Small business restructuring can stop a Director Penalty Notice only in limited cases. If a non-lockdown DPN is issued, appointing a restructuring practitioner within 21 days may remove personal liability. However, this option is unavailable for lockdown DPNs or if deadlines are missed, making timing and compliance critical for directors.
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On This Page
- Introduction
- Can Small Business Restructuring Stop a Director’s Penalty Notice?
- SBR Process Timeline
- When SBR May Not Protect Directors
- Alternative Options if SBR Is Not Possible
- Next Steps
- FAQs
Introduction
When a Director Penalty Notice (DPN) is issued, many directors look to small business restructuring as a way to manage company debt while protecting themselves personally.
However, restructuring does not automatically stop a DPN. Its effectiveness depends on timing, compliance, and the type of notice issued.
This guide explains when small business restructuring may remove personal liability and when it will not.
If you’re dealing with a DPN, the actions you take in the first 21 days can directly impact your personal liability.
Can Small Business Restructuring Stop a Director’s Penalty Notice?
Yes, but only in certain circumstances. It also depends on the timing and the type of notice.
If you receive a Non-Lockdown DPN, the penalty can be “remitted” (cancelled). Appointing a Small Business Restructuring Practitioner (SBRP) within 21 days of the notice date is a valid legal action to extinguish your personal liability.
Following are some important points to remember:
- Covered Debts: DPNs apply primarily to Pay As You Go (PAYG) withholding, GST and Superannuation Guarantee Charge (SGC). These are the taxes for which directors can become personally liable under the Director Penalty Regime.
- The 21-Day Deadline: This period begins the day the ATO posts the notice, not the day you receive it. Once the 21-day period expires, the penalty becomes a personal tax debt of the director and cannot be remitted by placing the company into restructuring or liquidation.
- Debtor-in-Possession Model: SBR is often preferred because it allows directors to remain in control of the business while the practitioner helps negotiate a debt compromise with creditors.
Small business restructuring can help because it:
- Allows the company to continue trading while negotiating with creditors
- Enables the business to propose a repayment plan for outstanding debts
- Is designed for companies with liabilities under $1 million
- Is overseen by a registered Small Business Restructuring Practitioner
SBR Process Timeline
After appointing a Small Business Restructuring Practitioner, the company typically has 20 business days to prepare and propose a restructuring plan to creditors. Creditors then have 15 business days to vote on whether to accept the plan.
If creditors approve the restructuring plan:
- The company may repay debts over time (typically within three years)
- The business can continue operating while implementing the plan
- ATO debts included in the plan may be restructured into manageable repayments
In practice, the ATO is often the largest unsecured creditor in restructuring matters. Because creditors vote on the restructuring plan, the ATO’s position can significantly influence whether the proposal is accepted.
Note: Under Division 269 of the Taxation Administration Act 1953, DPN liability applies to:
- PAYG withholding
- Superannuation Guarantee Charge (SGC)
When SBR May Not Protect Directors
In the following situations, small business restructuring will not protect directors:
Lockdown DPN
Restructuring cannot stop a Lockdown DPN. A “Lockdown” occurs if:
- BAS statements reporting PAYG withholding or GST were not lodged within three months of their due date.
- Superannuation Guarantee Charge (SGC) statements were not lodged by their due date.
Non-Eligibility
You cannot use the SBR process to avoid a DPN if the company fails to meet the strict criteria under the Corporations Act 2001 (Part 5.3B):
- $1 Million Cap: Total liabilities must be less than $1 million.
- Compliance Pre-requisites: You cannot propose a restructuring plan unless all employee entitlements (including super) are paid in full and all tax lodgments are current.
- The 7-Year Rule: Neither the company nor the director can have used SBR or simplified liquidation in the last seven years.
- Director Conduct Requirements: The restructuring process may also be unavailable where directors have engaged in serious misconduct, such as disqualification or unlawful phoenix activity.
Alternative Options if SBR Is Not Possible
If your business exceeds the $1M debt threshold or you have already missed the 21-day window, you must consider other legal pathways to mitigate personal exposure.
Formal Insolvency Procedures
Voluntary Administration (VA)
Suitable for larger companies. Like SBR, appointing an administrator within the 21-day window remits a Non-Lockdown DPN, though you relinquish control of the business.
Creditors’ Voluntary Liquidation (CVL)
If the business is no longer viable, placing it into creditors voluntary liquidation within the 21-day window stops a Non-Lockdown DPN from becoming a personal debt.
Legal Defences and Risks
Statutory Defences
Under Division 269, you may have a defence if illness prevented you from managing the company or if you took all reasonable steps to ensure the company complied with its obligations.
New Director Liability
If you recently joined the company, you have a 30-day grace period before you become personally liable for pre-existing unpaid tax debts.
ATO Enforcement
If a DPN is ignored and not remitted, the ATO can issue Garnishee Notices (taking money from your personal bank accounts) or initiate personal bankruptcy proceedings.
Safe Harbour Protection
Directors who take steps to restructure a financially distressed company — including appointing a restructuring practitioner — may also obtain Safe Harbour protection from insolvent trading claims under the Corporations Act.
Secured Creditors
A restructuring plan generally binds unsecured creditors, such as the ATO or trade suppliers. However, secured creditors (such as banks holding security over company assets) are not automatically bound by the plan and may still enforce their security unless they agree to the restructuring proposal.
Next Steps
Understanding how small business restructuring interacts with a DPN is critical, because the available options depend on timing and the type of notice issued.
For company directors, the next step is to:
- Confirm whether a Director’s Penalty Notice has been issued
- Determine whether the DPN is lockdown or non-lockdown
- Calculate the 21-day response deadline from the notice date
- Review whether the company’s BAS and SGC obligations were lodged on time
- Assess whether the company qualifies for small business restructuring
- Consider whether restructuring, administration, or liquidation may limit exposure
Acting quickly preserves available options and may reduce the risk of personal liability before enforcement action begins.
Seeking professional legal or insolvency advice early can help clarify whether restructuring is viable, identify alternative strategies, and determine the most effective response before the 21-day window closes.
At Halo Advisory, we work for you — the director. Financial expert Greg Bartels offers a no-obligation, confidential conversation to help you understand where you stand, what risks exist, and what options are realistically available before deadlines reduce control. Get in touch today.
FAQs
Can the ATO reject a small business restructuring plan?
Yes. The ATO is often a major creditor and can vote on the restructuring plan like any other creditor. If the ATO believes the proposal is unrealistic or poorly supported, it may vote against it.
Does entering small business restructuring stop ATO recovery action immediately?
Not always. While restructuring may pause certain creditor actions, the ATO can still monitor the process and assess whether the plan genuinely addresses the outstanding tax debt.
Do directors remain in control of the company during small business restructuring?
Yes. Unlike voluntary administration, directors usually remain in control of day-to-day operations while a restructuring practitioner oversees the process.
Can a company propose more than one small business restructuring plan?
No. A company can only have one restructuring plan in progress at a time. If creditors reject the plan, other insolvency options may need to be considered.
Does the ATO have special influence in small business restructuring plans?
In many cases, yes. Because the ATO is often one of the largest creditors, its vote can significantly affect whether the restructuring plan is approved.
How long does the small business restructuring process usually take?
The formal proposal period is relatively short. Directors typically have 20 business days to develop and submit a restructuring plan to creditors.
Can restructuring include debts other than ATO tax liabilities?
Yes. A restructuring plan can include most unsecured debts, including supplier debts, loans, and other outstanding obligations owed by the company.
Will small business restructuring affect the company’s creditworthiness?
It may. Credit reporting agencies and suppliers may view restructuring as a sign of financial distress, which can affect future credit arrangements.
Can directors start restructuring after receiving legal action from the ATO?
Sometimes. However, timing is critical, especially if a Director’s Penalty Notice has already been issued, because certain deadlines cannot be reversed.
Can a company continue trading during small business restructuring?
Yes. One of the key features of the process is that the business can continue operating while negotiating a repayment plan with creditors.
