AUSTRALIAN TAXATION OFFICE (ATO) WINDING UP PROCEEDINGS

The most active creditor pursuing winding up proceedings in Australia is the Australian Taxation Office (ATO). The role the ATO plays in ensuring insolvent companies are closed down and removed from the marketplace was particularly made evident in March 2020, with the ATO virtually stopping all collection activity during the COVID-19 pandemic. This resulted in insolvency numbers being halved from pre-pandemic levels for the next 2 years.

The ATO has since May 2022 signalled its intention to again commence normal recovery action.

While the ATO have signalled their intention to commence recovery proceedings, winding up actions has not commenced as of August 2022 to pre-pandemic levels.

This is predominantly because the step of closing down a company is seen as a step of last resort:

“Liquidation is the ultimate sanction for a corporate debtor that does not pay or make acceptable arrangements to pay a debt” – PS LA 2011/16

The ATO has recently concentrated on issuing director penalty notices (DPN’s) to directors however we are likely to see an increase in winding up action once the “last step” in the process is again pursued.

No, the ATO cannot simply close down a company. As advised above, the closing down, or winding up of a company, is seen as a step of last resort.

The ATO’s compliance model determines the strategies adopted to achieve overall compliance, with the aim being that assistance and enforcement actions can be tailored to improve compliance.  This model suggests that there is a time lag between when the ATO initially detects a taxpayer’s noncompliance to when the ATO commences recovery action, followed by winding up action as the step of last resort.

The below outlines the steps involved in securing ATO compliance.

ATO undertake an assessment of the taxpayer and past attempts to address tax debt. Winding up is seen as a “last resort” with the ATO making an assessment if other compliance attempts have been exhausted. The ATO has likely already attempted to engage with the taxpayer on multiple occasions and/or the taxpayer has breached various previous arrangements with the ATO to address the debt. See below the general and specific factors considered by the ATO when undertaking bankruptcy or liquidation proceedings.

After the ATO has determined to proceed with winding up, the first step will be the issuing of a statutory demand to the debtor requiring payment within 21 days.

The statutory demand is served on the registered address of the company. This can be problematic where the company ASIC register address details are not kept up to date with some directors being unaware that the statutory demand has been issued.

If you have received a statutory demand, you will have 21 days to either pay the debt or seek to set aside the statutory demand.

There may also be an opportunity to negotiate an arrangement or payment plan with the ATO after receipt of the statutory demand, depending on individual circumstances. Acceptance of any payment plan or other arrangement will be at the discretion of the ATO.

It is vital that you immediately seek advice from both an accountant and solicitor about your options if you have received a statutory demand. There are other restructuring options available to you, depending on your company’s financial circumstances.

After the expiry of the statutory demand, the ATO can commence winding up proceedings under s459P of the Corporations Act based on the company’s failure to comply with the statutory demand.

The Company will then receive notice a Notice of Filing of Hearing. This notice will specify a court date during which the court will consider whether or not to appoint a liquidator to the Company.

When this has occurred:

• It may be too late to make any arrangements with the ATO at this stage in some instances.
• The director can no longer appoint a liquidator and can only appoint an administrator to the company. The administrator’s appointment must be for a proper purpose.

You should seek professional advice from your accountant and solicitor to discuss your options further. Alternatively, you can contact Shaw Gidley to discuss if the appointment of an Administrator is a viable option for your company.

An example of court documents and a notice of filing and hearing is shown below:

Prior to issuing a statutory demand, the ATO will consider a number of matters, including, but not limited to:

• The asset position of the debtor.
• The size and nature of the debt – i.e. debts that are escalating or is the debt being disputed - although this is not in itself sufficient to prevent liquidation action.
• The future income of the debtor – where a debtor can demonstrate that the financial position will improve and debts will be paid in full (not appropriate for debtors who have a history of failing to honour promise to pay).
• The risk to the revenue – disposition of property or evidence that the debtor is taking steps to limit their ability to pay.
• Cost-benefit analysis of initiating proceedings v the likely return.

Factors specific to personal bankruptcy:

• Specific circumstances of the debtor – i.e. if age or ill health have an impact on the debtor’s poor financial circumstances.
• Likely future income contributions debtors would be required to make from their income.

Factors specific to liquidation:

• ATO may issue director penalty notices before taking liquidation proceedings if the company’s debts are under the withholding tax provisions or are for SGC. This could result in directors becoming personally liable to the ATO for the company’s debts.
• Where a corporate debtor has ceased trading or has been struck off by ASIC, or both, the ATO will not usually initiate liquidation proceedings unless there is a compliance-based justification.
• Where it is apparent that the company has been trading whilst insolvent the ATO will consider seeking its liquidation.
• Public interest factors such as evidence of fraudulent or criminal activity – i.e. systematic phoenixing.

• Company received a garnishee notice in 2013 and entered into various payment arrangements
• Company ATO running balance account was in deficit since July 2014.
• Company was issued with statutory demands in November 2015 and March 2016.
• Director managed to negotiate further payment arrangements following this date but continued not to engage with the ATO and did not report liabilities.
• The ATO assessed unpaid SGC entitlements for the period 1 July 2014 to 31 December 2016.
• A further statutory demand was issued on 15 March 2017.
• Company was wound up and a liquidator was appointed in July 2017.
• Director illegally phoenixed the business to another entity and refused to assist the Liquidator. Illegal phoenixing involves the transfer of a company’s assets and business below market value or for no market value.
• Following court examinations conducted on the director, the Liquidator established that the director paid approximately $200,000 to a pre-insolvency adviser in fees to assist him in the phoenix.
• In addition, the liquidator also found that the Company was insolvent since the statutory demands were issued in November 2015 and March 2016 and that the director had been trading whilst insolvent despite the ATO accepting the payment arrangements put forward.
• The director ultimately settled with the Liquidator for $260,000 in respect of various claims including insolvent trading.
• The ATO may yet proceed with the recovery of the unpaid SGC plus future unreported and unquantified SGC and PAYG under the Lockdown DPN against the director personally.

In this scenario, the Director:

• Should have sought early professional advice in around November 2015 when the first statutory demand was issued. An insolvency / restructuring practitioner would have been able to recommend various options to the director which would likely have avoided the above consequences and resulted in a better outcome for all parties involved.
• Should not have sought advice from the pre-insolvency adviser. In this case, the pre-insolvency adviser was not a registered liquidator and acted as an “unregulated adviser”. The funds paid to the pre-insolvency adviser were excessive and advice improper, if not illegal. directors should always seek advice from a registered liquidator or solicitor about these matters. We recommend directors obtain advice from a registered professional member of the Australian Restructuring, Insolvency & turnaround Association.

Where the ATO have commenced winding up proceedings, the director is no longer able to appoint a liquidator to the company however may consider appointing a voluntary administrator. The administration process allows the director to make an offer to creditors to pay back the outstanding debt with creditors voting on whether to accept or reject the director’s offer at the end of the administration period.

Section 435A of the Corporations Act 2001 states that:

The object of an Administration is to provide for the business, property and affairs of an insolvent company to be administer in a way that:

1. Maximises the changes of the company, or as much as possible of its business, continuing to exist; or
2. If it is not possible for the company or its business to continue in existence--results in a better return for the company’s creditors and members than would result from an immediate winding up of the company.

In determining whether to vote for an alternative arrangement, if an Administrator is appointed, the ATO will regard:

• Adequacy of the relevant report including its content.
• Liabilities not yet established such as unissued assessments or outstanding lodgements.
• Arrangements the debtor has made to meet future tax liabilities as and when they fall due.
• Debtor’s and relates parties and entities compliance history.
• Seriousness of any tax offences committed.
• Likelihood the proposal would be achieved.
• Association between the debtor and other creditors (including assignments of debt);
• Where debtors are not being candid about affairs – the fact that the administration process may not provide extensive investigation tools as compared to a liquidation.
• Other factors where voting for proposal removes power to investigate, examine and claw back assets.
• Any voidable transactions or dispositions which may not be pursued.
• Benefit to the commonwealth revenue that is expected from the proposal.
• The order of distribution between all classes of creditors (must not unfairly prejudice or discriminate).
• In rare circumstances where eligible employee creditors vote to alter their priorities in respect of wages, and in particular SGC, the ATO will undertake a thorough investigation of the circumstances prior to deciding to support such a proposal.

• ATO pursued winding up of the company.
• A hearing date was set and the ATO proposed a Shaw Gidley liquidator to be appointed.
• Administrators were appointed prior to the court hearing.
• Administrators planned to sell, and indeed did sell, the business of the company prior to the winding up hearing to a related party at auction value. Sales proceeds were insufficient to pay out the debts of the company.
• ATO challenged the nature of the purpose of the administrator’s appointment shortly prior to the winding up proceedings being commenced.
• Administrators argued that they should continue to stay on as liquidators as they had knowledge of the matter and there would be significant cost savings in retaining them.
• Court appointed a Shaw Gidley liquidator.
• Had the administrator not been appointed, the liquidator could have sold the business to the related party.
• The additional cost of the Administration process resulted in insufficient funds being available pay any return to priority creditors for liabilities such as superannuation with the ATO now able to pursue the directors personally for any shortfall.
• In these circumstances the directors would have been better off allowing the court to appoint a Liquidator to the company rather than conducting the Voluntary Administration.

ATO Website - 

https://www.ato.gov.au/General/Paying-the-ATO/If-you-don-t-pay/#:~:text=A%20statutory%20demand%20requires%20the,to%20wind%20up%20the%20company.

PS LA 2011/3 – Compromise of undisputed tax-related liabilities and other amounts payable to the Commissioner - 

https://www.ato.gov.au/law/view/document?docid=PSR/PS20113/NAT/ATO/00001

PS LA 2011/4 - Collection and recovery of disputed debts - 

https://www.ato.gov.au/law/view/document?docid=PSR/PS20114/NAT/ATO/00001

PS LA 2011/7 - Settlement of debt litigation proceedings - 

https://www.ato.gov.au/law/view/document?docid=PSR/PS20117/NAT/ATO/00001

PS LA 2011/14 - General debt collection powers and principles - 

https://www.ato.gov.au/law/view/document?docid=PSR/PS201114/NAT/ATO/00001

PS LA 2011/16 - Insolvency - collection, recovery and enforcement issues for entities under external administration - 

https://www.ato.gov.au/law/view/document?docid=PSR/PS201116/NAT/ATO/00001

PS LA 2011/17 - Debt relief, waiver and non-pursuit- 

https://www.ato.gov.au/law/view/document?docid=PSR/PS201117/NAT/ATO/00001

PS LA 2011/18 - Enforcement measures used for collection and recovery of tax-related liabilities - 

https://www.ato.gov.au/law/view/document?docid=PSR/PS201118/NAT/ATO/00001

PS LA 2011/21 - Offsetting of refunds and credits against taxation and other debts - 

https://www.ato.gov.au/law/view/document?docid=PSR/PS201121/NAT/ATO/00001

AUSTRALIAN TAXATION OFFICE DIRECTOR PENALTY NOTICE  - 

https://shawgidley.com.au/blogs/director-penalty-notices

AUSTRALIAN TAXATION OFFICE (ATO) PAYMENT PLAN / ARRANGEMENT  - 

https://shawgidley.com.au/blogs/australian-taxation-office-ato-payment-plan-payment-arrangement

AUSTRALIAN TAXATION OFFICE GARNISHEE NOTICES  - 

https://shawgidley.com.au/blogs/garnishee-notices

AUSTRALIAN TAXATION OFFICE (ATO) CREDIT REPORTING  - 

https://shawgidley.com.au/blogs/ato-creditor-reporting