Money

In recent times there has been a view among company directors that, in times of financial distress, payment of company tax can safely be deferred until after other creditors have been paid. Priority of attention is sometimes given to payment of trade creditors, particularly those to whom directors’ personal guarantees have been given. The rationale for this view is, firstly, to ensure a continuing line of credit with suppliers for as long as possible and, secondly, in the event that things go badly, to ensure that personal liabilities are discharged before those due to the Deputy Commissioner of Taxation and other unsecured creditors who, it is thought, will be left without a remedy if the company fails and is placed into liquidation.

This view, however, is quite wrong and does not reflect the law. This is because the insolvency regime which is contained in the Corporations Act 2001, is designed to ensure, firstly, that all unsecured creditors of the company rank equally within the priorities established by the relevant provisions of the Act and, secondly, that if companies do not pay their assessed tax, there is a mechanism by which the Deputy Commissioner may recover it from the company’s directors personally.

The means by which this is achieved is quite complex and beyond the scope of a short article of this nature. However, suffice it to say that the Deputy Commissioner has at his disposal a number of devices which can be quite effective in restoring the priorities accorded by delinquent company directors who have one eye on insolvency and the other firmly fixed on protecting themselves from personal exposure.

In the event that, as a company director, you find yourself in the unhappy position of having to choose between which creditors should be paid within their terms and which should be delayed, the time has arrived for you to take legal and accounting advice. Prompt attention to the matter may help to rectify the problem and may, incidentally, assist you to defend an insolvent trading claim. Failure to act or to take sufficient action may result in personal financial disaster.

If you wish to make further enquiry about the subject of this article, please contact our Commercial Litigation Team.


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