Commonly Asked Questions

A company is technically insolvent if it cannot pay its debts as and when they fall due. In some instances this may be a temporary cash flow issue in many instances it is the sign of underlying problems that need professional advice.

Insolvent trading is when a company continues to trade and incur debt whilst it is insolvent. It is an offence for a director to allow a company to trade whilst insolvent. Should the company be placed into liquidation a director can be liable for the debts incurred after the date the company was determined to be insolvent.

A Notice of a Directors Liability to Pay a Penalty to the Commissioner of Taxation (commonly referred to as a Director Penalty Notice or DPN) is a notice sent from the Australian Taxation Office to a director of the company in respect of outstanding Pay as You Go Withholding debts or Superannuation debts that requires them to complete one of three options within twenty one (21) days from the date of the Notice. The options are pay the debt, place the company into Voluntary Administration or Creditors Voluntary Liquidation. If one of these options is not completed within the time frame a director becomes personally liable for the debt amount detailed in the notice.

In circumstances where directors have not lodged the Business Activity, Installment Activity or SGC Guarantee Statements, as the case may be, within three months of their due dates, then the director is automatically personally liable for these debts. In these situations the DPN will not provide any options other than for the director to pay the debt. These are referred to as “lockdown” notices. Invariably these notices will be followed by debt recovery action from the Australian Taxation Office against the director personally.

Generally a company’s director is not liable for a company’s debts, with the following exceptions:

• Debts which the director has personally guaranteed.
• A liability to the ATO under a Director Penalty Notice as detailed above
• Any liability for insolvent trading
• Any traffic infringements from company vehicles where no nomination of a driver has been made.