Tag: insolvency

Director’s duty to prevent insolvent trading

ASIC has today released regulatory guidance to assist directors to understand and comply with their duty under the Corporations Act 2001 (Corporations Act) to prevent insolvent trading.

The Corporations Act requires a director of a company to prevent the company from incurring a debt if the company is insolvent, or if the company will become insolvent by incurring the debt or a range of debts including the debt.

“ASIC first contemplated issuing guidance during the downturn in economic conditions when a rise in corporate insolvencies was expected. We thought that the market, including directors and their professional advisers, would benefit from clarification about the factors we consider when deciding to commence an investigation in relation to possible insolvent trading, and issued some proposals in November last year”, ASIC Commissioner, Michael Dwyer said.

“It is important that directors focus on their obligations to prevent insolvent trading and we expect this guidance will assist directors of small-to-medium enterprises, in particular, to fulfil this fundamental responsibility”, Mr Dwyer said.

Regulatory Guide 217 Duty to prevent insolvent trading: Guide for directors sets out four key principles which ASIC considers directors should follow to meet their obligation to prevent insolvent trading, That is, to:

* keep themselves informed about the company’s financial position and affairs;
* regularly assess the company’s solvency and investigate financial difficulties immediately;
* obtain appropriate professional advice to help address the company’s financial difficulties where necessary; and
* consider and act in a timely manner on the advice.

RG 217 also details factors which ASIC will consider when deciding to bring proceedings against a director for allowing a company to trade while insolvent (including criminal proceedings and proceedings to recover compensation for loss resulting from insolvent trading).

Important Changes to Director Penalty Notices

Under the old regime, if a director has received a Director Penalty Notice (“DPN”), he could avoid personal liability for the company’s tax debt by entering into an instalment payment arrangement with the ATO.

Under the new regime, entering into an instalment agreement will not remove the director’s obligations under the DPN. The only thing an instalment agreement will do is to preclude the Commissioner from commencing proceedings to enforce the obligation of the director’s penalty notice for the period while payments are made.

The new regime confirms that a DPN takes effect from the date when it is posted — NOT when it is received by the director (DCT v Meredith).

The notice period of the DPN under the new regime has been extended from 14 days to 21 days before recovery proceedings can be taken against the directors.

To avoid personal liability, the company must appoint a Liquidator or Voluntary Administrator within 21 days from the date of the notice.

The defence of “illness or other good reason” is made more difficult for a director to rely on. In addition to establishing the director was ill or for some other good reason did not participate in the management of the company at the time the relevant tax liability fell due, the director must now also establish that it would have been unreasonable to expect her or him to have taken part in the management of the company at that time. This fixes drafting problems with the existing provisions.

The Court has no power under section 1318 of the Corporations Act to grant relief to a director from their obligations in respect of a DPN. This confirms the existing law in DCT v Dick.

The ATO has no discretion to remit a DPN regardless of circumstance.

Phoenix operator jailed for $6.7 million fraud

James Soong, 65, was today sentenced to three years jail in the Sydney Downing Court for failing to remit $6.7 million to the ATO.

Between October 1995 and July 1998 two companies operated by Mr Soong deducted tax instalments totalling $6.7 million from the wages of their employees. This money was not remitted to the ATO.

When the first of these companies was liquidated the employees were moved into the second company where Mr Soong continued to withhold funds from his employees’ wages without forwarding it to the ATO.

Tax Commissioner Michael D’Ascenzo said this case was an example of a ‘phoenix’ arrangement which involves the deliberate liquidation of a company to avoid paying outstanding debts.

The conviction is the result of a long standing joint investigation conducted by the Australian Federal Police and the ATO.

Soong will serve two years jail before being eligible for parole and has been ordered to pay back $6.7 million to the Commonwealth.