Many of the liabilities long predate the pandemic and the tax office is reviving companies to chase assets, Jirsch Sutherland says.
ATO, banks revive legacy debts and return to court action
Court action has become an indispensable tool in debt recovery again after years on the sidelines as the ATO and banks chase company obligations dating back years.
Insolvency specialist Jirsch Sutherland said companies were being reinstated to pursue legacy debts – many of which predated the pandemic – blindsiding directors who believed the liabilities had been shelved.
ATO-initiated court action increased significantly in October – following a lull in September – with winding-up applications and bankruptcy petitions both at their highest monthly level since 2019, according to the latest Credit Insights Report from Alares.
Its report also showed the big four banks had ramped up their court recoveries last month with high interest rates impacting the serviceability of debt.
Jirsch Sutherland partner Malcolm Howell said the ATO was “dusting off old files” to recover company debt using Director Penalty Notices to hold directors personally liable.
“A lot of the debt they are collecting at the moment is pre-Covid,” he said. “They're trying to open up old files and a lot of these companies may have been deregistered by default during the last three years, so we see them reinstating some of those entities and chasing those debts with personal guarantees.”
“If a company gets struck off for non-lodgement of returns, which a lot of companies do, then the ATO can make an application under the corporations act and get the company reinstated so it can start pursuing both the company and also the directors.”
“They appoint a liquidator like myself. And then it's really just for the purpose of being able to chase either the company because they know the company had assets before it went into liquidation or got struck off.”
“Or they know the directors have got assets and they want to chase them for the debts, in particular the entitlements for employees.”
“For example, the director of a company that was liquidated in 2019 recently advised us that the ATO had issued them with a DPN linked to the superannuation guarantee covering the 2015 and 2016 financial years.”
Alares director Patrick Schweizer said many of the current ATO court actions appeared to revive legacy tax debts that were previously the subject of legal action in 2019.
“The data clearly points to the ATO pushing to clean up and collect legacy debts,” he said. “Which may also explain the recent spike in Small Business Restructuring appointments, as business owners look for ways to keep their businesses afloat.”
“In previous months, the increase in SBRs coincided with a drop in ATO court activity; however, October saw an increase in both restructuring and ATO activity.”
Overall, winding-up applications had been trending upwards since the start of 2022 and continued to approach historical levels, he said.
Mr Howell said directors needed to be aware that the game was changing. “While in the past the ATO has been somewhat amenable to payment arrangements and reducing debt via a reduction in the level of interest accrued, this appears not to be an option now,” he said.
The renewed pressure from the ATO and banks meant court action and insolvencies would continue to rise.
“We’ve done forward calculations that indicate appointment external administration numbers will likely hit the 8,550 mark for the 2024 financial year, which is a significant increase on 2023.”