This post summarises the key findings of my article 'Director Penalty Notices – Promoting a Culture of Good Corporate Governance and of Successful Corporate Rescue Post Insolvency'.
The Australian director penalty regime under Division 269 to Schedule 1 of the Taxation Administration Act 1953 (Commonwealth) imposes an obligation on a company’s directors to cause the company to comply with its corporate employee taxes, or to cause the corporation to take certain steps, including appointing an administrator or winding up the company. The Australian Commissioner of Taxation (‘Commissioner’) is empowered to take action against the company’s directors to recover those outstanding tax debts of a company if these obligations are not complied with, subject to some very limited defences.
The Commissioner’s tax priority in a corporate insolvency was abolished in 1993, based on recommendations by the Australian Law Reform Commission in the General Insolvency Inquiry, known as the Harmer Report. The director penalty regime was introduced as a substitute for the Commissioner’s tax priority in a corporate insolvency and was aimed at encouraging directors to take early positive action to deal with insolvency.
The most recent changes to the director penalty regime were prompted by the need to deter directors who engage in fraudulent phoenix activities. A proposals paper by the Australian Government Treasury, entitled ‘Action against Fraudulent Phoenix Activity’ in 2009, reported that losses to the revenue authorities caused by fraudulent phoenix activity were estimated to run into the hundreds of millions of dollars and were growing. An analysis of Australia’s director penalty regime, including the most recent reforms, reveals that the regime helps to foster a culture of good corporate governance which is fundamental to achieving successful corporate rescue post insolvency.
Unlike many of the Commissioner’s powers, which predominantly serve a revenue purpose, the director penalty regime has a much closer connection with corporate insolvency law. This connection was considered in DCT v Dick (2007) 67 ATR 762 when Spigelman CJ noted that the director penalty regime serves ‘both revenue and corporations law purposes’ and that the director penalty provisions ‘reach into a core area concerned with corporations, namely their liquidation or administration’. Accordingly, whilst these provisions are principally concerned with the discharge of fiscal obligations, by accelerating collection of corporate employee taxes, they also have a direct connection with the liquidation or administration of companies. This close connection between the director penalty regime and insolvency can be demonstrated by the high rate of insolvencies following the issuing of a director penalty notice (DPN). Between 2011-2012 and 2013-2014, the Australian Taxation Office issued over 27,000 DPNs, and approximately 21 per cent of these taxpayers became insolvent following the issuing of a DPN.
A corporate taxpayer’s complacency in relation to complying with its tax obligations is a common factor of poor business conduct and of pending business insolvency. In that regard, directors who neglect their tax obligations put the company at risk of liquidation and administration and may subject themselves to breaches of other corporate statutory obligations. The director penalty regime provides a mechanism which mitigates this risk by making directors personally liable for such amounts. In that regard, the director penalty regime provides a framework in which good corporate governance is at the forefront. The regime encourages early intervention by directors to take action to resolve cash flow problems as soon as they arise and encourages directors to actively participate in the management of the company. These actions by directors are fundamental to be able to achieve corporate rescue post-insolvency, and to mitigate the insolvency risk to other stakeholders that will be adversely impacted by the demise of the company. Further, even in those cases where the directors fail to take the necessary action to comply with their tax obligations early, the director penalty regime allows for earlier intervention by the Commissioner than under the Commissioner’s former tax priority, which is likely to result in the directors of a company acting promptly to place the company into external administration, thereby increasing any prospects of corporate rescue post-insolvency.
Sylvia Villas is a lecturer at the Adelaide Law School, University of Adelaide.