Recently, the Australian Restructuring Insolvency and Turnaround Association, of which Partner Jonathan Paul McLeod is a Professional member, released a comprehensive analysis of some major issues surrounding ambiguity of garnishees in voluntary administration (VA). This article will seek to explore some of the issues raised surrounding ATO garnishees.
Under the Taxation Administration Act 1953 (Cth) it gives the ATO the ability to ‘give notice’ to debtors of a taxpaying company that requires the debtor to pay money to the ATO rather than to the company. Typically served on banks and debtors, they are also served on purchasers of assets prior to a sale being finished. This process makes the ATO a secured creditor giving it priority over other creditors. Given that it does not need to be registered on the Personal Property Securities Register, this means that an insolvency practitioner cannot search the register to see if the company has been subject to a garnishee notice, potentially leading to longer term issues. Overall, the ATO benefits from this arrangement, owing to its ability to remove items from the asset pool, without any recovery consequences in the event the company becomes Liquidated.
A major source of problems for administrators is the continued enforcement of garnishee notices, due to their personal liability for debts they incur during the administration. Typically, an administrator may be reliant on collection of debtors created during the trade-on to meet those liabilities. The first issue explored, is whether the ATO has the right to enforce pre appointment garnishees against the voluntary administrator’s post appointment debtors. This could have negative effects on the administrator being reluctant to take risks and continuing to trade if there is a possibility that they will be unable to recover the debtors that are generated from their trading activities. This could result in administrators being unable to put forward a DOCA to creditors or properly sell a business. Flowing on from this are multiple issues pertaining to poor outcomes for creditors and employees.
The second is that of the concern of managing practical implications if the ATO continues to enforce pre-appointment garnishees against the VA generated debtors. Given the concern that an administrator has no guaranteed notice of the garnishee this can lead to issues of false cash flow projections influencing a voluntary administrator to properly trade and incur liabilities.
The final concern raised in this article is that of the fact that the ATO may extend its recovery action and serve garnishee notices after the appointment of the voluntary administrator on the administrator’s debtors or bank accounts. Making them personally financially responsible for the garnishee notice liability.
With the ATO’s powers influencing voluntary administrators’ ability to do their job and garnishee notices providing concerns for debtors, creditors and administrators, it is important to stay abreast of the significant concerns surrounding these practices.
Source: Australian Restructuring Insolvency & Turnaround Association (ARITA) Journal