Deciding whether to be “naughty” or “nice” for 2017 – some things to consider if you are a company director

While the saying often goes that “nice people finish last” before you decide to indulge yourself in the New Year, spare a thought for your 2016 actions and ensure that a bit of further indulgence doesn’t end with you being unable to manage your company.

Part 2D.6 of the Corporations Act 2001 (Cth) (the Act) contains a number of provisions to disqualify a person from managing corporations (the Disqualification Provisions).  The Disqualification Provisions serve three main purposes, they:

1)     protect company shareholders;

2)     punish the offending director; and

3)     act as a general deterrence.

The Disqualification Provisions of the Act will apply in the following situations:

1)     A director is automatically disqualified from managing a company if convicted of certain criminal offences.  Criminal offences having a disqualifying effect include:

a) offences pertaining to the making of decisions relating to the company or which may affect the financial position of the Company: see section 206B(1)(a) of the Act; or

b) offences that are contraventions of the Act punishable by imprisonment for more than twelve months (or three months where it is an offence relating to dishonesty): see section 206B(1)(b) of           the Act; or

c) offences in a foreign jurisdiction punishable by imprisonment for longer than twelve months: see section 206B(1)(c) of the Act.

2)     A director is automatically disqualified if he or she becomes an undischarged bankrupt under the Bankruptcy Act 1966 (Cth) (the BA) or fails to comply with a deed of arrangement under Part X of the BA: see sections 206B(3) and 206B(4) of the Act.

3)     A director is automatically disqualified if disqualified from acting as a director of a foreign company (or being concerned with the management of a foreign company) pursuant to an order of a foreign Court: see section 206B(6) of the Act.

4)     Where a Court on application from ASIC elects to disqualify a director:

a) after making a declaration under section 1317E of the Act that the director has contravened a civil penalty provision of the Act: see section 206C(1) of the Act.

b) on account of the director being an officer of two or more failed companies within the last seven years: see section 206D(1) of the Act.

c) due to repeated contraventions of the Act: see section 206E(1) of the Act.

d) due to the director being subject to an order of disqualification from a foreign court: see section 206EAA of the Act.

What will happen next?

So, what happens if you end up on the ASIC disqualified persons register?

The length of disqualification will ultimately depend on the nature or grounds for the disqualification but can be up to twenty years in extreme circumstances.  During that period, the disqualified person is unable to manage a corporation.

Section 206A of the Act explains the concept of “managing corporations” and provides that any disqualified person will commit an offence if they:

1)     make or are seen to participate in making decisions on behalf of the company which affect the whole or a substantial part of the company;

2)     act in any capacity in which they might significantly affect the financial position of the company;

3)     communicate or provide instructions or wishes to directors knowing or expecting that those instructions or wishes will be carried out on their behalf.

So, while you may no longer be a director, if for example you are involved in negotiating rent or credit facilities you may still be seen as participating in making decisions which relate to a substantial part of the business and have committed an offence under section 206A of the Act.

Decision making when disqualified also becomes relevant if the company subsequently enters liquidation. Where a disqualified person has been making management decisions, section 588Z of the Act enables a liquidator to apply to make the disqualified person personally liable for part of the company’s liabilities if there is a connection between the debts and liabilities of the company and the decision making of the disqualified person.

If you need any assistance with understanding your corporate obligations or have any other corporate law questions, please contact us on 07 3859 4500.

Belinda Pinnow

Associate