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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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