Director’s Eligibility for Disqualification by ASIC

16 April 2016

The role of a Director, whilst one of privilege also carries duties and responsibilities mandated by the Corporations Act 2001. A Director's failure to comply with his/her duties often comes to light once a company is wound up.

What are Director's Duties?

A director has a requirement to ensure compliance with general and specific laws applying to the company's operations and a primary duty to shareholders of the company. If the company is insolvent, or there is a risk of insolvency, a Director's duties expand to include creditors including employees with outstanding entitlements.

Once a company enters external administration, a Director will also have duties to the external administrator.

What are the consequences of breaching Director's Duties?

Once a company enters external administration, a Director will also have duties to the external administrator.

A Director's failure to comply with their duties will often be revealed once a company is wound up and a Liquidator begins investigating the company's affairs and causes of failure.

A Liquidator has a duty to report any breaches of Director's Duties to ASIC.

ASIC may determine to use its power pursuant to Section 206F of the Corporations Act to disqualify a Director from managing a corporation if certain criteria are met.

Two Strikes

A Director of two or more failed companies faces a greater risk of being disqualified by ASIC if they have failed to comply with their duties as a Director.

Section 206F of the Corporations Act gives ASIC the power to disqualify a person from managing a corporation for up to 5 years if:

  • Within 7 years immediately before ASIC gives a notice:
  • The person has been an officer of 2 or more corporations; and
  • While the person was an officer, or within 12 months after the person ceased to be an officer of those corporations, each of the corporations was wound up and a liquidator lodged a report about the company's inability to pay its debts.

This means that a Director of two or more failed companies may be eligible for disqualification. A former Director of a company that is wound up can also face disqualification if the company is wound up within 12 months of them ceasing to act as a Director. Furthermore, there is a time frame of 7 years that applies, so the two failed companies may be independent of each other and may not be wound up concurrently.

Avoid a Strike!

To fulfil their duties as a Director and avoid potential disqualification, it is critical that a Director acts promptly if they suspect that a company is or may become insolvent.

There are many warning signs that indicate that a company is experiencing financial difficulty. They are varied and will be different for each business. These warning signs include ongoing losses, poor cashflow, unpaid creditors outside usual trading terms and problems obtaining finance. The warning signs point to an increased likelihood that a company is insolvent or will become insolvent.  ASIC Regulatory Guide 217 – Duty to prevent insolvent trading: Guide for Directors further details warning signs that Directors should identify.

If you are concerned about the financial position or solvency of your company, act now to maximise the chance of the successful restructure of the company and the continuation of the business.

Contact Rodgers Reidy now for a confidential discussion in relation to your specific business circumstances.

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