Running a business always carries some risk, but for company directors, that risk can become personal. From tax liabilities and trading debts to legal action and family asset exposure, directors are often unaware of just how exposed they are, until it is too late.
At de Jonge Read®, we regularly meet business owners who are caught off guard when something goes wrong. We compare it to being caught in a storm without an umbrella. You might not have expected trouble, but that does not stop you from getting soaked.
Being informed and prepared is your best protection. Here are some of the most common director risks we see, and how to avoid them.
ATO Director Penalty Notices (DPNs)
The ATO can issue a DPN to make directors personally liable for unpaid PAYG withholding, GST and superannuation. If lodgements are not made on time, directors may become automatically liable, with no chance to fix it later.
This also applies to new directors. If you accept a directorship in a company with existing tax issues, you may become liable for debts you did not create. That is why due diligence before accepting a role is critical.
Non-Compliance Tax (NCT)
If your company fails to meet PAYG withholding obligations, a non-compliance tax may apply to you personally. This can extend beyond directors to their associates, including spouses and family members.
This rule is designed to reverse the tax credit benefit that would otherwise apply to related-party payments. The ATO takes a broad view of what counts as an “associate”, so the risk may be wider than you think.
Related Party Lending
It is common for business owners or related parties to take funds from the business without thinking about repayment. While this may not seem important when times are good, these loans can quickly become a liability if cash flow tightens or the business is under pressure.
If the business goes into administration or liquidation, you may be required to repay those loans, sometimes immediately and in full.
Credit Applications and Guarantees
Always read the fine print. Many credit and loan applications include personal guarantees or caveatable clauses that use your personal assets, like your family home, as security.
We often see situations where a director’s spouse has co-signed a guarantee, without fully understanding the consequences. Unless there is a clear commercial justification, this can create unnecessary exposure. Unfortunately, the courts may still enforce these guarantees regardless of fairness.
Preference Claims
If your company later goes into liquidation, the liquidator may pursue preference claims against creditors who were paid ahead of others. While this may not affect you personally in every case, it is important to monitor who your company is paying, and when.
Early advice before entering liquidation can help you structure payments properly and avoid unnecessary claims.
Insolvent Trading
Trading while insolvent remains one of the most serious personal risks for directors. If your company incurs debts it cannot pay, and you continue trading, you could be held personally liable.
Even non-directors can be caught. If someone is effectively acting as a director i.e. making decisions, signing contracts, or controlling finances, they may face the same risks.
The Safe Harbour provisions introduced in 2017 give directors more protection, but only if certain conditions are met. This makes early advice more important than ever.
What can you do as a Director or Business Owner?
At de Jonge Read®, we work with directors to:
- Review business performance and early warning signs
- Help assess personal exposure and risk across loans, tax, and guarantees
- Work with your accountant or lawyer to ensure proper structuring
- Develop commercial workouts and risk mitigation strategies
If you are unsure whether your business is solvent, or if you are concerned about personal liability, now is the time to act.
Contact de Jonge Read® for confidential, independent advice that helps protect you, your family, and your future.
Did you know?
Phoenixing is another name of business restructure. Read more about business restructures and when this can be an option for you.
