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Liquidation resulting in a Director Banning by ASIC – how common is it?

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Many Directors think that there is some sort of automatic penalty that prohibits them from being a Director of another company if one of their companies enters liquidation.  It aint so!  But ASIC does have a (fairly) active programme going for Director Bannings.  So when is a Director likely to be banned?

Automatic Banning as a result of Liquidation – no such thing

Firstly, 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 attached to that event.

ASIC initiated Director Banning

ASIC has the power under Section 206F of the Corporations Act 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.

That’s the law, but it is a little different in practice. There are around 10,000 company liquidations every year and in around 29% of those liquidations, the director has a prior “strike”.   It is simply beyond ASIC’s resources to seek to ban every director that could be banned. In the second six months of 2013 there were 32 Director bannings by ASIC.  So in practice ASIC will look at a director banning where there are a number of “strikes” against a directors name or where ASIC suspects offences have been committed – but even then it is not a common occurrence.

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.

Bankruptcy

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.

Some Convictions

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.

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