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Timely reminder to directors that your responsibilities do not end when a liquidator is appointed

13 September 2023

#Corporate Restructuring and Insolvency, #Dispute Resolution & Litigation, #Corporate & Commercial Law

Published by:

Rebecca Cleary

Timely reminder to directors that your responsibilities do not end when a liquidator is appointed

The Australian Securities and Investments Commission (ASIC) has disqualified a director from managing corporations for three years due to his involvement in the failure of three companies. The regulator found that the director had failed to meet his obligations as a director, which included:

  • failing to pay Business Activity Statements, payroll taxes and Superannuation Guarantee Charge for two of the companies
  • failing to pay workers compensation premiums
  • failing to deliver all the books in his possession to the liquidator as soon as practicable after one of the entities was wound up
  • failing to maintain appropriate financial records
  • failing to prevent insolvent trading.

The decision is a timely reminder to directors that their conduct after a liquidator is appointed and throughout the winding up process can significantly impact whether a disqualification period is imposed and the length of the disqualification. 

ASIC’s power to impose director disqualification

ASIC has the power to disqualify a director from managing any corporations for a period of up to five years. This is sometimes colloquially referred to as a “banning order”.

ASIC will issue a notice requiring the director to show cause as to why they should not be disqualified (Notice). It is a requirement that, within seven years before issuing the Notice:

  1. the person was an officer of two or more corporations
  2. while the person was an officer, or within 12 months after the person ceased to be an officer of those corporations, each of the corporations was wound up and a liquidator lodged a report under subsection 533(1) of the Corporations Act 2001 (Cth) regarding the companies’ respective inabilities to pay its debts (a section 533 report).

A section 533 report is lodged when a liquidator believes that the company may be unable to pay its unsecured creditors more than 50 cents in the dollar. For ASIC’s purposes, the liquidation does not need to result in creditors actually receiving less than 50 cents in the dollar. It is sufficient for the liquidator to believe that this ‘may’ occur and lodges a report to this effect.  

The lodging of two section 533 reports triggers ASIC’s jurisdiction and enables ASIC to issue a Notice to the director, requiring them to demonstrate why they should not be disqualified from managing any corporations for up to five years. Once a Notice is issued, any subsequent positive outcomes (such as reversing the winding up or creditors receiving more than 50 cents in the dollar) may be considered by ASIC as factors against disqualification. However, these outcomes do not affect ASIC’s jurisdiction to issue the Notice, which is triggered by the lodgement of the reports.

For this reason, it is in a director’s interest to cooperate with the liquidator, provide books and records to the liquidator and submit the required reports. Failing to do so may contribute to the liquidator’s belief that there ‘may’ not be sufficient funds to pay out creditors, which could lead to a section 533 report being lodged. 

What can directors do?

If a liquidator forms the view that there are insufficient company funds and lodges a section 533 report, unhelpful conduct on the part of the director (for example, failing to provide books and records or to assist in the winding up) will not be looked upon favourably by ASIC in any subsequent decisions regarding disqualification.

In our experience, it is important to cooperate with ASIC upon receipt of a Notice. For example, through:

  • providing a comprehensive explanation in relation to the conduct
  • providing supporting documents
  • if allegations relate to deficiencies in the director’s conduct, providing an explanation of the steps that have been taken to prevent the deficiencies from occurring in future (for example, undertaking further training relating to the obligations of a director).

Also of relevance will be the director’s good standing in the community and the effect that a disqualification would have on the director’s broader business interests (including the potential impact on current financing arrangements and the ability to repay outstanding creditors).

If you have any questions about the legislation, ASIC’s powers, or have been issued with a Notice to demonstrate why disqualification should not occur, please get in touch with a member of our team below.

The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

Published by:

Rebecca Cleary

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