A company's money doesn't belong to the directors - they must use the money in the interests and benefit of the company.
Director fraud occurs where a director dishonestly uses company funds, including loan or investor funds, for personal gain or to the detriment of the company.
This is a criminal offence and illegal. When this happens, investors can lose some or all of their investment or a company may not have enough funds left to pay creditors.
Warning signs of director fraud
There are some common signs that may show something is not right with the company you've invested in. This can be when the company:
- continually raises funds from investors, but it isn't clear what it's using the funds for
- the promised return on investment seems unusually high when compared with returns provided by similar investments
- doesn't provide clear updates on their purchase of other large assets or their marketing, exploration or research and development (R&D) activities
- pays large consulting or service fees to related parties or is not clear who it is paying for such services
- has unexplained or unusual expenses in their financial accounts, or their accounts are not current or have not been prepared
- takes on loans, asset sales or purchase agreements with related parties where it is not clear that it is in the best interests of the company
Illegal phoenix activity
Illegal phoenix activity occurs when a director of a company transfers the assets of one company to a new company for little or no payment, to avoid paying its debts.
Directors take this action to reduce any amounts payable to creditors and shareholders when a company is liquidated.
If you suspect someone is engaging in this activity, you can report this to ASIC.
Find out more about illegal phoenix activity.
Responsibilities of company directors
To be a company director, individuals must act in good faith and in the best interests of the company. They must not dishonestly act in their own interests or in the interests of someone else.
This means company directors should always:
- be honest and careful in everything they do
- understand and follow all the laws that apply to the company
- make sure the company can pay its debts on time
- understand their company’s operations, financial position and business dealings
- make decisions in the best interests of their company
- make sure their company keeps proper financial and other company records
- know if the company is in financial difficulty
- take reasonable steps including to seek expert help if the company is in financial distress to determine if the company can be returned to profitability.
Find out more about company director responsibilities.
How to protect your investments
Minimise your chance of loss by researching companies before and after you invest.
Before you invest
- Check the company and directors are licensed or authorised (including other directorships they hold or have held).
- Check that the company is registered and that the directors and any financial advisor you are speaking to is not disqualified from managing a company or from providing financial advice.
- Research the company to check the health of the business, including by asking to see financial statements and annual reports. This includes research to identify any public comments or warning about the company, its directors and financial advisors.
- If your financial adviser or anyone else recommends the investment, check whether they have a personal involvement in the company or will receive any benefits. You can find this information in the Statement of Advice.
- Read the Product Disclosure Statement carefully, especially if the company is issuing new shares on the market.
- Seek independent legal and financial advice if you're not sure.
After you invest
When you've invested money in a business, keep track of the company's progress and your investment by:
- reading the company's annual report, including whether the directors believe the company is able to pay its debts when due
- checking for any continuous disclosure announcements to spot red flags
- attending the company's annual general meeting to ask the directors questions
Find out the other things you can do to keep track of your investments.
What to do if you suspect director fraud
If you think a company director is defrauding investors by using company funds for personal gain, you can report misconduct to ASIC.