1. Director’s Duties: What is different about
SME directors?
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Ben Sewell
Principal of Sewell & Kettle Lawyers
2. What is different about SME directors?
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Challenge 1: Dealing with the entrepreneurs
• Entrepreneurs develop strategy experientially and iteratively
• Contrast with lawyers who learn analytically in the
“classroom”
• Do we see creative people as “mad”?
3. What is different about SME directors?
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Challenge 2: Australia’s slow paying culture
• Government paper indicates that 90% of small business failure is
caused by poor cash flow
• National culture of slow payers of B2B debts (52.3 days v NZ 41.9
days)
• UK implemented a voluntary scheme “Prompt Payment Code” to
encourage better behaviour towards suppliers
4. What is different about SME directors?
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Challenge 3: New DPN Regime
• A DPN allows the ATO to pierce the corporate veil
• Appointment of administrator or liquidator may not
discharge personal liability (new)
• Directors now personally liable for unreported SGC as well
as unreported PAYG (new)
5. What is different about SME directors?
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Potential personal liabilities arising out of DPNs
• Unreported PAYG
• Unreported SGC
• Individual tax return PAYG credits withheld
• Note service requirements relaxed (tax agent)
6. What is different about SME directors?
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Insight 1: Spotting the phase your client is in
• As an entrepreneur:
Personal journey- going back to wandering?
• As a business:
Inception > Survival > Growth > Expansion > Maturity
7. What is different about SME directors?
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Insight 2: Spotting warning signs for the point of no return
• Poor management;
• The big project;
• Overtrading;
• + Predicable business risk event
• + Creative accounting
8. What is different about SME directors?
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Insight 3: Why do directors appoint a VA?
• To restructure (33%)
• Avoid consequences of liquidation (20%)
• For liquidation (20%)
• To avoid directors’ liability for withholding company tax (7%)
9. What is different about SME directors?
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Opportunity 1: Asking the right questions
• What direction are you going in?
• Do you have reliable financial information?
• Are BAS and other ATO reporting obligations current?
• What is your end game? Business continuity or business exit?
10. What is different about SME directors?
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Opportunity 2: “Pre-pack” voluntary administration
• UK insolvency law precedent of a “pre-packaged
insolvency”
• Avoids the temptation of phoenix company activity
• Lack of empirical research into VA process is troubling
• 2012 Anti-phoenix amendments to Corporation Act-
toothless tiger?
11. What is different about SME directors?
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Opportunity 3: Abuse of VA process or strategic behaviour?
• Delay creditors: Using the process to delay creditor action
• Litigation tactic: Staying winding up applications or other causes of
action
• Director’s escape valve: Avoiding investigations that may follow a
liquidation
• Control of the company: Resolution of internal disputes
• Employees: Stifle enterprise bargaining
• Future complaints: Avoid compensating future claimants
• Relation-back period deferred
12. What is different about SME directors?
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Critique of the VA process itself
• Non-viable deeds of company arrangement being accepted
• Deeds of company arrangement are increasingly used as a
means for discrimination between creditors
• Inadequate reconstruction of company accounts
• Poor quality of reporting to creditors
• An absence of impartiality on part of some administrators
• Use of phoenix companies
13. What is different about SME directors?
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Commerciality of the VA process
• SME directors more likely to put their head in the sand than public
company directors
• Cost of VA process is an issue
• No clear empirical research into “success” rates and control is an
issue
14. What is different about SME directors?
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Risks as an advisor
ASIC v Somerville & Ors [2009] NSWSC 934
• Solicitor advised financially distressed SMEs
• Advised regarding transfer of assets from oldco to newco in
consideration for “V” class share
• Court found the restructurings were a phoenix arrangement and
breach of director’s duties
• Solicitor found to have breach s 79 of Corporations Act for
involvement, aiding and abetting the directors
15. What is different about SME directors?
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Recap: Advising on DPNs
• Report on time (BAS and SGC statements)
• Consider payment plans
• Review ATO assessment tool
• Is the ATO the last to be paid?
• Are other advisors required?
• New directors due diligence essential
16. What is different about SME directors?
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Questions?
Ben Sewell contact details:
Phone: 02 8251 0075
Email: bsewell@sklawyers.com.au
Skype: sklawyers