Directors who have had a company go into liquidation, or individuals who have become bankrupt, frequently assume their days of running a business are over. In most cases, that assumption is wrong — but the rules differ significantly depending on whether you’re talking about company liquidation or personal bankruptcy, and both come with important exceptions.
The difference between liquidation and bankruptcy
Liquidation is the process of winding up an insolvent company. In a liquidation a company’s assets are sold and any surplus funds received after paying costs are distributed to creditors.
Bankruptcy is a process for insolvent individuals and it involves an independent party (bankruptcy Trustee) being appointed either voluntarily or by the Court to administer a person’s bankrupt estate, which involves the sale of certain assets, including real property, investments, cash at bank and motor vehicles (over a set value) and the distribution of any surplus funds to creditors.
Liquidation doesn’t automatically have a financial impact on a director, however, often their can be flow on effects which are summarised here. And often liquidation can lead to bankruptcy, however, that is not always the case and you can go through a company liquidation without ever facing personal bankruptcy.
Can you be a director after you have had a company go into liquidation
The answer is generally yes, however, there are some exceptions.
If you liquidate an insolvent company, you’re generally free to hold directorship of other companies or start a new one, provided there’s no reason for disqualification. Liquidation itself is not a punishment, or a restriction on operating other companies or businesses, it’s a legal mechanism for closing down a company that can’t pay its debts. However, in some cases directors may be disqualified from managing further companies, most commonly being:
You have been a director of multiple companies which go into liquidation
If you have two or more companies which go into liquidation within a 7 year period, ASIC can ban you from being a director pursuant to Section 206F of the Corporations Act 2001 (Cth) for a period of up to five years. In most cases ASIC will not seek to ban directors of corporate groups which fail at the same time (e.g. if you have three companies involved in the same business and they all go into liquidation). ASIC is more focused on banning directors who have a company go into liquidation and then start a similar (or new) business which then fails. ASIC must show there has been some form of misconduct involved, such as insolvent trading or breaches of directors’ duties and they rely on reports submitted by Liquidators to establish these grounds. If ASIC does seek to bank you under Section 206F you can dispute or appeal ASIC’s grounds and we have assisted a number of directors with this.
There is serious misconduct
ASIC can also bank you as a director if there has been serious misconduct. This might include things like misappropriation of company funds or assets or insolvent trading which causes significant damage. Again ASIC must establish this misconduct and it relies on reports from Liquidators to do so, and it is also more than likely that for ASIC to ban you as a director for serious misconduct that ASIC must make an application to Court to do so. Given these matters, banning for serious misconduct where only one company has gone into liquidation is not as common as banning under Section 206F.
Serious misconduct can also involve illegal phoenix activity which in simple terms is transferring a business or assets to another company for less than fair value. Liquidators and ASIC are very vigilant on investigating illegal phoenix activity and it can result in director banning, civil legal claims and also criminal prosecution.
Can you be a director after you have gone bankrupt
The moment you’re declared bankrupt by a court order or voluntarily, you’re automatically disqualified from acting as a director of a company for as long as the bankruptcy continues. The only exception to this is if the Court grants you leave to be a director and this exception generally will only occur for people who wish to continue as directors of Trustee companies for self managed super funds.
The restriction isn’t limited to being formally appointed as a director, either it also stops you from taking part in the management of a company, directly or indirectly, without being named as a director on paper.
If you were already a director when the bankruptcy order was made, you must resign; remaining in post while an undischarged bankrupt is against the law and in some cases can result in conviction and imprisonment.
Can you be a director of a company after bankruptcy
Bankruptcy generally goes for three years after which time you are discharged from bankruptcy. After you are discharged from bankruptcy you can be a director of a company unless there is some other restriction in place, such as banning from ASIC or a Court Order declaring you ineligible.
This means that you are free to start up a business again through a company. However, there may be some other restrictions involved in what sort of business you can trade, such as restrictions relating to trading a company in the building industry after bankruptcy.
Can you be a director after you have done a Personal Insolvency Agreement
A proposal for a Personal Insolvency Agreement (PIA) is a manner of settling your debts and avoiding bankruptcy. To propose a PIA you must first appoint a Controlling Trustee who in simple terms puts your proposal for a PIA to creditors. During the Controlling Trustee appointment period (which is about 25 days) you can be a director of a company. However, if the PIA proposal is accepted you immediately cannot be a director. A PIA can go from anywhere from a few months to a number of years and during this time the restriction on being a director remains.
Frequently asked questions
Here are the answers to some more common questions about this topic:
- What can you do with a company if you are bankrupt – The shareholders of a company are able to appoint another person as director of a company if you become bankrupt. However, in bankruptcy the shares may be property of your bankruptcy Trustee and there can also be risks associated with a new person coming on as a director.
- What happens to a Self Managed Superannuation Fund – If you become bankrupt you cannot be a director of a Trustee company for a SMSF. This means that the fund becomes non-compliant. The three things you can do in these circumstances are; transfer funds to a public superannuation fund, make an application to Court to be authorised to be a director or arrange for a qualified third party to mange the fund.
- Is there a register of banned directors – There is a government maintained register of people who are bankrupt or who have done a PIA. There is also a register maintained by ASIC of specifically banned or disqualified directors.
- Can you avoid director banning – there a various ways you can avoid bankruptcy and we can help you with this. Additionally, if ASIC seeks to bank you as a director you can oppose any such application and if ASIC still bans you appeal their decision in Court.
- Is there anything else to know – if your company is in financial difficulty or you are facing bankruptcy, there are numerous risks including of director disqualification or banning. You should urgently get advice from a professional and we can help you if you contact us.
Contact us
If you have any questions about this article or would like some advice or assistance, don’t hesitate to get in contact with us.
