What’s your risk as a company director?

As a company director, you hold a significant role with both legal and financial responsibilities. While many assume that being a director shields them from personal liability, over the last years changes in legislation have made it increasingly important to understand the potential risks.

In this article, we explore the main risks faced by company directors today and how you can protect yourself.

What are the Main Company Director Risks?

Being a company director involves several key responsibilities that can impact not only your business but also your personal assets. A company director must ensure that the company complies with a wide range of legal obligations. When the company fails to meet those obligations, directors could face significant risks, including personal liability. Below, we will outline the most common risks that company directors face.

Personal Liability for Company Debts

A primary risk that many directors overlook is their personal liability for certain company debts. As of recent legislative changes, directors can be held personally liable for unpaid PAYG (Pay As You Go) withholding tax, superannuation guarantee charges, and Goods and Services Tax (GST) obligations. The Australian Taxation Office (ATO) has been more proactive in issuing Director Penalty Notices (DPNs), and these notices can hold you personally responsible for company tax debts.

Inheriting Pre-Existing Tax Liabilities

New directors also face the risk of inheriting existing debts. If you join a company and there are outstanding tax liabilities, such as unpaid GST or superannuation guarantee charges, you may be held responsible for them. This is true if the debts remain unpaid for over 30 days after your appointment. Therefore, it’s critical to conduct a thorough review of the company’s financial standing before accepting the directorship.

Increased Scrutiny from the ATO

The ATO has ramped up its scrutiny of directors, particularly around overdue taxes. If the company is behind on its tax obligations, the ATO can issue DPNs, which can result in the personal liability of the director for unpaid amounts. Failure to act in time could lead to penalties and even legal action against you as a director.

Director Penalty Regime (DPN) Exposure

Under the Director Penalty Regime (DPN), directors are personally responsible for paying certain outstanding taxes, including PAYG withholding tax and superannuation guarantee charges. The expansion of the DPN regime to include GST, LCT (Luxury Car Tax), and WET (Wine Equalisation Tax) means that directors need to be even more vigilant about the company’s financial health.

Risk of Insolvency

Another risk directors face is the company’s potential insolvency. If the company becomes insolvent, and you, as the director, fail to take proper action or continue trading while insolvent, you could be personally liable for the company’s debts. Directors have a legal obligation to ensure the company does not trade while insolvent. Ignoring this can result in severe penalties, including personal liability for unpaid debts.

Fiduciary Duties and Legal Actions

As a company director, you have fiduciary duties to the company, its shareholders, and other stakeholders. Failing to fulfill these duties, whether by negligence or intentionally, can expose you to legal actions. For example, if you fail to act in the company’s best interests or mismanage company funds, shareholders or other stakeholders may take legal action against you. This could lead to financial penalties or reputational damage.

How to Protect Yourself from Company Director Risks

To protect yourself from the risks outlined above, it is essential to take a proactive approach. Here are a few practical steps to minimize your exposure:

• Conduct Due Diligence: Before accepting a directorship, thoroughly evaluate the company’s financial health. Check for any outstanding tax obligations, debts, or liabilities.
• Stay Informed and Compliant: Ensure that the company complies with all its tax and superannuation obligations. This includes filing reports on time and paying taxes owed to the ATO.
• Seek Professional Advice: Consult a legal or financial advisor regularly to stay on top of your responsibilities. Bridgepoint team of experts can help identify potential risks early on and advise on how to mitigate them.
• Ensure Regular Monitoring: Stay updated on any changes in the law that could affect your liability as a director. For example, tax law changes can introduce new risks or expand existing ones.

Being a company director is both a rewarding and challenging role. The risks associated with this position have increased, particularly with the expansion of the Director Penalty Regime and more scrutiny from the ATO. However, with careful planning and a proactive approach, you can minimise your personal liability and ensure that both you and your company remain on solid financial ground.