When a company faces financial difficulties, directors often consider liquidation or deregistration as ways to deal with debts and close the business. While these processes address company liabilities, they don’t necessarily protect directors from personal liability for unpaid tax debts included in a Director Penalty Notice (DPN).
This article explores how DPNs interact with liquidation and deregistration, common misconceptions about these processes, and what directors must do to safeguard their financial futures.
What is the role of liquidation in resolving DPNs?
Liquidation is a formal process used to wind up a company’s affairs when it cannot pay its debts. A liquidator is appointed to:
Sell the company’s assets.
Repay creditors in order of priority.
Apply to deregister the company once the process is complete.
For directors, liquidation may offer relief from some liabilities, but it does not eliminate all risks associated with DPNs.
How liquidation affects 21-day DPNs
If you act within the 21-day window of a 21-day DPN by appointing a liquidator, you can avoid personal liability for the debts included in the notice. This is because the liquidation satisfies the ATO’s requirement to address the company’s financial position.
How liquidation affects lockdown DPNs
Lockdown DPNs are not affected by liquidation. Directors remain personally liable for these debts regardless of the company’s liquidation status.
Key takeaway: Liquidation is a viable option for addressing 21-day DPNs but does not resolve lockdown DPN liabilities.
What is deregistration and how does it relate to DPNs?
Deregistration is the process of removing a company from the ASIC register, effectively ending its legal existence. It is often pursued by directors of solvent companies that have ceased trading.
Voluntary deregistration
This process is available if the company:
Has no outstanding debts.
Is not involved in legal proceedings.
Meets other criteria set by ASIC.
ASIC-initiated deregistration
ASIC may deregister a company if it:
Fails to pay annual review fees.
Does not lodge required documents.
Is inactive for a prolonged period.
How deregistration affects DPNs
Deregistration does not protect directors from DPN liabilities. In fact, lockdown DPNs can still be issued after a company has been deregistered, leaving directors personally liable for unpaid PAYG, GST, or SGC debts.
Common misconceptions about liquidation and deregistration
Misconception 1: Liquidation eliminates all DPN liabilities
While liquidation can clear liabilities under a 21-day DPN, it has no impact on lockdown DPN debts. Directors are still personally liable for unpaid amounts tied to late-lodged or unlodged returns.
Misconception 2: Deregistration prevents future DPNs
Deregistering a company does not erase tax debts or prevent the ATO from issuing a lockdown DPN at a later date. The ATO can still pursue directors personally for unpaid amounts.
Misconception 3: Liquidation is always the best option
Liquidation is not suitable for every situation. For viable businesses, alternatives like Small Business Restructuring may offer better outcomes, allowing the company to continue trading while reducing debts.
Case Study: Lockdown DPNs after deregistration
The situation
Laura was a director of a retail company that ceased trading and was deregistered by ASIC for non-payment of annual review fees. Two years later, the ATO issued a lockdown DPN for $50,000 in unpaid GST debts, making Laura personally liable.
The outcome
Since the GST returns had not been lodged on time, Laura was unable to dispute the DPN or shift liability back to the company. She had to use personal funds to pay the debt.
The lesson
Had Laura appointed a liquidator before deregistration, she could have resolved the company’s affairs more effectively and avoided the lockdown DPN.
Best practices for directors facing DPNs
1. Act quickly on a 21-day DPN
If you receive a 21-day DPN, appointing a liquidator or restructuring practitioner within the deadline can clear liability for eligible debts.
2. Lodge returns promptly
Late lodgement or non-lodgement of BAS, IAS and SGC returns is a common trigger for lockdown DPNs. Ensuring timely lodgement reduces your risk of personal liability.
3. Use liquidation strategically
For companies that are no longer viable, liquidation can help:
Address unpaid debts.
Prevent further financial damage.
Clear liability for 21-day DPNs.
4. Avoid unplanned deregistration
Ensure all financial obligations are resolved before allowing your company to be deregistered, whether voluntarily or by ASIC.
5. Seek professional guidance
Consult with insolvency experts to evaluate your options, particularly if your company is struggling with tax debts or facing enforcement action from the ATO.
FAQs about liquidation, deregistration, and DPNs
Q: Can a DPN be issued after liquidation?
Yes, but only for lockdown DPN debts. These liabilities can be pursued regardless of the company’s liquidation status.
Q: Is voluntary deregistration a safe option?
Voluntary deregistration is only safe if the company has no outstanding debts. Otherwise, directors remain liable for unpaid amounts, including those tied to a DPN.
Q: Can I reinstate a deregistered company to resolve DPNs?
Yes, but reinstating a company is a costly and time-consuming process. It’s better to address financial issues before deregistration occurs.
Key takeaways
Liquidation and deregistration are important tools for addressing company debts, but they are not guaranteed solutions for resolving Director Penalty Notice liabilities. Directors must act strategically and understand the implications of these processes to avoid personal liability.
If your company is facing financial challenges or you’ve received a DPN, contact Business Reset today. Our team can help you evaluate your options and develop a plan to protect your financial future.
Coming soon: Paying off DPN debts: Strategies to minimise financial impact
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