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Sobering truths of being a company director

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There’s no doubt that a lot of senior business people aspire to move into the non-executive board role in the twilight of their careers.

They will be able to use their experience and skills to make an impact on a board. Other company directors get their directorships almost by default, either as the owner of an incorporated company or as a passive director such as a spouse.

While a directorship can sound glamorous, in reality it entails work, diligence, responsibility and accountability. When you fully understand what a directorship entails, you should then make a personal decision considering your circumstances if a directorship, or a particular directorship, is worth it.

The first consideration is the duties of company directors. As a director, you have several duties and ASIC states the following.

General duties of company directors

General duties imposed by the Corporations Act on directors and officers of companies include:

The duty to exercise your powers and duties with the care and diligence that a reasonable person would have, which includes taking steps to ensure you are properly informed about the financial position of the company and ensuring the company doesn’t trade if it is insolvent.

  • The duty to exercise your powers and duties in good faith in the best interests of the company and for a proper purpose.
  • The duty not to improperly use your position to gain an advantage for yourself or someone else, or to cause detriment to the company.
  • The duty not to improperly use information obtained through your position to gain an advantage for yourself or someone else, or to cause detriment to the company.
  • Duty to not trade while insolvent

As well as general directors’ duties, you also have a positive duty to prevent your company trading if it is insolvent. A company is insolvent if it is unable to pay all its debts when they are due. This means that before you incur a new debt, you must consider whether you have reasonable grounds to suspect that the company is insolvent or will become insolvent as a result of incurring the debt.

An understanding of the financial position of your company only at the time you sign off on the yearly financial statements is insufficient. You need to be constantly aware of your company’s financial position.

Duty to keep books and records

Your company must keep adequate financial records to correctly record and explain transactions and the company’s financial position and performance. A failure of a director to take all reasonable steps to ensure a company fulfils this requirement contravenes the Corporations Act.

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.

Benefits of being a company director

It’s not all bad news, as there are actually benefits of being a director of a limited liability company.

  • Limited liability – assuming you have complied with your statutory director duties, you can have your personal exposure to financial loss of the company limited to the amount of equity you provided the company (there are some exceptions further explained below).
  • Being a director may increase your personal profile and status among your peers.
  • Skills development – a directorship is a different role than an executive. The role of a director is for the strategic direction and governance of the company. An executive role is implementing and executing that strategic direction and governance. As such, there is a different skill set required for a directorship than an executive.

True traits of successful company directors

Keith Tully, Managing Director of UK firm Real Business Rescue lists his most important traits of a successful director.

  • Willingness to do more – at the end of the day, the board is responsible for everything that happens within the company. When there are shortcomings, directors need to be willing to roll their sleeves up and pick up the slack.
  • Ability to adapt and adjust – no matter how much or how well you plan, circumstances change. Proficient company directors should be able to adapt to changes in their industry and quickly make adjustments to operations if need be.
  • Diligence and persistence – these are two traits that are so closely related I have decided to classify them as one. Diligence is the drive to work hard at whatever you’re focusing on, and persistence is the drive to continue working when things get tough. Both of these traits are needed in tandem – diligence without persistence will not put you ahead of competitors, and persistence without diligence will have you working harder but not smarter.
  • Creativity and innovation – sometimes you’ll have to think outside of the box and do some creative manoeuvring. Innovative directors are the leaders in their industries, formulating new product and service offerings and going above and beyond the efforts of the competition to impress and satisfy every client.
  • Adept learning and researching skills – no-one starts out knowing everything, which is why the ability to proficiently research and learn about new topics and concepts is such an important attribute for a successful company director to have.
  • Keen observation – you need to be able to effectively analyse the results of employee actions and take notice of any shortcomings that could be detrimentally affecting overall productivity.
  • Competitive drive – without a competitive drive, a director can lose sight of their goals and let their competitors capitalise unnecessarily.
  • Communication skills – when it comes to keeping clients happy and keeping employee morale high, communication may be the most important factor. People want to deal with individuals that are attentive, friendly, well-spoken, and easy to contact. In many cases, good communication skills are the only trait that will retain a client or motivate an employee in times of hardship.
  • Effective leadership qualities – an effective leader is assertive yet considerate, passionate yet logical, persuasive and inspiring.
  • Kindness and strong ethics – a little bit of kindness goes a long way in the business world, especially when you’re dealing with disgruntled employees or clients. Having a strong sense of ethics enables a director to treat people with respect and, in turn, that respect is reciprocated.

Where a corporate veil can’t protect directors

One of the benefits of limitation of liability in a company is the protection from personal loss resulting from the financial losses of the company. However, what is not so widely understood is that there are circumstances where the corporate veil can be lifted.

Some circumstances when a corporate veil can be lifted, according to Australian online legal platform Lawpath, are:

  • Fraud and improper conduct – if you register a company to take advantage of the veil, then the court may lift it. Furthermore, if the company is a ‘mere cloak or sham’, this may be tantamount to fraudulent or improper conduct. Usually, this occurs when there is a company set up with the purpose of not trading.
  • Agency – often, companies will act as a parent company for others. Where a subsidiary company acts as an agent for the parent company, the parent company can be liable. Where this occurs, the court may lift the corporate veil in order to hold the parent company liable.
  • Avoiding a legal obligation – the court may lift the veil if the company concerned is ‘using’ the veil to avoid fulfilling legal obligations. For example, if a company owes a creditor money but transfers their assets to another entity to avoid payment, the court can lift the veil.
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Other potential director liabilities

Guarantees

It is common for directors, particularly of small or newly established companies, to have to provide personal guarantees for company debts. If a director guarantees a loan on behalf of a company, and the company is unable to repay that loan out of its own cash and assets, the director’s personal cash and assets will be at risk. This is because they will have to personally repay the company’s loan.

Most commonly, a company will provide security for a loan over its own assets. However, in the rare case that a director agrees to secure a loan, that director will have to risk losing his or her own assets to satisfy repayment of the loan if the company fails to meet its repayment obligations.

Director penalty notices

Company directors are legally responsible for ensuring that their company meets its PAYG withholding and SGC obligations. If a company fails to comply with their obligations under the PAYG withholding system or the SGC provisions, company directors can be held personally liable for the amount the company should have paid. There is also proposed legislation to extend this to GST obligations. Anyone considering a company directorship, and any passive or shadow directors, should be particularly mindful of this, and ensure they do their due diligence on the financial position of the company.

Director’s expectations

Before you rush into becoming a company director, understand the duties and responsibilities that come with a directorship.

Consider if you have the traits to make you successful as a company director and seek advice on how the ‘corporate veil’ protections can be lifted and your personal liabilities.

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