The end of the insolvency relief measures – including the $90 billion JobKeeper wage subsidy scheme – is widely tipped to bring the biggest economic shock since the pandemic itself, leading to many unprofitable businesses closing and jobs being lost.
Such was the impact of the lockdown that a ‘tsunami’ of insolvencies was anticipated. Our economy, however, has been quite robust and defied this outcome. Whilst some indicators show a turbo-charged recovery in many market sectors, experts are still waiting on the fallout of insolvencies.
Statistically, the number of companies entering liquidation or voluntary administration halved in 2020, despite Australia suffering its first recession in three decades. As a matter of logic, the number of insolvencies must rise.
Surprisingly, there have been very few appointments of small business restructuring practitioners under reforms to insolvency laws which introduced a ‘debtor-in control’ model. Such was the anticipated demand for this new form of administration, a temporary relief period (providing extended protection from liability for insolvent trading) was introduced to give eligible companies time to find an insolvency practitioner who was available (and willing) to take the appointment. That demand did not eventuate. There have been a total of 8 appointments to date and only 4 restructure plans.
The small number of appointments can probably be attributed to factors which put a small business restructure beyond the reach of many companies. For example, for a company to be eligible, it must have liabilities that do not exceed $1 million, and it is a precondition to submitting a restructuring plan to creditors that a company have paid all employee entitlements and lodged all returns. Insolvency practitioners have also expressed reluctance in taking on such an appointment.
In the absence of trade creditors, landlords, banks and the ATO taking affirmative recovery action, the tide of insolvencies may continue at a slow rate.
The Australian Taxation Office has indicated that it will now start to take steps to collect unpaid taxes. The ATO has invited businesses to engage with it and seek to enter payment arrangements. Generous terms are likely to be offered. Indeed, a more hard-line approach from the ATO would run counter to the objectives of the relief measures in the first place. However, uncollected tax now stands at a staggering $50 billion. No doubt the federal government will be looking to tap this source of revenue to fund the various programs to be delivered under the budget for the 2022 financial year and beyond.
In the circumstances, businesses can expect the ATO to escalate recovery activity in the near future. This may not mean businesses will immediately receive statutory demands which are a precursor to winding-up proceedings. However, we can probably expect to see the ATO deploy other measures such as Director Penalty Notices (DPN) and Garnishee Notices.
Director Penalty Notice
A DPN imposes personal liability on directors for unpaid tax debts. A DPN issued as a result of a company failing to lodge its IAS/BAS returns within 3 months of the due lodgment date and failing to remit the debt due is described as a ‘lockdown’ DPN. A lockdown DPN does not allow the directors to avoid personal liability by placing the company into liquidation or voluntary administration. That is, their personal liability is ‘locked down’ and can only be avoided by payment of the debt or relying on one of the defence provisions.
A ‘non-lockdown’ DPN can be issued where the IAS/BAS returns have been lodged within the lodgment period but payment has not been remitted. In this case, the directors can avoid personal liability by having the company placed into liquidation or voluntary administration within 21 days of receiving a DPN.
In many cases, these measures are likely to result in directors taking the initiative of making the appointment of a voluntary administrator or calling a meeting of members to consider a resolution to wind up a company.
Insolvency practitioners often advocate for companies in financial distress to consider a restructure before its enterprise value is destroyed or deteriorates further. Moreover, if the wave of insolences eventuates, companies may find creditors less sympathetic to a restructure in the maelstrom of other failures which also affect their own business.
Even if tax debts cannot be paid, returns should still be lodged within the prescribed timeframe. Where an insolvency is likely, a proactive approach to a restructure may provide the best prospects of the underlying business surviving.
~ with Christian Mennilli, Lawyer