Manage Corporation Whilst Disqualified

A person cannot act as a director of a corporation when they are disqualified from managing corporations under the Corporations Act 2001. This article explains the offence and how a person can come to be disqualified.

The offence

Under section 206A of the Act, a person who is disqualified from managing corporations must not:

• make or take part in making decisions that affect the whole or a substantial part of the business;
• exercise the capacity to affect significantly the corporation’s financial standing;
• communicate instructions to the directors of the corporation (other than advice given in another capacity);
  • knowing the directors are accustomed to acting on those instructions; or
  • intending that the directors will act on those instructions.

Disqualification

Disqualification occurs automatically upon conviction of certain serious offences, via a ruling from ASIC, or via a court order.

Under section 206B of the Act, a person becomes disqualified from managing corporations if they:

1. are convicted of an offence that:

• involves making, or taking part in making, decisions that affect the whole or a substantial part of the business; or
• involve an act that has the capacity to affect significantly the corporation’s financial standing; or

2. are convicted of an offence that:

• contravenes the Act and is punishable by a prison term of more than 12 months; or
• involves dishonesty and is punishable by a prison term of at least 3 months; or

3. are convicted of an offence against the law of a foreign country that is punishable by a prison term of more than 12 months.

A person also becomes disqualified if they:

• are an undischarged bankrupt;
• have executed a personal insolvency agreement and have not complied with it;
• are disqualified from managing Aboriginal and Torres Strait Islander corporations;
• are disqualified from managing corporations under an order from a foreign court.

A disqualified person can apply to the court for leave to manage corporations, a particular class of corporations, or a particular corporation if the person was not disqualified by ASIC. However, courts will rarely grant this.

Disqualification length

The disqualification lasts for five years and begins the day the person is convicted, unless they serve a jail term, in which case the five-year period begins the day they are released from prison.

On application by ASIC, the court can extend the ban by up to an extra 15 years. For instance, under Section 206D the court can disqualify a person for up to 20 years if:

• in the past 7 years the person has been a director of two or more corporations when they have failed; and
• the court is satisfied the manner in which the corporation was managed was wholly or partly responsible for the corporation failing, and the disqualification is justified.

Penalties

The Act provides that the offence of managing corporations while disqualified is punishable by a fine of up to 50 penalty units ($11,100) or imprisonment for up to one year, or both.

Possible defences

A person will have a defence if they had permission from ASIC to act as a director. A person will also have a defence if they can show they were not acting as a director but were providing advice while actual directors retained ultimate decision-making capacity.

For advice or representation in any legal matter, please contact Armstrong Legal.