Director Disqualification in Australia

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36 individuals is almost triple the 14 disqualified the year before, and its highest total in the past five years. Half of those 36 disqualifications were for the maximum five-year period available under the Corporations Act, 2001.

There are three distinct pathways to disqualification, each with its own trigger, process and duration.

Court-ordered disqualification

ASIC (or in some cases a liquidator) applies to the court, and a judge decides both whether disqualification is justified and for how long, including permanently in serious cases. Critera can be:

• That the person contravened a civil penalty provision, most commonly a breach of directors' duties
• Where the person was an officer of two or more corporations that were wound up, each leaving a loss to creditors, and the court is satisfied that disqualification is appropriate having regard to the person's conduct in managing the corporation's affairs and property.
• Where there are repeated contraventions of the Corporations Act, capturing directors with a pattern of non-compliance rather than a single serious breach.

These orders sit at the top of ASIC's enforcement pyramid. There is no statutory cap on the period a court can impose, which is why the most serious phoenix activity and insolvent trading cases tend to attract court ordered rather than administrative disqualification.

ASIC's own administrative power

This is the tool ASIC reaches for most often, precisely because it doesn't need a courtroom. Under section 206F, ASIC may disqualify a director for up to five years where, within the preceding seven years, the person was an officer of two or more corporations that were wound up, a liquidator has lodged a section 533 report for at least two of them, and ASIC is satisfied, after issuing a show cause notice and considering the person's response, that disqualification is justified having regard to their conduct and any other relevant matter.

ASIC's enforcement history points to the conduct it treats as relevant:

• misusing a corporate position for personal advantage,
• giving false information to authorities,
• permitting insolvent trading,
• failing to keep proper records or meet tax obligations,
• failing to exercise reasonable care and diligence.

Automatic Disqualification

This is disqualification by operation of law. A person becomes disqualified if they are:

• convicted on indictment of an offence concerning the making of decisions that affect the whole or a substantial part of a corporation's business, or an act capable of significantly affecting its financial standing;
• convicted of an offence against the Corporations Act punishable by imprisonment for more than 12 months;
• convicted of an offence involving dishonesty punishable by imprisonment for at least three months (this includes foreign offences); or
• an undischarged bankrupt, or a party to an uncompleted personal insolvency agreement.

What disqualification actually stops you from doing?

Once disqualified, by whichever route, it is a criminal offence to manage a corporation. Making board level decisions, instructing staff as if a director, or attending meetings as an "adviser" while effectively directing outcomes all count.

Each day of continued involvement is treated as a separate contravention, and each one carries up to five years' imprisonment.

If you are a Director of a company and have any concerns regarding these rules, please contact us for a confidential discussion.