Being a company director comes with serious responsibilities and personal risks. Darren Vardy explains director duties under the Corporations Act, the dangers of insolvent trading, and why being a "director in name only" can be extremely dangerous. Critical knowledge for anyone considering or currently holding a directorship.

Key Topics Covered:

• Director's duties under the Corporations Act
• Personal liability for unpaid superannuation
• Director penalty notices for GST and PAYG
• Insolvent trading risks and consequences
• Why "director in name only" offers no protection
• Real-life scenarios of director's personal exposure

Key Takeaways:

• Directors are automatically liable for unpaid company superannuation
• Director penalty notices can create personal liability for tax debts
• Insolvent trading can result in personal liability for company debts
• Being a director requires active involvement and compliance monitoring

Who Should Listen:

Company directors, business owners considering incorporation, spouses listed as directors, board members of not-for-profits, and professional advisors.

Who Should Listen: Business owners, company directors, lawyers, accountants, and anyone wanting to understand financial distress warning signs.

About the Host:

Darren Vardy - Managing Director of Insolvency Options and Registered Liquidator with over 30 years of experience in business recovery and debt solutions. Darren has helped thousands of businesses and individuals navigate financial distress and find practical solutions to complex problems.

Connect With Us:

• Website: insolvencyoptions.com.au  • Phone: 1800 463 328 • LinkedIn: https://www.linkedin.com/in/darrenvardy/

Subscribe & Follow:

Don't miss future episodes! Subscribe to i.O. - Insolvency Options

Like this episode? Please leave a review and share with colleagues who might benefit from these insights.

Co-host: Anthony Perl

Produced by: Podcasts Done For You

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Introduction to Insolvency, understanding the basics.

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Welcome to our first episode of io

Insolvency Options with Darren Vadi,

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the managing Director of Insolvency

Options, and a registered liquidator.

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With over 30 years of experience

helping businesses and individuals

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navigate financial challenges.

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In today's episode, Darren shares

his journey into insolvency explains

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what insolvency actually means.

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And reveals the warning signs every

business owner needs to recognize.

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We'll explore when to seek

help and the difference between

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corporate and personal insolvency.

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You'll understand the

fundamentals of insolvency.

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Know when to seek professional

advice and learn why acting

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early gives you the most options.

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I'm your co-host, Anthony Pearl.

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Let's dive into unlocking

more about insolvency options.

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Darren, let's talk about, I think

what is an important topic is being

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a director of a company, because

many people find themselves in

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that situation now, don't they?

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I mean, there are companies that

are formed that are really out

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of small business for various tax

reasons that become a company.

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There are not-for-profits that

people sit on boards of that

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effectively are a kind of company.

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This whole idea of being a

director of a company is becoming

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more common and more important.

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Speaker 4: Yeah, that's true.

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We are finding that incorporation of

businesses becoming more regular than your

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traditional sole trader and partnership

type operations, but like partnership

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operations and sole trader, there is

personal exposure to being a director of

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a company and directors need to be, you

know, aware of what their duties are.

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There are various duties

under the Corporations Act.

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Some express duties set out in Section

180 to 180 4 of the Corporations

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Act that directors must abide by.

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There is also a duty to maintain

books and records under Section 2

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86 of the Corporations Act and to

maintain records to an extent that

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they show the true position of the

financial affairs of the company at any

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point in time and that if necessary.

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They can be audited.

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There's also a duty under Section 5 88 of

the Corporations Act that a director must

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not trade the company whilst insolvent.

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So we get back around to that

insolvency issue and the personal

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exposure that goes with, or potential

personal exposure that goes with

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trading a business whilst in silence.

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There are also a number of other areas

where directors can be personally

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exposed, and this is just simply in the

day-to-day operation of their business.

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So you know, one of those

is superannuation issuant to

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the taxation legislations.

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A director is automatically liable

for any unpaid superannuation.

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There is what's called.

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The director penalty notice regime.

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Now, in those circumstances, directors can

be held personally liable for GST and PAYG

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in certain circumstances where they don't

lodge their returns on time or within 30

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days of the due date, and the funds remain

outstanding for that period of time also.

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So the A TO can come around and issue a.

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What's called a lockdown director,

penalty notice on directors, which

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directors are automatically liable for.

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So whilst companies are set up and

we have this corporate veil that sits

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between the company and the director,

that corporate veil can be pierced

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for want of a better term through the

conduct of the directors if they're

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not careful in ensuring that they are

operating the company in a certain member.

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Speaker 3: It's interesting, isn't it?

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Because often you get advised, and

I'm talking about small businesses get

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advised, okay, go from the sole trader,

we'll set up a trust, you are the sole

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director, find a bit of paperwork and

you know, it's all just there to make the

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tax look a little bit better and, and a

bit easier, uh, to manage those things.

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But the responsibilities and

the implications around being a

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director are often not really.

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Explained, and certainly I would

imagine not really understood.

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Speaker 4: And we find that particularly

with small business that a spouse is put

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on as a director, and this is a legacy

probably from back when companies required

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more than one director back decades ago,

but where you have a non-working spouse,

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non-employed spouse as a director.

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Who is just there in name and doesn't

actually have any involvement with

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the company on a day-to-day level,

that spouse can be held liable

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for the activities of the company.

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Because being a director, you are

responsible for the day-to-day

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activities of the company.

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And it's not a defense to say I wasn't

involved, I wasn't employed, I didn't

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derive any benefit from the company.

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The very fact that you are a director.

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Gives rise to the responsibility

and obligation, which gives rise

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to internally exposure and risk.

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Speaker 3: Yeah.

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And how far does that risk extend?

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Because scenario of many people that

sit on on boards of not-for-profit

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boards, for example, and they're a

director, and these days you have

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to go through registration process.

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Right.

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As a director, it's not just a matter

of I'm on the board, you actually have

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to register as a director and then.

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Understanding what those

potential implications are.

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Speaker 4: The directorship registration

through asic that ASIC have put in place,

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I think has increased the awareness

of directors obligations because it's

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understood that when you apply for a

directorship, number asic, send out a

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note to you as a director, which sets out

what your obligations are as a director.

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Whether the directors read that or not

is a different matter, but ASIC are

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certainly attempting to make directors

more aware of their responsibilities,

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which is a good thing as to exposure.

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You know, we've seen some very untenable

circumstances such that my person

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operating the business wasn't the

director, but the spouse was the director.

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There's a marital breakdown.

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The person operating, the entity moves on

and then the spouse is left with all the

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exposure of operating the business and

then exposed to an insolvent trading claim

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because the business was operating at a

loss and debts were accruing to the likes

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of the tax office and its trade creditors.

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So no circumstances.

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The spouse who.

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Was blind to the financial operations

of the business and potentially naive to

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their role in the business as a director

has effectively been exposed to all the

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obligations and responsibility leading

them in a position where because of

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the various claims available against

the spouse, they've found themselves

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having to look at personal bankruptcy.

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Whilst the real owner of the business

has effectively walked away scot

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free, they are real life circumstances

that happen from time to time.

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You hear quite often hear the term shadow

director and you know that is effectively

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a director who is not by designation

or role recorded with asic, but it is

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the person who is actually directing.

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The company and operating it day to day.

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And you know, there are provisions

within the Corporations Act, which allow

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liquidators to pursue shadow directors.

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But the advice is that don't be a director

unless you are going to be personally

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involved in the business because of

the obligation and risk that comes.

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Speaker 3: I mean, it's quite

terrifying really when you think

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that superannuation can be at risk.

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'cause that's what people are

relying on for retirement.

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And here you are in a director

and things go bad and suddenly

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that can have a huge implication.

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Speaker 4: Correct.

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And with that comes the personal

exposure of the director to pay

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that superannuation to employees.

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Yeah.

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Because quite often we've

also seen directors.

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Will pay all their staff entitlements,

but they won't pay their super because

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they don't have enough cash flow.

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And quite often we hear the director

saying, but it's just my super.

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My answer to that is quite simple.

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It's not just your super, it's super that

is payable pursuant to a statutory scheme.

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It's not payable to you personally.

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It's actually payable to your super fund

for the benefit of your retirement And.

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When the tax office comes knocking and

comes to pursue the superannuation,

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they will see, and quite often we're

seeing this in circumstances, is that,

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you know, the directors have to then

go and refinance some property or find

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the funds to pay the tax office the

outstanding super, which then gets

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paid to the director's superannuation

fund and all they have done is simply

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incurred additional costs and interest,

which could have been avoided.

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If the super had been paid as

they went and they didn't not

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pay their super given the lack of

cashflow that they had at the time.

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And that then comes back around to the

position of, well, if you can't pay all

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your debts super for yourself, you know,

are you actually trading profitably?

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Is the business making enough

money to pay all its expenses?

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So it gets back to the, the very crux of.

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Why are we here?

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Why do we have a financial

position that we're in?

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Because if you can't run a

business and you can't trade

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profitably, why are you doing it?

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Speaker 3: It is such an

important question, isn't it?

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Because too often people have

found themselves in a business

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that really is just a job as well.

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I think that happened

particularly as a result of COVID.

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People started working from home and some

businesses made the, the decision that,

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well, if you're gonna work from home,

we're gonna treat you as a consultant.

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And so people set up their own businesses

and that suited people, but really they

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were only creating a job for themselves.

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And all of these risks and things that

come attached to it, you know, people

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not paying themselves a wage, let

alone superannuation, they're pretty

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Speaker 4: common.

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Correct.

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And you know what I say to.

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Tongue in cheek to directors.

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If you're not paying yourself a wage to

put food on the table, you may as well

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shut the roll at door, go down the beach

and watch the waves roll in because at

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least watching the waves roll in or put

a smile on your face rather than being in

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a business which you're shackled to and

for which you're not getting paid for,

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and you can't even put food on the paper.

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So it's about changing the mindset of the

directors to say, and a lot of directors

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come out of, a lot of businesses are

spawned by people working for larger

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organizations, finding out that they

have a talent at doing what they do.

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They go and build a nice little

business, and the business goes well.

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But when they get to a stage where

there's a financial impact and because

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they've been trading it for a long time.

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They're emotionally connected.

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It's a matter of removing the emotional

connection and really looking at it

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and saying, is this business for me?

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Whilst it might provide me with some

flexibility, whilst it might provide me

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with some autonomy, am I really making the

best of my life running my own business?

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Because if I'm not taking

home enough money, two.

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Put food on the table to

cover the household costs.

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It just then adds pressure at that level.

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Speaker 3: Tell me, what do you say

to people who are listing out there

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now and they've been advised to

move from the sole trader to being

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a company, a trust, or whatever the

structure is, or they're looking at

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jumping on a board of some description.

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What do they need to do?

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I mean, we've talked about a lot of the

potential negatives and things, but what

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do they need to really avail themselves

of before they make a decision to change

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that structure or to jump onto a board?

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Speaker 4: Sure.

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Changing the structure is very different

from just jumping onto a board.

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Changing a structure firstly, will

revolve around the nature of the

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business, the size of the turnover,

the inherent business risks.

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That go with the business,

which a corporate structure

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will help minimize those risks.

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Going onto a board, it's all about

looking at the financials, making sure

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that the company or the business is

compliant with its statutory obligations.

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Because if it's not, and you're on

a board for more than a month, you

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are then a lot personally liable.

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So it's making sure that the

compliance is up to date.

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Then once you are a director, it's

before you become a director, ensuring

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what you know, your obligations.

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But once you are a director, make

sure that the company is maintaining

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its obligations, and if it's not

maintaining its obligations as

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a board member, then you know,

resignation after raising the issues.

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Generally a few times, resignation

is something that would

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potentially need to be considered.

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And as a person who's moved from a sole

trader to a small business, seeking

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the right advice about compliance and

complying with those obligations is key.

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Speaker 3: Yeah, I think that's

such an important thing, isn't it?

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It's that advice is so critical to

making that kind of a decision that

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you're going to be involved with.

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And it seems simple when it's put

to you in terms of let's restructure

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and do this, but ultimately there's,

there are lots more implications

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that you need to consider.

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That's true.

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Well, that's it for this episode of

the IO Insolvency Options Podcast.

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I hope you've got plenty of valuable

knowledge and practical steps for whatever

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your situation is from Darren today.

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And if you need guidance on

insolvency matters, contact Darren

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Vadi directly@insolvencyoptions.com

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au or call 1804 6 3 3 2 8.

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Or of course, you could connect

with Darren on LinkedIn details

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in the show notes below.

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With over 30 years of experience,

Darren and his team provide personalized

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solutions for both personal and

corporate insolvency challenges.

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This episode was produced by my

team at podcast done for you.com

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au helping professionals

share their expertise.

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Through powerful podcast content.

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If you found value in today's episode,

please like, comment and subscribe

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to the IO Insolvency Options podcast.

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Wherever you are listening to this, your

engagement helps us reach more business

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owners who need these crucial insights.

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Until next time, remember, there's always

a way forward when you know your options.