Taking on the role of director of a company is not a decision to be taken lightly as the position holds a great deal of responsibility, and potentially personal liability, although the latter is not always evident initially.
Despite the level of responsibility, there are no real impediments or barriers for anyone wanting to become a director. There is generally no requirement for compulsory education or even any type of declaration required to say you are aware of your responsibilities.
However, to make sure you comply with your duties there are some keys principles to abide by that will help keep you on the right path. These simple principles include:
- understand what your company is doing;
- be honest and careful in all your dealings as a director, by acting in the company’s best interests, even if this is contrary to your own personal interests;
- make sure the company can pay its debts on time, including taxes to the ATO; and if there are grounds for suspecting the company is insolvent, you must not trade, incur debt, or continue to conduct business as usual – instead you should immediately seek trusted professional business advice;
- keep proper financial records for the company; and
- do not use information gained in your capacity as director to gain an unfair advantage over others.
Fundamentally you need to be active and engaged in the company’s dealings by questioning decisions and getting independent advice when appropriate for making an informed decision.
If you fail to uphold your duties the courts can impose heavy fines for breaches of the Corporations Act 2001 and can even ban you from being a future director. However by following the simple principles outlined above you should be well on the way to complying with the duties expected of you as a director.
Director Penalty Notices
Directors of companies unable to meet their tax liabilities may be served a Director Penalty Notice (“DPN”) that allows them only 21 days to act before becoming personally liable for debts of the Company. Upon receiving a DPN, directors are advised to seek professional help immediately.
ASIC focus on illegal phoenix activity
Illegal phoenix activity is where a new company is created to continue the business of an existing company that has been deliberately liquidated to avoid paying outstanding company debts, which can include taxes, trade creditors and employee entitlements.
The Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth) came into operation on 18 February 2021. The purpose of the Act is to give regulators greater powers to detect and disrupt phoenix activity, and to prosecute directors and other professional advisors who engage in or facilitate the activity.
Director Identification Number
As a further measure to combat illegal phoenix activity the Commonwealth Registers Act 2020 came into operation on 22 June 2020. The Act introduces a new Commonwealth Business Registry and a unique Director Identification Number (“DIN”). Whilst a commencement date for DINs is yet to be set, it will be no later than 22 June 2022.
The implementation of the DIN will increase the traceability of director’s dealings and relationships across companies and will help combat the use of fake identities.
The Australian Tax Office (“ATO”) and Australian Securities and Investments Commission (“ASIC”) have commenced beta testing of the systems that will be introduced to process and administer the DIN system. Pilot Partners staff have been invited to participate in this testing.
If you would like to discuss any aspects of Directors’ duties, DPNs or applying for a DIN, please contact Cameron Woodcroft on 07 3023 1300.