As a business owner and company director, being in financial difficulty and then receiving a Director Penalty Notice (DPN) can be a distressing experience.
Other than payment to the ATO, there are 3 options available to satisfy a DPN and avoid a director being personally liable. These options are:
- Placing the company into Voluntary Administration, which provides an opportunity to save the business through a plan called a Deed of Company Arrangement (DOCA);
- Placing the company into Liquidation; and
- Undertaking a Small Business Restructure.
In this article, we focus on the small business restructure (SBR) and how it can be applied in cases of financial difficulty.
What is a Small Business Restructure?
A Small Business Restructure allows eligible businesses to compromise their debts with its creditors’ agreement and maximise their chances of trading profitably in the future. It also allows for business owners to remain in control of their business during the restructuring period.
An SBR can be an effective and quick way to deal with a Director Penalty Notice (or financial difficulties before a DPN is issued), providing the business qualifies and the company director can put forward a viable plan.
Small Business Restructure Main Qualifying Criteria
- Unsecured debts under $1m (excluding employee entitlements);
- Outstanding employee entitlements (including superannuation) must be paid; and
- Lodgements (tax returns and BASs) must be up to date.
Small Business Restructure Process
- SBR Practitioner Appointed:
Control of the business remains with the director, and the company continues to trade. - Moratorium:
There is a moratorium on creditors enforcing their rights against the company and personal guarantees during the SBR process. - Plan to Creditors:
A plan is prepared to be put to creditors within 20 to 30 days, which could include lump sum payments, instalments, a percentage of trade profit, or the sale of assets – it is individualised to the business’ specific circumstances. - Report:
The SBR Practitioner will provide a report to all creditors comparing expected cents in the dollar return under the plan compared to a potential liquidation return. - Voting:
Creditors have 15 days to vote to accept or reject the plan. Related party creditors cannot vote.
Small Business Restructure Plan Outcomes. What Happens Next?
If 50% of the value of unrelated creditors vote in favour, the plan is accepted, all admissible debts are bound, and any remaining debt is released upon satisfaction of the plan terms.
If the plan is not accepted, the SBR appointment ends, the company carries on and all company debts remain. The personal liability under a non-lockdown DPN is avoided, but the ATO is likely to take further action to recover the unpaid taxes. In those circumstances and Voluntary Administration or Liquidation may need to be explored.
Maximising Creditor Support for a Proposal
To maximise the chance of the ATO and other creditors supporting a proposal, some key considerations include:
- Contribution Rate:
Financial capacity and time period for payments and return to creditors compared to a liquidation scenario. - Details on Improvements:
Providing details concerning the business’ background, factors that led to financial distress and improvements to avoid a repeat of the situation. - Related parties:
There are circumstances where it can be appropriate for related party loan accounts to be forgiven.
How an Insolvency Lawyer Helps Satisfy a Director Penalty Notice
The most important action for directors who receive a Director Penalty Notice is to act swiftly due to the time-critical consequences associated with DPNs. Seeking advice from an insolvency lawyer can help directors explore the options available, whether that be small business restructuring, voluntary administration or entering into liquidation. It’s important to look wholistically at the circumstances of not only the business, but also related entities and the directors personally.
BlueRock’s Melbourne-based insolvency lawyers are here to assist company directors (and their accountants) by providing personalised advice and developing effective strategies to address company financial distress and DPNs. Submit the form below, and we’ll be in touch to arrange a consultation.
