Will you be banned by ASIC as a director?
We are often asked whether or not you will be banned as a director if your company goes into liquidation.
Be aware that there is nothing illegal about simply being a director of a company that enters into liquidation and there is no automatic banning as a director.
Circumstances resulting in Director Banning
There are a couple of ways that a person can be banned from acting as a director for a period of time. Firstly, it is fairly common for a director to have to declare themselves bankrupt, usually as a result of providing personal guarantees to creditors. A person cannot act as a director of any company whilst they are a bankrupt. Bankruptcy normally lasts for three years.
Also, there is provision under the Corporations Act (Section 206F) for ASIC to disqualify a person from managing a corporation for up to 5 years if the person has been an officer of two or more companies that have entered liquidation within the previous seven years. ASIC is required to consider a few things in determining whether or not it should ban a person from acting as a director:
- whether any of the companies were related to one another;
- the person’s conduct in relation to the management of the company; and
- whether the disqualification would be in the public interest.
Lastly, if a person is convicted of an offence that is a contravention of the Corporations Act and is punishable by imprisonment for a period of greater than 12 months, then the person is automatically disqualified from acting as a director of a company for the same period of time (Section 206B). Remember, it is quite a rare thing for a Director to be convicted of an Offence under the Corporations Act.
What happens in the real world
That’s the law above, but it is a little different in practice. Remembering that there are over 10,000 company liquidations every year and in hundreds or perhaps even thousands of those cases the situation will arise where a director has been a director of two or more companies entering liquidation. It is simply beyond ASIC’s resources to seek to ban every director that could be banned. Every year there are a couple of hundred director bannings out of the 10,000 or so company liquidations. So in practice ASIC will look at a director banning where there are a number, probably well in excess of two, “strikes” against a directors name.
Directors should rightly be concerned about their ability to act as a director in the future. However, if it is the first time a director has been a director of a company that enters liquidation, ASIC cannot seek to ban the person unless there are specific offences. If a director has multiple “strikes” as a director then it is possible, but still relatively unlikely, that they will be banned by ASIC.