ASIC’s Power to Disqualify Directors – What do I need to know?

The Australian Securities and Investments Commission (ASIC) has extensive powers to disqualify a person from managing a corporation for a period of up to five years if certain criteria are met. There are clear rules which ASIC must follow before banning a director, yet it also has a broad discretion in making its final decision.  If a director can show the adverse impacts disqualification would have on the employees and clients/customers of a business, they may be able to avoid the harsh consequences available under Section 206F of the Corporations Act 2001 (Cth) (the Act).

What are the rules for ASIC banning a director?

Before ASIC can disqualify a person from managing a corporation, the following requirements must be satisfied:

1. within a seven-year period:
   1. the person has been an officer of two or more corporations; and
   2. while the person was a officer or within 12 months after the person ceased to be an officer, each of the corporations were wound up, and in each liquidation, the liquidator lodged a section 533(1) report about the corporation’s inability to pay its debts (when the corporation is unable to pay unsecured creditors more than 50 cents in the dollar);
2. ASIC has given the person a notice requiring them to prove why they should not be disqualified and has given them an opportunity to be heard; and
3. ASIC is satisfied that the disqualification is justified.

An “officer” of a corporation includes directors and secretaries, as well as a person who:

1. makes, or participates in making, decisions that affect the whole, or a substantial part, of the of the corporation; or
2. has the capacity to affect significantly the corporation’s financial standing; or
3. the directors of the corporation are accustomed to act in accordance with their wishes.

Sometimes these officers are referred to as ‘shadow directors’. In an extreme case a person who has not been formally appointed as a director can still be disqualified from managing corporations by ASIC.

In our experience, ASIC will take all reasonable measures to ensure that a person served with a notice is afforded procedural fairness to respond to the notice. Those steps may include by allowing them sufficient opportunity to make submissions, to provide documents in support of those submissions and to be heard at a hearing with legal representation.

After considering any submissions made by the person, ASIC will then decide whether to proceed with disqualification.

Will all directors of an insolvent company be banned?

No, not all directors of an insolvent company will be banned from managing a company in the future. As set out above, the person needs to have been a director or officer of two or more insolvent companies in a seven year period for ASIC to consider them as a target for further investigation.

What does ASIC consider when making its determination?

The Act recognises that the subject corporations may have been liquidated due to circumstances outside of the person’s control.

So, when deciding whether disqualification is justified, ASIC will have regard to:

1. whether the wound-up corporations were related to one another;
2. the person’s conduct in relation to the management, business or property of the corporations;
3. whether the disqualification is in the public interest; and
4. any other matters it considers appropriate.

ASIC has a very broad discretion and the matters it considers will vary from case to case.

Recent examples demonstrate that a persuasive factor is often whether the director did not keep and maintain proper books and records.

ASIC recently disqualified a director from managing corporations for a period of five years after finding that the director did not meet his obligations in relation to three separate companies, which owed a combined estimated total of more than $700,000.00 to unsecured creditors (including the Australian Tax Office).

In reaching its decision, ASIC had regard to the fact that the director:

1. made frequent bank transfers between related entities, with no documentation to verify that the transfers were made for a genuine business purpose;
2. failed to follow the companies’ tax reporting requirements, including the lodgement of Business Activity Statements and annual income tax returns; and
3. did not maintain proper financial books and records.

This decision is a timely reminder of the importance of keeping true and accurate written financial records and ensuring compliance with tax reporting obligations.

How do I know if a person has been disqualified?

ASIC keeps a publicly available register, which provides information on the people who have been disqualified from the register shows the names of the people who have been disqualified and the commencement and cessation dates of the disqualification.  The disqualification also prevents the person from acting as a shadow director.

What should I do if I receive a notice from ASIC?

In the last six months, we’ve noticed that ASIC has increased its enforcement efforts, including the provision of disqualification notices.

A disqualification notice can have significant consequences for its recipient, both financial and legal.

So, if ASIC has issued you with a notice to demonstrate why disqualification should not occur, it is important that you act promptly in seeking advice from an appropriately qualified professional and responding to the notice. When preparing submissions to ASIC, you should address the concerns set out in the notice in detail and look to explain any relevant background circumstances which led to the liquidation of the relevant corporations.

Coulter Legal has had recent, direct experience in advising and acting for a director served with a disqualification notice issued by ASIC and, in that case successfully demonstrated why disqualification should not occur.  In responding to the notice it became clear that ASIC will seek to balance the perceived public interest in the disqualification occurring against the adverse repercussions disqualification would have for the employees and clients/customers of the business operated by the company.

Coulter Legal offers expertise in insolvency matters and as noted above, has considerable experience in helping its clients with navigating the insolvency landscape, including the implications arising from disqualification notices issued by ASIC.  For information on what happens when a business becomes insolvent, see our article here.

If you require assistance, please contact our Litigation & Dispute Resolution team today.