If you are the director of a company placed into liquidation, you won’t necessarily be banned from acting as a director of another company.
This is because ASIC recognises that businesses may fail for various reasons – often outside a director’s control.
There are, however, three main scenarios where you may be disqualified from acting as a director of another company for a period of time.
These are explained below.
The three scenarios where you may be disqualified from being a director
1. Bankruptcy or entering into a Personal Insolvency Agreement
If you become bankrupt, you are disqualified from being a director of a company for the period of your bankruptcy, which is usually three years.
Similarly, if you enter into a Personal Insolvency Agreement, you’re also excluded from being a director for the period of the agreement.
A Personal Insolvency Agreement is an alternative used to avoid bankruptcy. The duration of the agreement may be short, say three months, or it may run for a number of years, depending on the terms of the agreement.
2. Being a director of more than one company placed in liquidation
Section 206F of the Corporations Act grants ASIC the power to disqualify a person from being a director of a company for up to five years if:
- The person has been an officer of two or more companies that have gone into liquidation within the previous seven years; and
- The liquidator of those companies has lodged a report pursuant to Section 533 of the Corporations Act (which provides details of any misconduct that occurred in relation to the company).
Disqualification pursuant to Section 206F of the Corporations Act is not automatic. To assess whether to consider banning a director, the ASIC will take a number of factors into account, including:
- Whether the failed companies were involved in the same business: ASIC is unlikely to ban a director of companies that were part of a group that all failed around the same time;
- The conduct of the director in question and particularly any misconduct reported by the liquidators of the companies; and
- Whether disqualification would be in the public interest.
If ASIC considers that a person should be banned from acting as a director of further companies, they will give that person notice and the right to make submissions as to why they should not be banned.
After considering these submissions, there may be a hearing chaired by a delegate of ASIC to consider a director’s conduct and any submissions that the director and ASIC may wish to make.
After the hearing, the delegate of ASIC will make a decision on director banning. Even if the decision is made to ban a director, it is open to appeal:
- To the Administrative Appeals Tribunal (AAT) in the first instance;
- To the Federal Court of Australia afterwards.
For directors who have received notice from ASIC that they are considering banning them from being a director of companies in the future, it is best to be proactive and engage a professional advisor to assist with reviewing relevant material and acting in making necessary submissions to ASIC as to why director banning should not apply. In this regard, in the past, we’ve made submissions to ASIC on behalf of a number of directors to help them avoid director banning. This has assisted directors avoid being banned by ASIC and avoid the significant costs which may be associated with appealing a decision to the AAT or the Federal Court of Australia (should the director wish to proceed in this manner).
3. Serious misconduct
In certain rare cases, ASIC can also ban someone from acting as a director of a company if they have been involved in serious misconduct.
However, to be banned on these grounds ASIC will usually be required to obtain a Court Order banning the individual from acting as a director for a period of time. The person who is the potential subject of director banning in these circumstances naturally has the ability to be represented in proceedings brought by ASIC and to make submissions to the Court as to why director banning should not apply.
Concerned about ASIC director banning, or being excluded from being a director, and need assistance?
As set out above, we have made submissions in the past on behalf of a number of directors to help them avoid ASIC director banning.
If you have any questions about director banning or would like some advice or assistance, don’t hesitate to get in contact.