Protecting Directors from unfair preferences with the ATO

Each year as the number of companies entering external administration continues to climb, unfair preference deals with the ATO are being made which may land directors in hot water.

In essence, an unfair preference deal is a payment made to the ATO for outstanding tax liabilities, essentially discriminating one creditor at the expense of another. Often when this deal is made with the ATO, it can be seen as a good solution, as it provides the company room to move in terms of cash-flow. However, this short term fix can end in the Director potentially facing personal liability if the company becomes insolvent.

There are a number of instances when the director can be considered personally liable. This usually occurs when the ATO pursues an indemnity claim against the company director. Generally occurring when liquidators seek to recover preferences from the ATO. This indemnity only extends as far when the unfair preference relates to pay as you go (PAYG) withholding or superannuation guarantee charge liabilities. These elements are outlined in the Corporations Act 2001 (Cth) (Act) under section 588FGA.

However, this indemnity only operates if the Supreme or Federal Court makes an order that a payment is considered an unfair preference. Some of the criteria include that: the payment was made from the company to the ATO within a certain time of the company’s insolvency, that the company was or became insolvent at the time or because of the payments and that the ATO received more money than it would have during the company’s liquidation.

This being said, directors do have a number of potential defenses against personal liability.

  • at the payment date the director had reasonable grounds to expect, and did expect, that the company was solvent at that time and would remain solvent even if the company made the payment;
  • the director had reasonable grounds to believe and did believe:
    (a) that a competent and reliable person (the other person) was responsible for providing to the director adequate information about whether the company was solvent; and
    (b) that the other person was fulfilling that responsibility; and
    (c) the director expected, on the basis of information provided to the director by the other person, that the company was solvent at that time and would remain solvent even if the company made the payment;
  • because of illness or for some other reason, the director did not take part in the management of the company at the payment time; or
  • the director took all reasonable steps to prevent the company from making the payment or there were no such steps the director could have taken.

Ultimately, unfair preferences can cause a number of issues for the directors and everyone involved in the case. Should you be in any doubt about the company’s financial situation or be concerned with ATO payment arrangement, it is important to obtain advice from a professional insolvency accountant.

For advice and more information please contact us at McLeod & Partners to discuss it with an insolvency specialist.