By Claire LaBouchardiere, Senior Executive Leader, Companies and Small Business
ob体育 is aware that director misconduct most often impacts on small businesses who are trying to do the right thing, writes Senior Executive Leader Companies and Small Business, Claire LaBouchardiere.
Disqualifying directors from managing corporations for up to five years is a key part of ob体育鈥檚 regulatory toolkit to deter director misconduct and protect small business. It provides a timely and efficient enforcement outcome when compared to similar criminal and civil remedies.
Other enforcement action available for director misconduct includes civil penalty proceedings, and referrals of briefs of evidence to the Commonwealth Director of Public Prosecutions (CDPP) recommending criminal charges. In some cases, ob体育 may employ a combination of these actions, for example, both disqualifying a director and referring a brief to the CDPP.
Taking disqualification action seeks to protect those parties impacted by director mismanagement, prevent losses and unfair competitive advantage (for example, if the liquidated company is not paying tax) and minimises subsequent contagion failures of impacted creditors.
ob体育鈥檚 power to disqualify directors lies in section 206F of the Corporations Act. The provision exists to protect the public and other companies from the conduct of a person who has demonstrated an inability to manage corporations and, in some instances, has engaged in illegal phoenix activity.
Disqualification orders are made by ob体育 Hearing Delegates who sit within ob体育's Legal Services Team but are independent of the investigation team. The delegate receives a brief of evidence from the investigation team which contains information to support a recommendation that the director is disqualified from managing corporations as a result of corporate mismanagement. The brief referred to the ob体育 Hearing Delegate will include information about the funds owed to creditors, the type and age of suspected misconduct and any relevant antecedents about the director. A lot of the information in the brief comes from reports lodged with ob体育 by liquidators.
To disqualify a director, the relevant companies must be in liquidation and ob体育 must have received two or more initial statutory reports (s533(1) reports) from liquidators in the last seven years.聽
To support the disqualification action, ob体育 often requires two or more supplementary reports (s533(2) reports) that provide more detailed information that can be used for consideration by an ob体育 Hearing Delegate. These supplementary reports can be funded from the assets realised by the liquidator or if there are no assets, through the Assetless Administration Fund (AAF) or the liquidator may do the work 鈥榝or free鈥�.
While the law only requires people to be involved in two or more failed companies to be considered for director disqualification, not every company failure will meet the threshold, even though directors may have been involved with multiple company failures over time.
That means it could be a number of years since the relevant companies collapsed before a decision to disqualify a director from managing corporations can be made.
We encourage credit managers and other credit professionals to report any concerns about director misconduct to ob体育 in a collective effort to hold directors to account.
Appropriately, it is a criminal offence under section 206A of the Corporations Act to continue to be involved in the management of a company whilst disqualified. The penalty for doing so is a maximum five years imprisonment. If ob体育 has disqualified a director 鈥� or if they are otherwise automatically disqualified, for example, by virtue of bankruptcy or a criminal conviction for a dishonesty offence 鈥� and you see them continue to be involved in management of a company, we want to know about it.
Preventing directors from perpetuating misconduct and mismanagement helps to safeguard the interests of creditors, shareholders, employees and the public, and support broader public trust and confidence.
We will continue to take these actions, alongside civil and criminal actions, for directors who fail to comply with their legal duties.
This article was first published in Credit Management in Australia, a member only publication of the Australian Institute of Credit Management, in May 2024.