Running a Company whilst Disqualified

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Disqualification

ASIC has the power to disqualify a person from managing a company for up to 5 years where that person has, within the previous 7 years, been an officer of two or more companies that have been wound up and deemed insolvent by a liquidator.

A person will be automatically disqualified for being convicted of certain offences listed under the Corporations Act, being an undischarged bankrupt, not complying with the terms of a personal insolvency agreement or as the result of a court order.

Exceptions to disqualification

ASIC may in its discretion, permit a person it has previously disqualified to manage a particular company. They may grant this permission subject to certain conditions and exceptions.

Similarly, where a person has been disqualified by way of court order, the person may apply to the Court for leave to manage a particular company or to manage companies in general.

What constitutes ‘running a company’ when disqualified?

ASIC maintains a record of persons who are disqualified and conducts investigations to ensure the disqualification is being complied with.

A disqualified person will be committing an offence where:

  1. they make, or participate in making, decisions that affect the whole, or a substantial part, of the company;
  2. they exercise the capacity to significantly affect the corporation’s financial standing; or
  3. they communicate instructions or wishes (other than in a business or professional capacity) to the directors of the corporation where they intend for the directors to follow their instructions and know that they are accustomed to doing so.

There is a fine line between what ASIC deems as merely assisting a company, and what is seen as actively running a company in a ‘puppet master’ like capacity. A disqualified person should extensively weigh up the risks when deciding whether or not to assist or provide advice to a company in its operations whilst disqualified; the Commonwealth may prosecute and impose heavy fines for contravening a disqualification order.

Whilst ideally it would be safest not to be involved in a company at all, where this is not possible, the disqualified person should, at the very least, isolate themselves from any acts which might be deemed management related such as:

  • operating bank accounts or drawing cheques;
  • evaluating or employing staff;
  • approving stock purchases and sales; or
  • entering into agreements or contracts on the company’s behalf.

If you have any questions relating to running or being involved with a company whilst disqualified, please don’t hesitate to contact me.

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