Controlling delinquent directors Law Reporter

ASIC enjoys some success with those trying to cut corners

One of the most difficult areas for the Australian Securities and Investments Commission to operate in is in relation to the review of delinquent directors or directors who have been disqualified from becoming directors of companies because of bankruptcy or other offences. ASIC has significant powers to seek orders from the court to prevent persons from managing corporations or being directors of corporations. But, because of the many thousands of companies, there are always persons willing to try to cut corners in achieving success and in trying to overcome the operations of the regulator. ASIC has to be consistently on its toes to seek the assistance of the courts in order to achieve success in this regard. In a recent decision of Einfeld J in the Federal Court (and after Wakim of course these decisions will now have to be made by the Supreme Court) the judge confirmed the importance of allowing a significant discretion in ASIC in dealing with delinquent directors. The case, Australian Securities Commission (ASIC's predecessor) v Roussi & Ors ((1999) 32 ACSR 568) involved a simple set of facts but one which again emphasises the importance of a clear and decisive administrative regime. The facts are taken from the Butterworths Company Law Reports.

The first and second respondents (defendants), husband and wife, R1 and R2, were directors of 18 companies between 1988 and 1996. These companies retailed computers and software. The first respondent, R1, became bankrupt on 9 June 1994 and remained undischarged. There was evidence from the Department of Fair Trading (of New South Wales) that between 1995 and 1998, there had been 430 complaints from customers. There was also evidence that nine companies of which R1 was a director owed more than $1 million. On 8 October 1997, the Australian Securities Commission filed an application seeking orders prohibiting R1 and R2 from managing any corporation for a period to be determined by the court. The regulator pleaded breaches of the Corporations Law against R1 and R2 and, in the case of R1, managing a corporation while insolvent. The defences filed by R1 and R2 were withdrawn, so that the sole issue before the court was the appropriate length of disqualification. R1 and R2 submitted that different periods of disqualification should be imposed to reflect the different roles they played in the conduct and management of the companies.

Einfeld J ruled that the two directors should be prohibited from managing a corporation for a period of 10 years. That order came into effect immediately for the second respondent (director) and once the first director had been discharged from bankruptcy.

In making this order Einfeld J reminded us that the powers of ASIC under section 230 of the Corporations Law are to be viewed as protective and not punitive in nature. Their aim is to ensure that the public is protected from the possible fraud or negligence of persons who might otherwise be given the freedom to manage companies. In reaching this conclusion Einfeld J endorsed criteria laid down in an earlier decision, Commissioner for Corporate Affairs v Eekamper ((1987) 12 ACLR 519) where a judge of the Western Australian Supreme Court held that the following matters were to be looked at in determining what period of disqualification should be ordered by the court under the equivalent of section 230. These were:

(1) Character of the offenders;

(2) Nature of the breaches;

(3) Structure of the companies and the nature of their business;

(4) Interests of shareholders, creditors and employees;

(5) Risks to others from continuation of offenders as company directors;

(6) Honesty and competence of offenders;

(7) Hardship to offenders and their personal and commercial interests; and

(8) Offenders' appreciation that future breaches could result in future proceedings. (at pages 560-571)

In concluding his judgment, Einfeld J made some interesting observations about the role of directors who were not really directors but simply going for the ride as it were, relying on others to undertake appropriate tasks. He noted that in any case where a director was a director of a company that person could "not take the rewards of [the companies] while disowning [their responsibilities to] the companies and the community." Einfeld J then went on to note that the instant case "is a gross case of abuse of company law by directors. It deserves and requires the clearest and most serious response from the court in protection of the affected community." Both directors were disqualified for the period referred to earlier.

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The purpose of this database is to provide a full-text record of all articles that have appeared in the CDJ since February 1997. It is aimed to assist in the research and reference process. The database has a full-text index and will enable articles to be easily retrieved.It should be noted that information contained in this database is in pre-publication format only - IT IS NOT THE FINAL PRINTED VERSION OF THE CDJ - therefore there might be slight discrepancies between the contents of this database and the printed CDJ.