Credit Reports Due Diligence
4 mins read

Essential steps when conducting director due diligence

In a time of increasing insolvencies and bankruptcies, and rising costs of doing business, an intimate knowledge of the directors of current or future potential trading partners can be of great value to your business. This is especially true during high-growth phases, during which you may seek to increase activity and engagement with a higher volume of new partners and clients, increasing your risk exposure.

What is director due diligence?

Due diligence concerns the level of research that you invest in, both before and during a commercial relationship with any third party. When implementing or reviewing due diligence procedures within your business, it’s important to focus not only on the creditworthiness of a trading partner as a whole, but also its individual associated directors.

Individuals come with their own risk profiles, separate to that of any of the businesses that they may be associated with, and a credit history check is imperative. They might also retain unknown directorships of other companies, which may in turn present conflicts of interest that affect the nature of your trading. Additionally, they may have a history of malpractice, including illegal phoenixing or withheld cross-directorship. All these issues, and more, can be mitigated by your business through CreditorWatch’s Director Due Diligence.

How does it protect a business?

If your trading partner’s company director has a history of fraudulent behaviour, bad debt, or malpractice, your business is immediately placed at risk of falling victim to the same, or similar, practices. This can lead to serious credit and insolvency risks to your business as a result of defaults, late payments, misinformation and non-delivery of goods – all of which can be identified ahead of time if you are armed with the right information by way of a credit history check in Australia.

Director due diligence reporting can alert you to any potential red flags, pertaining to certain individuals, decreasing the risk of default or insolvency to your business. You can go so far as to avoid doing business with any entity associated with that director, in order to reduce your exposure to them entirely.

What is illegal phoenixing?

Illegal phoenixing refers to the planned declaration of bankruptcy or liquidation by a company’s directors, with the intention of thereafter establishing a new company trading in effectively the same way. This new company rises ‘from the ashes’ of the old, however is unbound to any of the former company’s associated debts.

It defrauds creditors of the original company, including subcontractors and employees, as such a declaration of bankruptcy wipes some or all of the debt owed to them, under the potentially false assumption that the company does not have the necessary saleable assets or cash to pay it moving forward. It also demonstrates a lack of good faith towards these creditors, as their interests and protection are clearly not important to the directors in question.

This practice, when repeated, allows for an illegal loop of activity by irresponsible company directors, escaping accountability for credit owed to their trading partners, who may be placed at threat of default themselves as a result. Operations essentially continue unabated if the practice remains undiscovered, simply trading in the same way under a new name following the most-recent declaration of insolvency.

How can businesses protect themselves against illegal phoenixing?

As of November 2021, it became a requirement in Australia that any proposed or existing director of a company, registered Australian body, or registered foreign company under the Corporations Act (2001), needed to apply for a 15-digit unique Director Identification Number (DIN). This is implemented and administered by the Australian Business Registry Services (ABRS), to verify directors’ identities in order to prevent false representation.

Once a DIN is issued it remains with that individual permanently, allowing for the compilation and maintenance of an accurate history of their business dealings, malpractice record and previous directorships. CreditorWatch’s credit reports provide the necessary analysis of individual directors to inform your decision making, alongside credit risk analysis of their business as a whole. This information is essential to making appropriate decisions concerning new or existing trading partners, especially in regards to their trustworthiness.

This new identification process allows both business and regulator to more accurately recognise the risk of illegal phoenixing, as shareholders, employees, creditors, consumers, external administrators and regulators are all entitled to view the information and history of a director that a DIN provides. This makes it significantly more difficult for dodgy directors to bury any previous directorship history.

With CreditorWatch’s due diligence and reporting solutions, along with recent regulatory changes, your business stands well placed to know exactly who you’re doing business with, and whether they can be relied upon. Get in touch for a free demo of CreditorWatch now and start making the most informed decisions for your business.

creditreporting duediligence
Communications & Marketing Coordinator
Bridget joined CreditorWatch as Coordinator of Communications and Marketing in June 2021. She is passionate about developing and communicating content that assists businesses of all sizes to be supported and protected to grow.
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