Liquidation and Director Banning – what are the chances?

We are often asked by a director whether or not they will be banned as a director if their 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.  But it can happen. 

Circumstances resulting in Director Banning

There is provision under the Corporations Act (Section 206F) 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. The regulator 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.

Also, 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 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 the regulator’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 they 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, the regulator cannot seek to ban the person unless there are specific offences. If a director has multiple “strikes” as a director then it is possible that they will be banned.