Former directors can still face serious consequences after resigning as a director, particularly where a company has unpaid tax or superannuation liabilities connected to a period during which they were involved in the company.

A Director Penalty Notice (DPN) can expose a former director to personal liability for certain unpaid company tax debts, including goods and services tax (GST), PAYG withholding and superannuation guarantee charge obligations. This can be especially difficult where the current management of the company is uncooperative, the company’s financial position is unclear, or the company is already in financial distress.

For former company directors, the key issue is often timing. Once a DPN is issued, strict timeframes may apply. Depending on the circumstances, a former director may need to act quickly to understand the relevant tax debt, the reporting period involved, the company’s current position and any available response options.

Can You Receive A Directors Penalty Notice After Resigning?

Resigning as a director does not automatically remove the risk of personal liability for company tax debts. A former director may still remain liable where the relevant tax obligation arose during a period in which they were a director, even if the DPN is received after their resignation has taken effect.

This is why director resignations need to be considered carefully where there are concerns about unpaid tax liabilities, business activity statements, instalment activity statements, superannuation obligations or broader company debts. The effective date of resignation, the relevant reporting period, the due date for the company’s tax obligations and the company’s lodgement history may all become important.

Former directors may also face practical difficulties after leaving the company. They may no longer have access to company records, current financial information or cooperation from other directors. In those circumstances, it can be difficult to assess whether the company can pay the debt, whether the debt is disputed, or whether urgent legal proceedings may be required.

Why DPN Defence Depends On Timing

A DPN defence or response strategy will depend heavily on the type of DPN issued, when the notice was issued, the company’s tax position and whether any statutory options remain available.

In some circumstances, personal liability may be avoided or remitted if the company pays the debt, enters voluntary administration, appoints a small business restructuring practitioner, or begins to be wound up within the relevant timeframe. In other circumstances, particularly where a lockdown DPN applies, or reporting obligations were not dealt with on time, the available options may be more limited.

That is why former directors should not assume that resignation alone is enough. The director penalty regime is designed to make company directors personally responsible for certain unpaid company taxes unless the company complies with its obligations or enters one of the recognised external administration pathways within the applicable timeframe.

Where a DPN is issued after resignation, supporting documentation can become especially important. This may include resignation documents, ASIC records, business activity statements, correspondence with the Australian Taxation Office, company financial records, payment arrangement records and communications with fellow directors or the company’s current management.

When Can A Former Director Remove Personal Liability?

Whether a former director can remove personal liability will depend on the type of DPN issued, when the relevant reporting period occurred, and whether the company takes action within the required timeframe.

In some circumstances, a director may be able to avoid personal liability if the company pays the debt, enters an accepted payment plan, appoints a voluntary administrator, appoints a small business restructuring practitioner, or begins to be wound up before the DPN deadline expires*. If the debt remains unpaid and no recognised step is taken in time, the former director may become personally liable for the relevant amount.

This is why timing is critical. A DPN issued after resignation should be assessed quickly, particularly where the former director no longer controls the company, cannot access current financial records, or is relying on other directors to deal with the company’s tax obligations.

*Note that appointing an administrator or liquidator will only remit personal liability if the DPN is a standard ‘non-lockdown’ notice (meaning company returns were lodged within statutory timeframes). If a ‘lockdown’ DPN has been issued due to late lodgements, external administration will not remove your personal liability; only full payment or a successful statutory defence will suffice.

What Hall v CAP Security Services Pty Ltd Shows About DPNs After Resignation

Former directors who receive a Director Penalty Notice (DPN) in respect of a company’s tax or superannuation liabilities are often placed in a difficult situation, especially where the current management of the company is not cooperative.

The Federal Court’s decision in Hall v CAP Security Services Pty Ltd [2023] FCA 1237 highlights a potential pathway for former directors who receive a DPN after their directorship has ended.

The case involved Mr. Hall, a former director and claimed creditor of the company, and Tallicat Pty Ltd, a shareholder and contributory, seeking urgent orders from the Federal Court for the company to be wound up. The urgency was propelled by Mr. Hall receiving a DPN related to the company’s GST liabilities in the sum of $208,574, pushing for an immediate resolution to circumvent potential personal liability.

Demonstrating the Court’s flexibility in these types of urgent matters, procedural requirements such as advertisement of the application and service time were dispensed with. Leave was also granted for Tallicat to seek orders that the company be wound up in insolvency (it required leave as it was a contributory, and not a creditor).

Despite the absence of a statutory demand, which usually precedes insolvency assumptions, the Court found substantial evidence of insolvency. The company’s abandonment of its business premises and failure to display its financial standing were critical factors. Furthermore, Mr. Hall and Tallicat provided compelling evidence of the company’s debts to various parties, including a significant GST liability and unpaid rent.

The Court also resolved to wind the company up on just and equitable grounds due to a lack of confidence in the management of the affairs of the company, and the public interest in preventing an insolvent company from continuing to trade.

In light of the above, the Court’s orders that CAP Security Services be wound up meant that Mr Hall was able to avoid the significant consequences of the DPN expiring without the company being put into liquidation.

Why The Company’s Financial Position Matters

Hall v CAP Security Services Pty Ltd shows that a company’s financial position can be central to the way a former director responds to a DPN after resignation.

In that matter, the Court considered evidence that CAP Security Services had unpaid GST liabilities, unpaid rent and outgoings, and had abandoned its business premises. The company also failed to provide evidence explaining its financial position or disputing the relevant tax debt in a meaningful way.

For a former director, this kind of evidence may matter because a DPN issue is not always limited to whether the company has an unpaid tax debt. It may also require urgent consideration of whether the company can pay its debts as and when they fall due, whether it is insolvent, whether current management is dealing with the company’s affairs appropriately, and whether liquidation or another form of external administration may be available or necessary.

This is particularly important where the former director is no longer involved in the management of the company. If current directors are not cooperating, or if the company’s financial situation cannot be properly assessed, the former director may need to act quickly to obtain advice and consider what evidence is available.

Practical Considerations For Former Directors Who Receive A DPN

A former director who receives a DPN after resignation should carefully review the notice and the surrounding circumstances before taking any action.

The first issue is timing.

The date the ATO posts the DPN (which is typically the date printed on the notice) triggers a strict 21-day countdown. It does not matter when you actually receive or open the letter; the deadline is calculated from the date of postage. Missing a deadline can have serious consequences for personal liability.

The second issue is the tax debt itself.

The former director should identify whether the DPN relates to GST, PAYG withholding, superannuation guarantee charge, or another relevant company tax obligation. It is also important to identify the reporting period involved and whether the unpaid amounts relate to a period when the person was a director.

The third issue is the company’s current position.

A former director may need to consider whether the company has paid the debt, entered into a payment arrangement, appointed a voluntary administrator, appointed a small business restructuring practitioner, or begun to be wound up. If none of those steps has occurred, urgent advice may be needed.

The fourth issue is evidence.

Resignation documents, ASIC records, business activity statements, company correspondence, tax agent communications, financial records and any supporting documentation about the company’s affairs may all be relevant.

Because DPN debts can create direct exposure to a director’s personal assets, former directors should seek professional advice as soon as possible after receiving a DPN.

Rose Litigation Lawyers Can Assist Former Directors With DPN Matters

Here at Rose Litigation Lawyers, we have recent experience in successfully dealing with these types of matters on behalf of former directors.

Strict timeframes apply in these types of matters, and it is crucial that you receive specialist advice from a lawyer with expertise. If you are a former director who has received a DPN, contact our team of specialist insolvency lawyers with a track record of success in this field today.

The content of this publication is intended to provide a summary and commentary only. It is not intended to be comprehensive nor does it constitute legal advice, and has been prepared based on applicable legislation and case authority at the date of publication. You should seek legal advice on specific circumstances before taking any action.