
• Issued to directors where a company has failed to lodge within the
prescribed timeframe.
• Director penalty permanently locks-down and no option to have
penalty “remitted.”
LOCKDOWN EXAMPLE:
Example:
• Company trading poorly, ATO debt accumulating
• Directors do not pay PAYG and Super, and fail to lodge in
prescribed timeframe
• Director penalty permanently locks-down
DPN issued - if not paid within 21 days, ATO can commence
recovery action against director
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THE FEDERAL GOVERNMENT’S PACKAGE OF
REFORMS AIMED AT ADDRESSING ILLEGAL PHOENIX
ACTIVITY IS NOW LAW AND THERE’S LOTS OF THEM…
• Treasury Laws Amendment (Combating Illegal Phoenixing) Act
2020
• Treasury Laws Amendment (Recovering Unpaid Superannuation)
Bill 2019
• Treasury Laws Amendment (Registries Modernisation and Other
Measures) Bill 2019
• Business Names Registration (Fees) Amendment (Registries
Modernisation) Bill 2019
• Corporations (Fees) Amendment
(Registries Modernisation) Bill 2019
• National Consumer Credit Protection
(Fees) Amendment (Registries Modernisation)
Bill 2019
TREASURY LAWS AMENDMENT (COMBATING
ILLEGAL PHOENIXING) ACT 2020
• Personal liability for GST, WET and LCT
– applies to tax periods from 1 April 2020
• Creditor defeating dispositions
– came into effect on 18 February 2020
• Limits on Director resignations
– effective from 18 February 2021
• Retention of tax refunds
– commences on 1 April 2020
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TREASURY LAWS AMENDMENT (RECOVERING
UNPAID SUPERANNUATION) BILL 2019
• Passed both houses of Parliament – awaiting Royal Assent
• One-off amnesty to self-correct historical SG non-compliance
over the period 1/7/1992 to 24/5/2018
• Amnesty period – 24/5/2018 to six months after Royal Assent
(to disclose and pay any unpaid superannuation)
Amnesty will:
• allow employers to claim tax deductions; and
• removes the administrative component and Part
7 penalty, for SG disclosed and paid during the
amnesty period
A SERIES OF BILLS INTRODUCING A DIRECTOR
IDENTIFICATION NUMBER (DIN) REGIME & TO MODERNISE
BUSINESS REGISTER SYSTEMS
• Treasury Laws Amendment (Registries Modernisation and Other
Measures) Bill 2019
• Business Names Registration (Fees) Amendment (Registries
Modernisation) Bill 2019
• Corporations (Fees) Amendment (Registries Modernisation) Bill 2019
• National Consumer Credit Protection (Fees) Amendment (Registries
Modernisation) Bill 2019
IMPORTANT:
• DIN will be a permanent unique identifier for a
Director and provide traceability of relationships
across companies
• 32 existing Business Registers will be
integrated onto one platform
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MYTH 2“If I go bankrupt, I will lose my home…”
BANKRUPTCY &
THE FAMILY HOME
HOW A FAMILY HOME SITUATION IS APPROACHED…
• Worrells is appointed
• Identify there’s a property (via searches and discussion)
• Caveat is lodged
• Obtain insurance
• Payout is sought from mortgagee(s)
• Property is valued
• Next steps are decided - If there’s equity, the trustee will contact
the bankrupt or co-owner and say:
…are you interested in in coming to a deal?
…want to jointly sell and split costs?
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Common scenario…
Equity (e.g.): $100k
Negotiation
Sale (e.g.) spouse for $100k via payments over
time
Note: Mortgage still needs to be maintained.
Benefits to the estate makes it easy for a trustee
to justify:
• Families are not displaced
• Creditors are no worse off
• Less costs incurred
AGREEMENT
WITH THE
BANKRUPT OR
CO-OWNER
• Trustee can choose to do nothing – just sit and
wait.
• Property still vests even after the bankruptcy
ends!
• That can work against a client if the property
value goes up!
Example:
• Debtor goes bankrupt in 2015
• Property ERV $700k, Mortgage $880k
• Sits & waits – Trustee – not worth taking action
• 2020 – Trustee reassesses position
• Property & Mortgage – ERV is now $1 million,
Mortgage is $600k
• Sell – Trustee moves to sell
WHAT IF
THERE IS
NO EQUITY?
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There can be a myriad of ways to reduce or
extinguish a trustee’s claim…
Equity of exoneration
• where bankrupt has drawn on the property
equity for business purposes
(i.e., used up some of “their” equity)
Personal injury proceeds
• Where the purchase was from personal
injury proceeds
Constructive/resulting trust claims
• e.g., where the deposit for
the house was paid externally
EXTINGUISHING
OR REDUCING A
TRUSTEES
CLAIM
MYTH 3“If I go bankrupt and I don’t lodge my
Statement of Affairs, it doesn’t matter.
Eventually, the trustee will forget about it and
it will all go away…”
THE END OF A
BANKRUPTCY BEGINS
AT THE BEGINNING
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THE IMPORTANCE OF LODGING A STATEMENT OF
AFFAIRS…
• Bankrupts are required by law to lodge a Statement of Affairs
• Debtors Petition – Voluntary Bankruptcy – A statement of Affairs is
lodged to commence the bankruptcy
• Creditors Petition – Involuntary Bankruptcy – The debtor is required
to lodge a Statement of Affairs within a prescribed time
• A Bankrupt is discharged from bankruptcy three years and one day
after the statement of affairs is lodged with AFSA (unless the period
is extended due to misconduct or other prescribed reason)
THE IMPORTANCE OF LODGING A STATEMENT OF
AFFAIRS…
• If a Bankrupt does not lodge a Statement of Affairs,
they remain bankrupt forever.
• If a Bankrupt chooses to lodge a Statement
of Affairs several years later, the three years
and one day time period commences from
acceptance of the lodgement of the
Statement of Affairs with AFSA.
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MYTH 4“I’m not insolvent…why on earth would I
contemplate a liquidation…!”
NOT ALL
LIQUIDATIONS
ARE BAD
THE VARIOUS FORMS OF LIQUIDATION…
• Members Voluntary Liquidation – winding up of a solvent entity
➢ Useful for the tax effective treatment of distributions
➢ May provide some finality to future (potential) contingent liabilities
e.g. warranties, compensation claims
• Court Liquidation - for some other reason such as a partnership dispute
(“Just and Equitable Grounds”)
• Provisional Liquidation – appointment of a liquidator
to determine whether a company ought to
be wound up…
…and if the company is insolvent…these are the
options…
• Creditors Voluntary Liquidation – winding up of an
insolvent entity
• Court Liquidation – winding up of a company by the
Court on the grounds of insolvency
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A COMPANY’S CREDIT RATING IS NOT A DIRECTORS
CREDIT RATING
The Corporate Veil is there to protect a director however, in certain
circumstances, it can be pierced, resulting in a potential risk to a
Directors credit rating. Some of the most common risks are:
• Personal Guarantees
• Breach of Director Duties
• Director Penalty Regime – PAYG & Super (and soon to be GST,
LCT & WET)
• ATO Preference Claims & Director Indemnity
• Debit Loan Accounts
• Credit Loan Accounts (Inc.UPEs)
• Insolvent Trading
• Unreasonable Director-related transactions
MYTH 5“If I go bankrupt, will my credit rating be
affected for the rest of my life? Will I ever be
able to get a loan? What about my
company’s credit rating? Does it have one?”
CREDIT
RATINGS
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CREDIT RATING FOR INDIVIDUALS:
• Bankruptcy – for a period of 5 years from the date of bankruptcy
with a credit rating organisation. However, the National Personal
Insolvency Index records the bankruptcy on its database forever.
• Traditional financiers have changed their way of dealing with credit
risk i.e. in today’s climate (thanks to the banking royal inquiry) they
are less inclined to lend to an at-risk borrower.
• New market has emerged to deal with the gap in lending. Most are
sophisticated lenders with slightly higher rates of
interest but offer loans to an impaired
credit rating applicants.
CREDIT RATING AND COMPANIES:
• On 22 October 2019, Federal Government passed law which allows the ATO
to disclose tax debt information of businesses to registered credit reporting
bureaus (CRBs).
• Commencement date of the new law: 21 February 2020
• Certain criteria must be met:
➢ it has an Australian business number (ABN),
and is not an excluded entity
➢ it has one or more tax debts, of which at least
$100,000 is overdue by more than 90 days
➢ it is not effectively engaging with the ATO to
manage its tax debt, and
➢ the Inspector-General of Taxation is not
considering an ongoing complaint about the
proposed reporting of the entity's tax debt
information.
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CREDIT RATING AND COMPANIES:
• The ATO will notify a business in writing if they meet the reporting
criteria and give them 28 days to engage with the ATO and take
action to avoid having its tax debt information reported.
• The ATO will only provide information to CRBs if they are
registered with the ATO and have entered into an agreement
detailing the terms of the reporting.
• Businesses which are engaging with the ATO to
manage their tax debts will not have their tax debt
information reported to CRBs.
MYTH 6“If I resign as a director and back date the
date of resignation, no one will be able to
chase me for the company’s debt…because
I wasn’t in control…”
RESIGNING &
REPLACEING
DIRECTORS
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RESIGINING / REPLACING A DIRECTOR:
• New legislation coming into effect 18 February 2021 which will
restrict the capacity of directors to backdate their resignations.
• ATO have become more active with their inquiries to Insolvency
Practitioners to investigate when and why a director has resigned
prior to a formal insolvency appointment.
• FEG have shown interest in funding legal proceedings against
directors who were in control of an entity whilst it was insolvent.
• ASIC are requesting more information into director’s conduct,
particularly those who have had multiple liquidations of an insolvent
entity.• ASIC and ATO appear to be taking a special
interest in shadow directors when reported by
liquidator.
• New Director Identification Number (DIN) will
provide traceability of Directors over multiple
entities.
IMPORTANT!!!
If a client wants to resign or relace themselves as a director
and cannot provide a legitimate reason before an insolvency
event, they will be a risk of an inquiry from the authorities and
the ATO.
Their advisor will also be at risk of being pursued under the
new anti-phoenixing laws.
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SOME
WORTHY
MENTIONS
• Will bankruptcy affect my
professional
accreditations / capacity
to work?
• Should I take out all the
money from my
superfund before I go
bankrupt so that my
trustee can’t get to it?
• Creditor voting in
Corporate
administrations – Majority
in Number and Value.
What does that actually
mean?
AN
INSOLVENCY
APPOINTMENT
CAN IMPROVE
ONES MENTAL
HEALTH!
It’s not all doom and gloom. In-
fact it can be quite the opposite.
The system has been designed
to respectfully deal with a
person’s or company’s financial
circumstances.
In essence it’s simply a reset
button which can take away
inordinate amounts of pressure
from an individual under
financial strain.
We don’t have to look far to see
success stories of people and
companies who have used the
insolvency process to keep on
going and become stronger and
more resilient in their personal
and business life.
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