When you begin trading with a new business, the history of its directors may not be something that you immediately think of as being important. But extending credit to companies that have unscrupulous directors will not only putting your business at risk but can also potentially expose you to criminal activity.

In this article, we explore what cross-directorship is, the ways in which it can affect your business and how you can manage the risk it poses through business credit checks, credit monitoring and credit reports.

What is cross-directorship?

Simply put, cross-directorship is when a director holds the same position in one or more companies. Directors hold liability for their decisions, making them responsible for a high-level of all obligations regarding the company. This level of obligation can be extended to company debt.

Operating as a director of multiple companies is need not always be a red flag. Under section 165(1) of the Companies Act, a director is legally allowed to hold the office of director for 20 companies simultaneously. Directors also have no obligation to tell a business that they are in a cross-directorship position.

While not illegal, cross-directorships can certainly open up the potential for conflicts of interest if not managed properly.

How adverse cross-directorships can harm your business

Adverse cross-directorships can occur as often directors will hold appointments within similar industries. Although there is no legal prohibition upon directors to be fully transparent about their other directorships, they do have a duty to act in the best interests of the companies they represent. Often creditors will be unaware of this cross-directorship, making it hard to know who you’re doing business with unless you are delving deep with a credit check through a credit bureau.

Under the Corporations Act 2001, if a company is in debt, a director can become personally liable. If the director you are doing business with is facing insolvency or has an adverse action registered against one of their businesses it can be very difficult to recover money owed to your business.

Fraud and phoenix activity can also occur in cross-directorship, exposing your business to not only financial risk but legal risk. If you are working with someone who has participated in illegal phoenixing or fraud, they could be faced with criminal charges and end up with you and your business coming under investigation.

The knock-on effects of cross-directorship can come quickly, or they can take time. You may not notice the risks straight away but there are ways to minimise these risks before your business takes a downfall.

CreditorWatch’s solutions for managing director risks

In the case of cross-directorship, business credit checks are crucial. Avoiding debt to reveal who you’re working with is made simpler with CreditorWatch through credit reporting, monitoring and alerts, director due diligence, Know Your Customer (KYC) procedures, UBO reports and ASIC company searches.

Director Due Diligence helps to reveal exactly who you’re working with. With our thorough business credit checks, you are provided with any director’s past and present activity. CreditorWatch credit checks also provide you with default risks, credit enquiries, credit scores, adverse information, tax defaults, court actions, ASIC notices and other essential information.

Monitoring and Alerts automatically notifies you 24/7 when any changes occur to a business’s details such as court actions commenced against it, administrations, payment defaults, insolvency notices and mercantile enquiries.

Reducing the chances of fraud, CreditorWatch’s Know your Customer (KYC) makes compliance easy. It allows you to meet AUSTRAC reporting obligations by reducing your exposure to fraud, terrorism financing, money laundering and any other criminal activity.

Determining the credit risk of those you plan to conduct business with, RiskScore uses three categories to assess the risk level of a business. These three categories include tradeline behavioural data, business demographic risk data and traditional credit risk drivers such as court judgments, ATO tax debt defaults, bankruptcies and insolvencies.

Helping you to comply, with the Anti-Money Laundering/Counter-Terrorism Financing (AML/CTF) Act, the UBO Report from CreditorWatch uses sophisticated software to scan ASIC reports and calculate ownership. This tool quickly allows you to understand any risks associated with illegal phoenix activity.

Take your due diligence to the next level with CreditorWatch

Through CreditorWatch’s Financial Risk Assessments, you can level up your director due diligence for key customers and large contracts. This credit history report provides you with a comprehensive look into the financial health of an entity.

Through quantifiable prediction, this credit management tool gives you an insight into an entity’s cash flow, balance sheets and income statements, making forecasting future performance a much more accurate task.

Contact us today to hear more about how our suite of digital credit tools can help you protect, automate and grow your business.