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Amid the stress of running a business that’s heading towards insolvency, it’s common for business owners to avoid dealing with what can feel like an unending wave of challenges.
The combination of immense pressure and hope leads to a tense cycle of “if we can just…” statements, which go on repeating until it appears that every possible avenue has been exhausted and the owner finally seeks advice.
There are many factors that determine how long this cycle lasts, but our experience has shown us that it’s often much longer than it should. By the time advice is sought, it’s not uncommon for business owners to reveal that they have received a Director Penalty Notice (DPN) from the tax office – either recently or even months before. This generally occurs when you:
- have not engaged with the ATO about outstanding debt
- don’t have an active payment arrangement
- have a tax debt over $100K
- have outstanding superannuation guarantee amount
A DPN can come in the form of a “lockdown DPN” or a “non-lockdown DPN”, with the latter being the most common and providing 21 days from the date of issue to act.
With ASIC reporting a 36.2% increase in corporate insolvencies year on year, it’s likely that we’re going to see the currently low personal insolvency figures return to (or even exceed) historical standards, particularly as the ATO ramps up efforts to pursue debts attached to DPNs.
Whether you have received a non-lockdown DPN as a warning, or a lockdown DPN advising that you are now personally liable for outstanding business tax debt, it’s important not to ignore it.
Although we would always hope to be able to help a company before it reaches this point, our approach remains the same…
A 3-phase approach to regaining clarity and control
1. Explore options: Every engagement with RSM’s restructuring and recovery team, whether formal or informal, starts with a conversation. We need to understand the problem so we can determine the options available to you. Through further engagement, we then map out these options and use them to develop a strategy for moving forward.
2. Implement a strategy for the business debt: Once a strategy is agreed on, we work with you to implement it. In the case of restructuring the business, this might include negotiating with creditors, streamlining operations, selling non-core assets, and exploring funding options. In administration, it might mean that we step in to manage the business for a period. In the case of insolvency, you may appoint our registered liquidators and we will commence the process of winding up the business and negotiating with your creditors.
3. Deal with the personal debt: Sometimes, actions taken in phase 2 to help the business recover mean that a non-lockdown DPN no longer applies. Tax debt is settled, and the business can continue its recovery. In situations involving a lockdown DPN and subsequent liquidation, directors must remember that the DPN they received still applies. And while the tax office cannot act on this during the liquidation process, it’s quite certain they will once it ends.
How we help directors deal with a DPN
Our ability to assist with a DPN depends on whether we have acted as administrators or liquidators in the wind up of the business. If we have, we cannot directly act on your behalf to resolve your DPN. It’s purely a conflict of interest issue; if we act for your business debt, we cannot act for your personal debt and vice versa.
However, we can and do continue you to support you by:
(a) making sure you are aware of the ongoing DPN
(b) helping you understand your options to devise a strategy to address it
(c) connecting you with trusted professionals who can provide the services you will need
If we have not acted as administrators or liquidators for your business, our registered trustees can help you resolve your DPN. What this looks like depends on how much you owe and your personal circumstances. Some of the possible options include…
Informal agreements – This is where we help you negotiate payment plans or deals with the tax office and any creditors with whom you have a personal guarantee for outstanding debts. Informal agreements are generally useful when debt amounts are low and/or there are few creditors.
Personal insolvency agreement (PIA or Part X) – For larger debt amounts (typically over $100K), where you may wish to keep your home and avoid bankruptcy, a well-structured personal insolvency agreement can provide a valuable alternative to bankruptcy. In these cases, you appoint us as a personal controlling trustee and we assist you to propose a binding agreement with all your creditors (including the ATO). Repayment can take the form of a lump sum with support from a lender or a third party, repayments over a period of time, or a mix of both.
A PIA provides certainty because they ensure all known and unknown creditors with claims or even personal guarantees are captured, and cannot pursue you in the future.
Bankruptcy – When you owe a lot of money or repaying what you do owe is impossible, bankruptcy is often the quickest and most cost-effective solution. It's usually not as daunting as people fear, and provides a path to resolution so you can move forward with life. There are even still ways to explore saving the family home. If you jointly own your home, the co-owner might be able to buy out your share in the home which then allows your family to retain the property.
Act now if you have received a DPN
It’s vital to note that once you receive a lockdown DPN, any financial issues your business was facing have now become a personal issue too. While your trusted advisor cannot help you resolve both, they should always be looking at your situation holistically to ensure you have maximum clarity across the full spectrum.
Ideally, if your business is on a trajectory towards insolvency, get advice now. At RSM, even if we’re not the best fit for your situation, we will always be able to recommend other sources of support that may be. This is even more critical if you have received a non-lockdown DPN, as the advice you get may help you avoid becoming personally liable for your business debt.
If you have received a lockdown DPN, or are dealing with a DPN from a business that was wound up months (or even years) ago, it’s time to face it head on. As the ATO continues with its determination to recover outstanding debt, your ability to resolve the debt on your terms will diminish the longer you wait.
Reach out to us, have a chat about your options, and then decide what you want to do. Taking the first step towards regaining clarity and control could be the best decision you make for your business, yourself, and your future.
