You must comply with your legal obligations as a director under the Corporations Act 2001. This is the case even if you appoint an agent to look after your company’s affairs.
Who can be a director
To be eligible to be a director of a company, you must:
- be at least 18 years of age
- consent to taking on the role and responsibilities of a director.
However, You cannot be a director if you:
- are an undischarged bankrupt
- have entered into a personal insolvency agreement under the Bankruptcy Act 1966 and failed to fully comply with the terms of that agreement
- have been banned by ASIC or a court from managing corporations under the Corporations Act 2001 (the length of the banning period will be set by ASIC or the court)
- have been convicted of various dishonesty related offences, such as fraud. You will be automatically banned for five years from the date of the conviction or, if you are imprisoned, for five years from the date of your release.
- If you are already a director and you become an undischarged bankrupt or do not fully comply with a personal insolvency agreement, you will be automatically disqualified from managing corporations and cease to be a director of a company unless you have been given leave by the court to manage corporations.
If the company is a proprietary company – that is, it has ‘Pty’ in its name – it must have at least one director, who must ordinarily reside in Australia.
If the company is a public company (and doesn’t have ‘Pty’ in its name), it must have a minimum of three directors, at least two of whom must ordinarily reside in Australia.
Responsibilities imposed on directors
There are numerous and important legal responsibilities imposed on directors under the Corporations Act 2001 and other laws, including the general law.
Of these duties, some of the most significant are:
- to act in good faith in the best interests of the company and for a proper purpose
- to exercise care and diligence
- to avoid conflicts between the interests of the company and your personal interests
- to prevent the company trading while insolvent (i.e. while it is unable to pay its debts as and when they fall due)
- if the company is being wound up, to:
- report to the liquidator on the affairs of the company
- help the liquidator (e.g. by giving the liquidator the company books and records that you may have in your possession).
Director’s personal liability for unpaid company tax
If you are a director or are about to become a director of a company, you should make immediate inquiries to ascertain if there are any unpaid and unreported Pay As You Go (PAYG) withholding or Superannuation Guarantee Charge (SGC) amounts.
Directors of a company that fail to meet a PAYG withholding or SGC liability by the due date will become personally liable for a penalty equal to the unpaid amount. The Commissioner of Taxation may issue you with a director penalty notice (DPN) in respect of a penalty which is equal to your company’s unpaid liabilities.
Illegal phoenix activity
Illegal phoenix activity involves the intentional transfer of assets from an indebted company to a new company to avoid paying creditors, tax or employee entitlements.
The directors leave the debts with the old company, often placing that company into administration or liquidation, leaving no assets to pay creditors. Meanwhile, a new company, often operated by the same directors and in the same industry as the old company, continues the business under a new structure. By engaging in this illegal practice, the directors avoid paying debts that are owed to creditors, employees and statutory bodies (e.g. the Australian Taxation Office (ATO)).
Illegal phoenix activity is a serious crime and may result in company officers (directors and secretaries) being imprisoned. This practice severely disadvantages creditors and gives these business operators an unfair competitive business advantage.
While illegal phoenix activity can take many forms, the key characteristics are that:
- the company fails and is unable to pay its debts
- the company acts in a manner that intentionally denies unsecured creditors equal access to the company’s assets to meet and pay debts
- soon after the failure of the initial company (usually within 12 months), a new company commences that may use some or all of the assets of the former business and is controlled by parties related to either the management or directors of the previous company.
Guarantor or security over personal assets
As a matter of commercial practice, a bank, trade creditor or anyone else providing finance or credit to a company may ask you for:
- A personal guarantee of the company’s liabilities
- Some form of security over your house or personal assets to secure the performance by the company of its obligations.
Where personal guarantees are provided by you, you may become personally liable for the repayment of company loans or debts.
Debts incurred by companies acting as trustees
If your company is acting as a trustee, in some circumstances you may become personally responsible for liabilities incurred by the company. For example, if the trustee company breaches the terms of the trust.
“ASIC Home | ASIC – Australian Securities and Investments Commission”, Asic.gov.au, 2017. [Online]. Available: http://asic.gov.au/. [Accessed: 27- Apr- 2017].