Business Structures

·

31 Oct 2019

Director duties: risk versus reward

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3 min

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To be or not to be a director…that is the question!


I don’t know if it’s just a sign of the times, but the number of dire situations we are seeing where accountants and advisors have taken on roles as directors of companies that are placed into liquidation, is quite astounding.

In one matter, we saw a highly qualified (and well respected) accountant accept the role as director of a company, which ultimately went into liquidation, with millions of dollars owing to creditors. The company had three directors, comprising of two non-resident directors and one Australian director (the accountant). Business went bad and the two non-resident directors absconded Australia and returned to their home country leaving the Australian director to “face the music”—and it’s not a pretty song at all. The lesson is this case is quite simple. Do not become a director of your client’s company. If you still choose to do so, understand the risks that will flow directly to you if things go bad. The same principle applies regardless of whether the other directors reside in Australia or not.Director risk_OTP

Unfortunately, in this case, the accountant director is now facing bankruptcy and deregistration from practicing as an accountant and registered tax agent.

In a similar scenario, albeit there are many others, we have also seen an Australian resident director “left holding the bag” when the company was liquidated owing several hundreds of thousands of dollars and tens of millions in shareholder money transferred to overseas jurisdictions that do not recognise Australian insolvency law. Putting aside the fact that the overall structure of this entity extended to multiple (and notorious) tax havens throughout the world, the end result is the Australian director is now facing potential criminal charges for conspiracy to defraud creditors and investors.  Meanwhile, the overseas colleagues are believed to be living lavish lifestyles at the expense of creditors, shareholders, and the Australian director.

So, what is the moral of both stories?

Simple. Don’t be a director for clients unless you fully understand and appreciate the risks associated with the role. In the case of a company with Australian resident directors and overseas directors on the books, do whatever you can to protect your interests or run the risk of being held responsible for the actions of others who may not share the same moral compass as you.

The Australian Securities and Investments Commission (ASIC) has a range of guides for directors to understand their duties available at its website.

Related information: Worrells Asset Protection ebook

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