Liability for new Directors

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If you are about to be appointed as a director of an established company, you may be surprised to learn that you could be liable for historical company debts owing to the ATO.

Liability for Historical Debts

Even though debts may have arisen before their appointment, new directors will become personally liable for the unpaid and unreported PAYG, GST and SGC debts of their company. 

In these situations, new directors have little scope or time to manage their exposure. Even resigning will not avoid liability. A newly appointed director who realises their company has historical debts to the ATO must, within 30 days of their appointment, ensure that the company either:

▪ pays the relevant debts in full;

▪ appoints an administrator or small business restructuring practitioner; or

▪ commences a winding up process.

Director Penalty Notices

Although new directors have personal liability after 30 days, things can still get worse. This is because they face the prospect of Director Penalty Notices (DPNs) and lockdown liability. 

DPNs are notices issued by the ATO to company directors. A director is personally liable for a penalty equivalent to the unpaid ATO debt, and the ATO can commence action against a Director 21 days after a DPN has been issued.

DPNs can be either ‘Non-Lockdown’ or ‘Lockdown’. 

By way of background, non-lockdown DPNs are used if a company doesn’t pay its ATO debt but lodges on time. Under a non-lockdown DPN, Directors can extinguish their liability by ensuring the company pays the debt or commences various insolvency or restructuring processes within 21 days of the notice. 

If action is not taken within 21 days, the DPN locks-down on the director so that they cannot avoid liability by placing the company into external administration. Lockdown DPNs also apply if an ATO debt remains unreported and unpaid 3 months after its due date. 

Lockdown Penalties for New Directors

The key thing to note for new directors is that any historical director penalties will lock down on that new director if they remain unpaid and unreported 3 months after that director’s appointment. At this time, the new director cannot avoid their personal liability by placing the company into external administration.

Hot Tips

If you are thinking about accepting appointment as a director of an established company, there are several things to consider.

Before accepting the appointment, you should ensure that the company’s lodgement history is complete and correct. You should also ensure that the company has actively dealt with all of its tax debts. Speed is essential, as timeframes are vanishingly small.

Aintree Group Legal will be happy to discuss all of your commercial law needs. Contact us today.