ASIC defends action on dodgy directors
The corporate regulator has said it has robust processes for deterring director misconduct and protecting small businesses.
ASIC has outlined its regulatory approach for cracking down on director misconduct, warning that misconduct often impacts small businesses doing the right thing.
The regulator said disqualifying directors from managing corporations for up to five years is a key part of its regulatory toolkit to prevent director misconduct and protect small businesses.
“It provides a timely and efficient enforcement outcome compared to similar criminal and civil remedies,” ASIC said.
“Taking disqualification action seeks to protect those parties impacted by director mismanagement, prevent losses and unfair competitive advantage and minimises subsequent contagion failures of impacted creditors.”
ASIC’s power to disqualify directors comes from 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.”
Other enforcement actions for director misconduct that ASIC can exercise include civil penalty proceedings and referrals of briefs evidence to the Commonwealth Director of Public Prosecutions (CDPP) recommending criminal charges.
The regulator noted in some cases, a combination of these actions may be employed such as if a director is disqualified and is referred to the CDPP.
Disqualification orders are made by ASIC hearing delegates who sit in the legal services team but are independent of the investigation team.
ASIC said disqualification orders are made by hearing delegates who receive a brief of evidence supporting why a director should be disqualified, often supplied by a liquidator.
“The brief referred to the ASIC 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,” the regulator said.
“To disqualify a director, the relevant companies must be in liquidation and ASIC must have received two more initial statutory reports from liquidators in the last seven years.”
For a recommendation to be considered, ASIC said it requires two or more supplementary reports that provide more detailed information.
ASIC said its disqualification actions are fair as the law requires people to be involved in two or more failed companies to be considered for disqualification. However, not every company failure and director meets this threshold if involved in multiple failed companies.
This can lead to directors not being disqualified for a number of years since a relevant company’s collapse.
The regulator said it is a criminal act under section 206A of the Corporations Act to continue being involved in the management of a company whilst disqualified, with a maximum penalty of five years imprisonment.
ASIC said it will continue to take these actions, alongside civil and criminal actions for directors who fail to comply with their legal duties.
“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,” ASIC said.
“We encourage credit managers and other credit professionals to report any concerns about director misconduct to ASIC in a collective effort to hold directors to account.”
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