What are the risks with becoming a company director?

What are the risks with becoming a company director?

If you're anything like the general population you sign the documents required to start your company without much thought as to what you're actually signing. Directors of small and medium-sized companies tend to underappreciate the responsibilities that come with being a company director, much more so than directors of larger companies.

With that in mind, we thought we'd take a look at the two key areas where directors of SME companies can personally come unstuck. The below list is by no means exhaustive and is aimed at SME companies. Its always wise to get paid legal advice when it comes to this stuff, so don't say you've not been warned!

INSOLVENCY

Let's get the big scary one out of the way first. It is illegal to trade whilst insolvent and if a company is found to be trading whilst insolvent the directors can be held personally liable for any debts incurred by the company whilst the insolvent trading was going on.

Insolvency is a tricky area, but broadly speaking a company is said to be insolvent if it's unable to pay it's debts as and when they fall due. This includes employee entitlements, suppliers, loan repayments, BAS ... any kind of debt.

ASIC also considers any company unable to prove they are not trading insolvent (by providing adequate financial records) to be trading whilst insolvent. The following is from the ASIC website: "For the purposes of an insolvent trading action against a director, a company will generally be presumed to have been insolvent throughout a period where it can be shown to have failed to keep adequate financial records." Good inspiration for keeping your books up to date!

If you suspect that your company might be insolvent you should immediately get professional advice - speak with your accountant in the first instance. They'll be able to take a quick look before involving an insolvency specialist (liquidators, administrators, etc.). There are new rules that allow for 'safe harbour' in instances where directors saw there was a problem and put in place plans to rectify the issue that they honestly believed would work. This may provide some protection against claims of trading whilst insolvent. Safe harbour aside, always get advice if you suspect you're on the insolvency ship, the consequences are simply too serious to take a gamble on.

DIRECTORS PENALTY NOTICES

Insolvency, guarantees and shady business aside, directors aren't generally held personally liable for debts of the company. There is one big exception to that however and it comes in the form of unpaid PAYG withholding and superannuation guarantee payments for  employees (and this includes the directors).

The ATO can chase you personally as a director for any unpaid PAYGW and superannuation the moment it becomes overdue by issuing a Directors Penalty Notice (DPN) which contains a penalty equal to the amount unpaid. Resigning from being a director won't necessarily save you either as you can still be held liable for amounts that related to your tenure as a director.

If you're thinking about becoming a director of an existing company you're going to want to check carefully that the company has been paying their PAYGW and superannuation obligations in full and on time otherwise you might find yourself personally liable. We note there is a 30 day grace period from when you become a director to do your due diligence in which time you can resign and not be held liable, but once you go past 30 days you're on the hook.

Any small business owner will tell you how easy it is to fall behind on your BAS payments and superannuation payments, especially for contractors, so it's important to understand what the consequences are if the ATO comes knocking.

If you're a company director and the above has raised concerns for you, why not get in touch? We've worked with plenty of business owners over the years to help get them and their businesses out of sticky situations and we'd love to help you too.

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