Will the regulator ban you from being a director of other companies?
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) 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.
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 the regulator’s resources to seek to ban every director that could be banned. Every year there are less than one hundred director bannings out of the 10,000 or so company liquidations. So in practice the regulator will look at a director banning where there are a number, probably well in excess of two, “strikes” against a directors name.
If the above advice has not answered your questions you might want to review the following pages and downloadable Information Sheets: