Directors Cut: Technical arguments fail for disqualified directors

Articles, Procedure + Litigation

The Corporations Act 2001 empowers the Australian Securities and Investments Commission (ASIC) to disqualify people from acting as directors in circumstances where they have been directors of two or more companies which have been wound up and as a result of the winding up creditors were paid less than 50c in the dollar.

The power is an important one and is designed to protect the public from the actions of directors who cause losses through either their dishonesty or incompetence. Orders banning people from holding office as director can cause significant commercial and reputation damage. The orders are an important tool available to ASIC to assist in the protection of the community.

In order to justify the making of an order, there are two preconditions that must be satisfied.

Those preconditions are:

  1. that within 7 years immediately before ASIC gives a notice (the preconditions to making an order) the person was an officer of 2 or more companies; and
  2. while the person was an officer, or within 12 months after ceasing to be an officer, each of those companies was wound up and the liquidator lodged a report under  s533(1) of the Corporations Act about the company’s inability to pay its debts.

In ASE 16 v Australian Securities and Investments Commission the recipients of a notice from ASIC challenged the issue of the notice. The challenge was made on the basis that it was asserted:

  1. that the winding up had to be complete before the requisite notice could be issued by ASIC; and/or
  2. the notice given by the liquidator concerning the company’s inability to pay its debts must be lodged within 12 months of the person being or ceasing to be a director.

The Court rejected both of these arguments. While superficially the challenge appeared to have merit based on a narrow reading of the  wording of s206F of the Corporations Act, the Court noted that when interpreting words or phrases contained in a statute, the Courts will consider the objective statutory purpose so as to arrive at an interpretation that would best achieve the purpose of objective of an Act. Thus the meaning of “was wound up” in s206F should not be taken to mean the winding up was complete, but rather be a reference to the time at which the relevant companies began to be wound up.

Equally, the Court held that s206F should not be interpreted to mean the liquidators report had to be lodged within 12 months of the person ceasing to be an officer. Such an interpretation would prevent the community being protected from the actions of recusant directors merely because of the delayed actions of a liquidator or simply fortuitous (for the person involved) timing.

In delivering its Judgment, the Court has reinforced the importance of ASIC’s power to issue banning orders and affirm the willingness of the Court to interpret provisions in such a way to assist in ensuring these powers are exercised in the way Parliament intended and in a way that can assist in fulfilling its aims in  protecting the community.

The case also serves as a useful reminder that when considering what is meant by legal provisions in statutes, it is often very important to remember that words and phrases will not always be read according to their literal meaning.

For more information contact ERA Legal.

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