Disqualified Directors Insights

As we move into more uncertain times and we are seeing a corresponding increase in the number of insolvency appointments, the issue of when a director banning might impact a person becomes relevant.

Disqualified!

As we move into more uncertain times and we are seeing a corresponding increase in the number of insolvency appointments, the issue of when a director banning might impact a person becomes relevant. Set out below is a brief summary of the various circumstances in that a director banning might occur. It’s worth understanding when and how it happens.

A Bankruptcy or Personal Insolvency Agreement

An undischarged bankrupt is automatically disqualified from being a director of a Company (s.206B(3)). This disqualification is in place for the period of the bankruptcy, which is usually three years but can be extended in many situations such as a lack of cooperation on behalf of the undischarged bankrupt.

A person who has entered into a Personal Insolvency Agreement is excluded from managing a corporation, as long as the terms of the Personal Insolvency Agreement have not been fully complied with (s.206B(4)).

More Than One Company Wound Up In Insolvency

Subject to s.206F of the Corporations Act 2001, ASIC has the power to disqualify a person from being a director of a corporation if the person was the director of two or more companies that have gone into liquidation in the last seven years. The action to disqualify follows the lodgment of a report by the Liquidator under s.533(1) for the relevant companies.

The disqualification can apply for up to five years. A director has the right to make submissions as to why they should not be disqualified, following notice being given to the director.

If a submission is made by a director subject to notice, a delegate of ASIC is appointed to chair a hearing at which the delegate considers the director’s conduct and any submissions that the director makes. After the hearing, the delegate will make a decision regarding the disqualification of the person under s.206F.

In assessing whether disqualification is to be issued, ASIC will consider multiple factors, including: – whether the failed companies subject to the submission were part of a related trading business or group. ASIC is not likely to rely on the failure of a related group for the 2 company criteria. – The general conduct of the director in management, business or property in each relevant matter, including any misconduct reported by the Liquidator(s) in submissions under s.533(1). – whether the disqualification would be in the public interest.

After the determination, if a decision has been made to disqualify a person from managing a corporation, the person may contest the decision by appealing to the Administrative Appeals Tribunal, and subsequently to the Federal Court of Australia.

Conviction

A conviction for a breach of the Corporations Act that is punishable for a period of greater than 12 months, or a conviction in relation to the management of a company, results in disqualification from managing corporations. This ban remains in place for the period of imprisonment plus 5 years (s.206B(2)).

Court Ordered Disqualification

The Court also has the power to order a disqualification on application by ASIC. The disqualifications under a Court order can apply for up to 20 years. Applications can be made under a broad range of circumstances relating to insolvency and conduct in the management of corporations, including directorship of two or more companies in liquidation, misconduct, and competition and consumer laws. Disqualification from managing corporations by court order in a foreign jurisdiction also results in disqualification in Australia (s.206B(6)).

Directors subject to ASIC notices relating to a disqualification process, or subject to an application to the Court for disqualification should treat the matter with urgency, as an effective response and management of the process can impact the outcome. Continuing to act in the capacity of a director, or in managing a corporation, can lead to further penalties, and directors should be mindful of this when considering their options.

There is a right for an individual to object to the banning order through the Administrative Appeals Tribunal. Legal advice should sort regard the circumstances leading to an individual’s banning and determine if there is any ability to object to or overturn the banning order. However, the better course of action is to seek earlier and appropriate advice (i.e. before any banning process commences) to ensure that as a director you continue to comply with your duties under the Corporations Act so as to avoid investigations being undertaken by ASIC as a result of the investigations and reporting that a liquidator of the failed company has identified.

You can also access materials from the website of the Australian Investments and Securities Commission on director duties. The link is below.

https://asic.gov.au/regulatory-resources/insolvency/insolvency-for-directors/

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