Understanding Director Risks: Why Entrepreneurs Should Protect Their Assets

By Jaye Mankelow

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Being a company director comes with significant responsibilitiesand risks. While directors play a vital role in driving business success, thepersonal liabilities they carry can jeopardise their wealth. For entrepreneurs,especially those managing multiple businesses, personal ownership ofinvestments can expose them to risks that could be mitigated through strategicplanning.

This article focuses on the risks faced by directors and whyseparating personal assets from business operations is essential.

Key Director Risks

1. Personal Guarantees

Directors frequently provide personal guarantees for:

• Business loans.
• Commercial leases.
• Supplier or equipment contracts.

These guarantees make directors personally liable if the companydefaults. Creditors can pursue personally owned assets, such as investmentproperties or savings, to recover outstanding debts.

2. Insolvency and Trading Risks

If a company becomes insolvent, directors can be held personallyliable for debts incurred:

• Insolvent Trading: Directors are required  to stop trading when they reasonably suspect the company cannot pay its debts. Continuing to trade in such circumstances can lead to personal liability for the company’s debts.
• Voidable Transactions: Directors may be forced to repay creditors or liquidators if payments are deemed preferential or unfair.

3. Creditor Claims

Creditors may pursue directors personally if:

• The company is unable to settle debts.
• There are allegations of breaches in director duties.
• Unsecured creditors are  left unpaid during liquidation.

This includes claims from suppliers, subcontractors, orfinanciers.

4. Uninsured or Self-Insured Liabilities

Some liabilities may not be fully covered by insurance:

• Workplace incidents or personal injury claims exceeding policy limits.
• Professional indemnity claims where the excess is substantial.
• Legal costs or penalties  from regulatory breaches.

In such cases, directors may be personally responsible forsettling claims.

5. Risks from Multiple Directorships

Many entrepreneurs serve as directors across multiple businesses.This increases exposure to:

• Cumulative Risk: Financial difficulties  in one business can impact others, especially if guarantees or cross-collateralisation agreements exist.
• Inter-Entity Claims: Transactions between related businesses may attract scrutiny, leading to disputes or legal challenges.

6. Personal Liability for Unpaid Taxes

Directors can be personally liable for unpaid company taxes, suchas:

• PAYG withholding.
• Superannuation Guarantee Charge (SGC) liabilities.
• GST debts.

The Australian Taxation Office (ATO) can issue Director PenaltyNotices (DPNs), making directors personally liable for these amounts.

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Strategies to Protect Personal Assets

1. Use Trusts and Corporate  Structures:some text
    
   • Holding personal investments through discretionary trusts or bucket companies creates a legal barrier between personal assets and business operations.
    
   • These structures prevent direct access by creditors in the event of claims against the director.
 
2. Review and Limit Personal Guarantees:some text
    
   • Negotiate contracts to reduce or eliminate the need for personal guarantees.
    
   • If guarantees are unavoidable, ensure they are limited in scope and duration.
 
3. Separate Personal and  Business Finances:some text
    
   • Avoid using personal assets as collateral for business debts.
    
   • Keep personal wealth and investments out of business structures.
 
4. Maintain Comprehensive  Insurance:some text
    
   • Ensure adequate coverage for professional indemnity, public liability, and directors' and officers' (D&O) insurance.
    
   • Regularly review policies to address gaps or underinsurance risks.
 
5. Monitor Company Solvency:some text
    
   • Regularly review company financials to identify risks early.
    
   • Seek professional advice if insolvency risks arise to avoid breaches of director duties.

The role of a director comes with inherent risks that can putpersonal wealth in jeopardy. By understanding these risks and implementingstrategies to protect assets, directors can minimise exposure while focusing ongrowing their businesses. If you’re an entrepreneur or director, considerreviewing your asset ownership structure and seeking professional advice tosafeguard your financial future.

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