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Should I become a Director? Part 4 – A Guide for new directors – tips to prevent or reduce personal exposure.

A Guide for New Directors – know your duties and risks

It is widely recognised that directors hold a crucial position in any business, whether within an established company or if embarking on a new business venture.   Consequently, it is essential for directors to possess a comprehensive understanding of their obligations and responsibilities.

Director’s role

In previous articles, we highlighted the complexity of the director’s role and stressed the importance of thoughtful consideration in decision-making.  Unfortunately, numerous individuals assuming directorship lack a comprehensive understanding of their duties and exposures, often leading to significant financial hardships should the company’s financial situation deteriorate.

Recent legislative changes

Furthermore, recent legislative changes have significantly increased the personal financial exposure and risks directors face.  This can lead to directors facing severe consequences such as loss of control, investigations, legal actions, and even personal bankruptcy.

Ten tips for directors

In this final article of the series, we provide ten tips to assist directors in taking a proactive approach to fulfilling their obligations and preventing or minimising personal exposure:    

1. First and most important, consider whether being incorporated is the best option to run your business and take proactive measures to get educated in directors’ duties and personal risk.

2. Engage good accountants and business advisors who have the following characteristics:

  • Accurate preparation of accounts and tax returns.
  • Knows how to treat personal drawings correctly and advises you if drawings are excessive. 
  • Has a basic understanding of insolvency and exposures to directors
  • Alerts you to possible risks of your business.
  • Sends reminders of upcoming lodgment due dates or alerts you if your obligations are overdue.
  • Flags ongoing company losses and debt that appears to be abnormally high.


3. Maintain lodgments and payments to the ATO for all tax compliance – GST, PAYG Withholding, and superannuation.

4. Act in a timely way when the company appears to be struggling to pay its debt. Consider approaching a registered liquidator to discuss options.

Options include:

  • Safe harbour
  • Small business restructuring plan
  • Creditors Voluntary Administration (CVL)
  • Voluntary Administration (VA)
  • Members Voluntary Administration (MVL)

5. Do not sell company assets below market value. To be safe, obtain a valuation report or sell on the open market, such as an auction. Keep good records of the sales and the valuation. Ensure sale proceeds are only used for the company’s benefit.

6. Avoid making preferential payments to creditors, particularly related party creditors (such as relatives), for old debts, as the liquidator could recover these payments as preference payments.

7. Use the company’s bank account for company-related transactions except for director drawings – quarantine and separate company accounts from personal accounts.

8. Keep a record and track personal drawings.  Understand that any monies withdrawn from the account or used for expenditure that does not relate to the company are either a loan from the company or personal drawings and could be recovered by a liquidator.

9. Reduce personal drawings and draw monies from the company account as a director’s salary.

10. Keep financial records up to date! A liquidator can presume the company is insolvent from the date the company stopped keeping accurate records. Ensure records and transactions are updated regularly to keep track of company profitability and director drawings. Consider hiring a good bookkeeper and/or accountant.

Summary

The message becomes resoundingly clear:  deciding to become a director demands utmost consideration and should not be taken lightly.  It is more important than ever for directors to fully comprehend their duties and the potential risks inherent in such a position.  They need to understand where they could be personally exposed and the potential consequences that may arise should their company be placed into liquidation.

Recognising the significance of these risks is crucial, and seeking guidance from a knowledgeable and experienced liquidator can be beneficial.  Their expertise offers invaluable and practical guidance, helping individuals effectively navigate the complexities in these situations.   

If you are considering becoming a director or you are a director of a company experiencing difficulties and are concerned you may be personally exposed, please contact our liquidator and trustee in bankruptcy Anthony Bagala at dVT Group on (02) 9633 3333 or by email mail@dvtgroup.com.au.

dVT Group is a business advisory firm that specialises in business turnaround, insolvency (both corporate and personal), business valuations and business strategy support.

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dVT Group is a business advisory firm that specialises in business turnaround, insolvency (both corporate and personal), business valuations and business strategy support.

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