It can be easy to overlook a director’s history when engaging with new clients or suppliers. However, neglecting to conduct director due diligence can significantly impact a business and expose it to poor payment behaviour and stagnant cash flow. This is why it is essential for Australian business owners to conduct the necessary checks to avoid the risks of adverse cross directorships.  

What is a cross directorship? 

A ‘cross directorship’ refers to when an individual is the director of more than one company. While this is not always a red flag for financial risk, it can become one if that director has a history of poor payment behaviour, fraud or misconduct within that other business and you’re unaware of these transgressions.  

What is an adverse cross directorship? 

An adverse cross directorship occurs when the director of a company has an adverse action registered against another one of their companies that may affect your business.  

Adverse actions may include payment defaults, court actions, mercantile enquiries, insolvency notices and more. The types of actions registered against one of the companies is generally considered to be a high risk factor for financial distress, and may mean the company is more likely to have poor payment behaviour.   

It’s important to keep in mind that many directors can run multiple successful businesses without falling into the category of adverse cross directorship. That being said, conducting thorough director due diligence should be one of the first steps a business takes when engaging with new clients or suppliers, as it helps to safeguard against potential adverse cross directorships.  

If your business is unaware of an adverse cross directorship, there are two potential reasons. Either you haven’t done the appropriate due diligence or they have taken steps to prevent you from finding out. This is an unfortunate reality for many business owners, as unscrupulous professionals will try to obscure adverse actions to continue trading. 

How cross directorships can adversely affect your business 

There are a range of ways that cross directorships can severely impact your business, including both financial and legal risks. Firstly, if a director has a history of adverse action registered against one or more companies, it is highly likely this behaviour will occur again.  

In fact, CreditorWatch research shows that: 

• A director with a previous payment default is 5x as likely to do so again. 
• A director with a court action is 2x more likely to receive another. 
• A director with a failed business is 2x as likely to fail in the future. 

Also, it can be much more challenging to recover money owed to your business if the entity has an adverse action registered against the director. In many instances a company credit check is not always enough, as the director may be personally liable for debts within another company name under the Corporations Act. Put simply, this means any money that could be owed to you would be at the bottom of a long list to be paid.  

What is illegal phoenixing?  

In some cases, directors may attempt to engage in illegal phoenixing activity, in which a company is liquidated, wound up, or files for bankruptcy or insolvency to avoid paying any outstanding debts, however, the director forms a new company. The director then goes on to continue its same business activities without its existing debt, likely continuing to burn businesses as it operates.   

Some directors may try to avoid detection by changing personal information, such as names and addresses. Thankfully, this type of behaviour is less likely to go undetected thanks to the implementation of Director Identification Numbers (DIN), as well as reporting and monitoring tools provided by CreditorWatch.  

Director Identification Numbers are a relatively new requirement from ASIC, legally enforcing every company director to apply for a unique identifier that can help track their activity. Should you need to engage ASIC for higher-level actions, this number will help them gather the necessary information. 

CreditorWatch solutions for essential director due diligence 

At CreditorWatch, we provide the tools to protect your business – allowing you to spend more time focussing on delivering your product and less time chasing down untrustworthy and unreliable trading partners. This protection extends to mitigating the risks of engaging with company directors who may do more harm than good.  

Our comprehensive, market-leading Credit Reporting suite allows you to reveal adverse director activity within a few clicks. Simply search the Australian Business Number (ABN) or Australian Company Number (ACN) of any trading partner and allow our intuitive platform to do the rest. It will reveal all kinds of adverse directorial behaviour including court actions, ASIC notices, payment defaults and more, arming you to make smart decisions.  

That’s for events that have already happened, but what about adverse events yet to happen? We’re ready for them as well. With CreditorWatch 24/7 Monitoring and Alerts by your side, you’ll never miss a change in critical, risk-related information for any trading partner. As soon as we know, you’ll know – with an automated email direct to your inbox.  

If you want to dive deeper (or are legally required by virtue of the business you’re in), then our Know Your Customer (KYC), Anti-Money Laundering (AML) and Ultimate Beneficial Owner (UBO) reporting tools are second to none. Your business can identify any true beneficial owners of trading partners, the involvement of politically exposed persons (PEP), and conduct sanction checks, adverse media checks, and so much more. Complying with AUSTRAC regulations is a breeze when CreditorWatch has your back. 

With our support, your business can avoid the significant risks of adverse cross directorships, protect cash flow, and thrive moving into the new year.  

Speak to our expert team today.