If someone is the director of a company placed into liquidation, they won’t necessarily be banned from acting as a director of another company.
Why not? Because many companies are placed into liquidation because of circumstances beyond the director’s control.
For example, if a company’s major customer goes into liquidation the resultant cash flow difficulties could force the company to go into liquidation as well. But it’s not the director’s fault that the customer couldn’t pay, and so it would be unfair to ban them from being the director of another entity.
So why are people banned from acting as the director of a Company? There are two main reasons:
- Personal Bankruptcy. Section 206B(3) of the Corporations Act states that a person is disqualified from managing corporations if the person is an undischarged bankrupt.
- ASIC Disqualification. Section 206F of the Corporations Act grants ASIC the power to disqualify a person from managing a corporation for up to five years if the person has been an officer of two or more corporations that have gone into liquidation within the previous seven years and the Liquidator of these corporations has lodged a report pursuant to Section 533 of the Corporations Act.
Now, disqualification pursuant to Section 206B(3) is automatic, and lasts for the duration of a person’s bankruptcy (usually three years).
But disqualification pursuant to Section 206F is anything but automatic. When ASIC considers disqualification they must take a number of factors into account, including:
- whether the corporations were related to one another
- the conduct of the officer in question
- whether disqualification would be in the public interest.
Even if ASIC is satisfied these criteria have been met, there’s no guarantee it will pursue a banning order against the officer in question. In fact, director banning orders are relatively rare because ASIC doesn’t have the resources to pursue them against all potential candidates.
Evidence suggests ASIC is more likely to pursue candidates:
- who’ve been officers of significantly more than two corporations that have gone into liquidation
- in cases where public interest is likely to be heightened.
If your client is a first-time director of a company that’s placed into liquidation, chances are they’re not a candidate for director banning. Even if they’ve been a director of more than one failed company (and therefore eligible for a director banning order), ASIC probably won’t pursue them unless the number of failed companies is significantly more than one.
However, we’ve recently seen ASIC increase their efforts to monitor and build their files on directors who have had multiple business failures. And so we’re predicting ASIC will be increasing its activity on banning repeat offenders.
If you have any other questions about director banning, or would like some advice, don’t hesitate to get in touch with us.