Rising tide of financial distress


Rising tide of financial distress

There is a rising tide of concern that we will soon see significant financial distress in the private sector.  Sobering headlines such as ‘Building industry facing slump‘ (The Age, 20 May 2022) remind us that the worst of the post-pandemic predictions – an “insolvency tsunami” – have yet to arrive, but may not be too far off.

With surging costs of materials, supply chain delays and interest rate hikes, a perfect storm looms on the horizon.  Indeed, the Australian Taxation Office has announced it expects “a number of insolvencies to occur in the coming months as the economy normalises”.

ATO activities

The ATO is now escalating its recovery efforts to get in approximately $60B of unpaid tax debt.  The ATO recently despatched 50,000 letters to taxpayers who are a high risk or have refused to engage with the ATO, with a warning to directors of possible Director Penalty Notices (DPNs) for their company’s failure to meet tax liabilities arising through the pandemic.

The ATO is currently issuing 30 – 40 DPNs each day and expects that number to increase.

What is a DPN?

A DPN is a formal notice issued by the ATO to directors which can impose personal liability for unpaid PAYG, GST and superannuation (including an estimate of the tax liability if lodgements are not up to date).

A DPN typically requires a director to pay the tax liabilities or take remedial action, such as appointing an external administrator, with 21 days.  If a director fails to do so, s/he may become personally liable for those debts.

Insolvent trading

Directors may also be exposed to personal liability for their company’s unpaid debts if they allow the company to trade whilst insolvent.  Directors have a positive duty to prevent their company from incurring debts when it is insolvent, or will become insolvent as a result of incurring those debts.

ASIC may apply for a civil penalty of up to $200,000 and disqualify a director from managing corporations.

If you have received a DPN or think your company might be insolvent …

It is imperative that you act quickly to reduce the risk of personal liability and optimise the outcome for the company.

We recommend that directors seek assistance from an experienced insolvency practitioner who can conduct a thorough review of the company and advise on the available options which may include a restructuring the company’s affairs.

We invite you to contact our of our team who specialise in insolvency and reconstruction to discuss any concerns and your options.