Unintended consequences arising on the deregistration of a corporate entity.
"How can the ATO issue a director penalty notice for a deregistered company?" That was the question a perturbed former company director asked me.
The background to this conversation was as follows:
- The company ceased trading a few years ago.
- It had no assets.
- There was legacy Australian Taxation Office (ATO) debt of approximately $180,000 relating to unpaid BAS, SGC, penalties and interest.
- The annual Australian Securities and Investments Commission (ASIC) review fee had not been paid for several years.
- ASIC subsequently took steps under section 601AB(1A) and (1B) of the Corporations Act 2001 to deregister the company.
- A year after the company was deregistered, the ATO issued the DPN.
As many readers know, the practical effect of a 'non-lockdown' DPN is to give notice of the personal liability of the directors for certain company tax debts incurred and owing (e.g. GST; SGC; PAYG). Personal liability is only remitted if, within 21 days of its issuance, the directors cause the company to pay the debt, the director/s pay the debt personally, or they place the company into external administration (i.e. liquidation, voluntary administration, or small business restructuring).
In this instance, due to at least one year's annual review fees remaining unpaid for over 12 months, ASIC took steps to deregister the company. The effect of deregistration is that a company no longer exists as a legal entity, and any property held immediately prior to deregistration vests in ASIC or if held on trust, such property vests in the Commonwealth.
When the directors ceased trading the company some years back, they paid all debts except (and as is often the case) the outstanding ATO debt. Upon ASIC's notice to deregister the company, the directors naively believed that once the company was deregistered the debt would not be owed as the company would no longer exist. Because of this, they wilfully ignored the ASIC review fee requests.
What the directors were unaware of was that the ATO reference tax debts to an entity's Australian Business Number (ABN). Company deregistration has no effect on an ABN status (nor the deregistered company's underlying debt which remains due and payable). ABN holders must apply to the ATO to cancel an ABN, and the ATO will not oblige when tax debts are owing. In this case, the ATO, through its debt collection process (now ramping up to pre-COVID levels), issued the DPN in relation to tax debts incurred prior to company deregistration.
Options available to the directors
First, paying the tax debt was ideal; however $180,000 was not within their financial means.
Second, they could appoint an external administrator, however as the company was no longer registered, this was not possible.
Third, they could apply to ASIC to reinstate the company so it is taken to have continued in existence as if it had not been deregistered and is subject to all of the Corporations Act requirements. This is referenced in ASIC Regulatory Guide 83, which includes the following:
- ASIC may reinstate a company's registration under section 601AH(1) of the Corporations Act if satisfied that the company should not have been deregistered.
- ASIC may also reinstate a company's registration under section 601AH(1A) if the company was deregistered under section 601AB(1B) and ASIC receive an application for reinstatement and payment of the company's outstanding fees and related penalties.<
- A person who was a director, secretary, or member of a company at the time of deregistration, or a third party, may apply to ASIC for reinstatement of a deregistered company.
- Reasons and supporting documentation must be provided to support the view that the company should not have been deregistered.
Fourth, they could apply to the court for the reinstatement of the company, Regulatory Guide 83 states "Regardless of whether ASIC can reinstate a company, an application may be made to a court for reinstatement. This is referred to as a 'court reinstatement'".
Finally, they could do nothing and allow the DPN to "crystalise" thereby crystalising their personal liability of $180,000 (on a joint and several basis).
In considering the above options, the concern was less about whether ASIC would reinstate, but more so on the timing. The DPN's 21-day deadline made it highly unlikely that ASIC would reinstate the company within this time frame. Several days had already been lost in seeking advice on this matter.
The more certain, but significantly more costly route, was as an urgent application to court for the company's reinstatement, coupled with a request to appoint a liquidator. The downside of course was the legal costs which ran into many thousands of dollars—exacerbated by the fact that the application was urgent. Of course, not to mention the personal stress involved.
Take-home for advisors
DPNs are the poison chalice used by the ATO as part of its debt collection strategy. As illustrated above, clients who live in a space of denial will pay a far greater price in the end. If a company is insolvent, particularly where the ATO is a creditor, serious consideration should be given to appointing a liquidator to wind up the company's affairs and address the directors' personal exposure to the ATO, at least in respect to non-lockdown DPN liabilities. This real-life example is good reason for thinking carefully before allowing a company to be deregistered by ASIC.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.