‘Money never sleeps’ and neither does ASIC: disqualification as a Director pursuant to Section 206F Corporations Act 2001

During the corporate excitement of entrepreneurial risk-taking in a limited liability Company, thought is not usually given to the possibility that a Director may be disqualified if ‘things go wrong’. Even in the event of liquidation of a Company, Directors are – notwithstanding the ‘corporate veil’ – more likely to be concerned about Director’s liability and losing their assets or, in extreme circumstances, criminal liability.

Yet the Section 206F disqualification notice issued by ASIC pursuant to the Corporation Act 2001 (‘Act’) is one of the most common, and perhaps least understood, actions that occur.

Underrated, and often unexpected, the Section 206F notice may be one the most lethal weapons in the ASIC armoury. Most importantly, an understanding of the case law and circumstances which result in the issuing of the Section 206F notice may assist Directors in preventing the conduct resulting in the collapse of Companies in the first instance.

Given the recent spikes in corporate collapses, an examination of Director’s disqualifications under Section 206F of the Act may be valuable in many respects.

What is a section 206F Notice?

A notice issued by ASIC pursuant to Section 206F of the Act is one which requires a Director to demonstrate why he or she should not be disqualified from managing a Corporation.

Section 206F of the Act allows ASIC to disqualify a Director from managing a Company for a period of five years in the event the Director (within the seven-year period before the issuing of the Notice) was an officer of two or more corporations and, while the person was an officer (or within 12 months of ceasing to be an officer) each of the corporations was wound up. The liquidator may then lodge a report under Section 533 (1) of the Act due to the Corporation’s inability to pay its debts and, if ASIC is satisfied that the action is justified, the Director may be disqualified.

Responding to a Section 206F notice

A recipient of a Section 206F notice has an option to respond by way of written submissions and/or attendance at a hearing with an ASIC delegate (preferably both).

The dialogue during the hearing is recorded, and legal representation is allowed. However, the party subject to the notice should expect to answer direct questions from the delegate. Supporting statutory declarations from witnesses involved with the Company, and even character references, are useful. There are no prescriptive rules. However, in accordance with the case law, the ASIC delegate will seek to ascertain whether:

    1. There was any fraud, dishonesty or gross incompetence by the Director and, if so, whether there were any mitigating factors;
      Potential mitigating factors could include, for example, those which evidence that the conduct was an uncharacteristic lapse of judgment caused by extreme circumstances and/or remorse by the Director accompanied by efforts to rectify the damage.
    2. The Director had a proper understanding of Director’s duties and used their best endeavours to comply with their statutory responsibilities;
      Evidence of a strict approach to financial management and/or financial resources available from group entities and/or the Director’s history of successfully managing corporations in the past may also be relevant.
    3. There is a credible explanation for why any taxes were unpaid (such would be extremely limited) or whether there was intentional tax evasion;
    4. There were external circumstances outside of the control of the Director which led to the demise of the Companies;
    5. It is likely that the conduct could occur again if the Director continued managing Companies;
    6. There was a blatant disregard of creditors/no genuine attempt to pay them or whether there was a genuine belief that funds would be available to pay creditors when the debts became due;
    7. Hardship would be suffered by the Director’s family due to a disqualification.
      In some cases, the inability of a Director to manage a Company for five years (when their financial livelihood and entire work experience has depended on such ability or property is held by the Company) could be devastating.

It will be interesting to observe how the recent ‘safe harbour’ legislative provisions may impact the decisions pertaining to section 206F disqualifications. Until case law arises, we may only speculate in this regard.

In any event, none of the above factors would solely determine the issue nor are they exhaustive. However, they provide a guide as to considerations, which are relevant, and some insight into how Company collapses may arise. Situations in which another Director was solely in charge of finances, or there was a period of limited involvement by the Director in question are not compelling, however, appear to be common.

The best defence, as always, is compliance. Understand your statutory obligations as a Director. Intimately know the Company’s financial status always. Don’t rely on overly speculative factors in determining whether there will be capacity to pay debts when they arise. And when in doubt, speak to your lawyer.

Want to make sure you know your statutory obligations? Concerned you may be at risk? Call us today on +61 (07) 3876 5111 to book a consultation.

Written by
NB Lawyers