Liability of directors for tax if certain payments are set aside

11 Oct Liability of directors for tax if certain payments are set aside

The Corporations Act (“the Act”) has been amended to include section 558GA which gives the Commissioner of Taxation a right to recover from directors personally an amount of “loss or damage” resulting from a Liquidator successfully recovering from the Commissioner for Taxation payments which are ordered to be an unfair preference.

Section 588FGA provides that:

(1) This section applies if the Court makes an order under section 588FF against the Commissioner of Taxation because of the payment of an amount in respect of a liability under any f the following provisions of the Income Tax Assessment Act 1936 or under a provision of Subdivision 16-B Schedule 1 to the Taxation Administration Act 1953.

(2) Each person who was a director of the company when the payment is made is liable to indemnify the Commissioner in respect of any loss or damage resulting from the order. The obligation to indemnify means that the directors must fully compensate the Commissioner for all losses incurred because of the failure to retain the payment voided by the Company’s Liquidator under Section 588FF of the Act. This means that directors are liable for interest required to be paid by the Commissioner on the repayment amount and also the Commissioner’s reasonable legal costs. Section 588FGB provides a number of defences to a director including:

• that the director had reasonable grounds to expect that the company was solvent and would remain solvent even if the payment was made;
• that the director relied on a competent and reliable person in providing the director with adequate information concerning the company’s solvency;
• the director did not take part in the management of the company because of illness or some other good reason;
• the director took all reasonable steps to prevent the company from making the payment.

The Act captures every person who was a director when the payment was made, whether there were a director before the Liquidator was appointed, or a person who was not a director when the debt was incurred. The section raises the interesting position that directors of insolvent companies may be found personally liable for not only incurring debts whilst the company was insolvent but for paying tax debts before the liquidation, even if the company was solvent at the time the tax debt was incurred. Directors must be aware of the Commissioner relying on the personal indemnities of company directors pursuant to section 588FGA before negotiating payment plans with the Commissioner particularly where there is a risk that the company may be wound up within 6 months. In Palmer v. Commissioner of Taxation [2006] NSW SC 1253 it was stated that:

it is not a defence to a claim under section 588FGA that the director acted honestly when he made the payment. It is not a defence that he acted reasonably, or that he thought he was doing the right thing in using the company’s money to pay the principal creditor.

For further information please contact Ian Smith.