Director Penalty Notices | Defences and mitigating personal exposure

Director Penalty Notices (DPNs) issued by the ATO expose directors to personal liability for company tax debts, including PAYG withholding, GST and superannuation guarantee charges.

While DPNs can be severe in their consequences, the available statutory defences are limited and often difficult to establish in practice. When facing DPNs and potential proceedings, directors should focus not only on any available defences, but also on early strategic action to mitigate exposure, including insolvency options where appropriate.

Understanding the Nature of a Director Penalty Notice

Under Division 269 of the Taxation Administration Act 1953 (Cth), directors have a positive obligation to ensure their company:

• pays certain tax liabilities; or

• enters administration, restructuring, or liquidation.

  
  

If this does not occur, directors will usually become personally liable for those debts.

There are two types of DPNs:

• non-lockdown DPNs – liability may be remitted if action is taken within 21 days; and

• lockdown DPNs – liability cannot be remitted (typically where lodgements are late).

  
  

Failure to act within the required timeframe exposes the director to immediate personal liability, often in substantial amounts.

Statutory Defences to a Director Penalty Notice

There are only two complete statutory defences available:

1. Illness or “Some Other Good Reason”

A director will not be liable if:

• they did not participate in management; and

• it would have been unreasonable to expect them to do so due to illness or another good reason.

However, this defence is narrow and often difficulty to establish because:

• the director must have not participated at all during the relevant period;

• even minimal involvement can defeat the defence; and

• courts require the reason to be objectively “good”, not merely subjectively reasonable (that is there is some higher threshold, not just unwell).

  
  

In practice, where a director remains involved in the business - even during difficult circumstances - this defence will generally not be available.

2.     “All Reasonable Steps” Defence

A director may also avoid liability if they took all reasonable steps to ensure the company:

• paid the debt; or

• appointed an administrator; or

• entered restructuring; or

• went into liquidation.

  
  

This defence is also difficult to establish as directors must address all available options, not just one. Courts expect proactive and decisive action. It is however, the more reasonable of the two defences to establish.

Why Defences Rarely Succeed

The reality is that:

• directors are often aware of the DPN but delay action;

• commercial pressures (e.g. continuing to trade) usually override compliance;

• advice from other professionals can create conflicting priorities.

As a result, it is often seen, by the time proceedings are commenced, that:

• the statutory defences are no longer available; and

• the director faces substantial personal exposure.

Strategic Considerations Beyond Defences

Given the limited availability of defences, the key issue becomes strategy rather than technical liability.

Practical options may include:

• delaying or managing proceedings to allow time for restructuring;

• considering personal insolvency options, including:

  • bankruptcy; or

  • a Part X Personal Insolvency Agreement.

    
    

A Part X agreement can be particularly useful as it:

• allows directors to continue operating their business;

• provides flexibility in dealing with creditors;

• may result in a reduced and structured repayment outcome.

  
  

Key Takeaways for Directors

DPNs impose serious personal liability on directors.

The available defences are extremely limited and rarely successful.

Time is critical – action must be taken within strict statutory periods.

Early legal advice is essential to:

• preserve potential defences; and

• implement a commercial strategy to minimise exposure.

Conclusion

Director Penalty Notices can expose directors to significant personal liability with limited avenues for defence. Navigating these issues requires early, strategic advice and a clear understanding of both the legal framework and the commercial realities at play. If you have received a DPN or are concerned about potential exposure, the team at Roberts Litigation can assist in assessing your position and implementing a practical strategy to protect your interests.

Contact us today to discuss your matter with our experienced insolvency team.