Protect me, I’m a Director

As a director there are risks that arise if your company becomes insolvent. A liquidator is obliged to scrutinise your company’s financial affairs, your management of it and any benefits you may have got from it. These are the main risks; director penalty notices, personal guarantees, loans to directors (the advance wages or bonus or dividend your accountant never got around to declaring as income), insolvent trading and misconduct. We deal with penalty notices and personal guarantees separately. (It amazes me that advisors say directors shouldn’t give personal guarantees – easy for them – sometimes you just have to do it. But when financial problems strike – best to have a strategy in place to protect yourself and your family – go to our section on Personal Guarantees to learn about how to address personal guarantees).

The main ‘misconduct’ risk is where a director uses the company assets or knowledge to benefit individually. The equipment or car that was written off in the books as fully depreciated but ends up being driven by your family but is still worth $10k, the liquidator will identify the car on the depreciation schedule and want it back. Not keeping books of account. Secret commissions, that sort of thing. There are many others which concern taking advantage of the company to enrich oneself, not being diligent in running the company and not acting in good faith (being intentionally dishonest with the numbers). There are lots of costs in mounting full legal action against a director so it is fairly unusual to see directors of SME’s prosecuted unless they have a recurring history of offence. It is a good idea to have an expert quickly identify things which could be obvious to a liquidator just in case liquidation or voluntary administration happens to your company.

Loans to directors is a really important area to cover of your company might face insolvency. Why? Because a liquidator has to collect all the assets of the company and that loan from the company to you or your family is one such asset. Sure you may have given the company cash at the outset or equipment or your time and never charged for it. Tough titty, the liquidator will not set off the company’s obligation to you against what you owe to the company. If you have a house he will want that to repay your loan to the company, then, if you are lucky, pay you 10% of what the company owes you out of the money he got from selling your house. It is vital to have an expert quickly identify things which could be obvious to a liquidator just in case liquidation or voluntary administration happens to your company.

Insolvent trading is often quoted by liquidators to get you to sign them up (appoint them as liquidator to your company), but there are simple rules which will protect you. as long as you don’t take on debts that you know the company can’t repay, after the poiunt at which you knew or should have known the company couldn’t repay them, you are ok. If you have any doubts then pay cash. Again we deal with this separately so go to our section on Insolvent Trading. if you are behind in your tax commitments.

Just a bit of background before we go further; a company is a separate legal entity from the directors and owners. If someone sues the company they are not suing you. However many people run the company just like they would a sole-trader where they ARE in fact the business. I’ve seen this misconception exist even where the company is quite large – an SME turning over several millions a year. And that can create problems with liquidators, ASIC and the courts. In summary any person who undertakes the role of director is exposed to potential liabilities which become highlighted when financial problems strike.

So while it is true that the owners (shareholders) and directors are NOT liable for the company’s obligations it is the exceptions to the rule that cause problems for the directors in particular. In most cases, these liabilities arise upon the failure of the company. There are also many liabilities imposed on Directors which arise from the normal course of business; when it goes wrong. These are often peculiar to each industry (e.g. those arising under unsafe work practices or under licenses given to say mining or chemical companies). In general, the Director of a company will face liability for the environmental damages of his or her company. A franchisor can face exposure from misleading and deceptive conduct or representations made to the franchisees.

In summary, the director is not the company. The shareholder is not the company. Financially and legally their exposures are quite different to those of the company. Sometimes less (e.g. debts that can’t be paid), sometimes more (e.g. if directors allow the company to ‘trade’ when it later goes bust, or if they use the company assets for their own enrichment). You may need to take expert advice if you feel exposed. You can use us, Triple R, to give you a first up overview of where you stand before you start spending time and money on any particular path.