Australia: Disqualified director successfully seeks leave to manage an Australian corporation

In brief - Five year disqualification period set aside by court

A court may set aside the automatic five-year disqualification preventing a person from managing any Australian corporation if it can be satisfied that there are considerations in favour of such an order.

Applicant disqualified for five years as a director in Australia

In the case of Re Colin Gregory Ryan [2014] QSC 18, Mr Ryan ("the applicant") successfully sought leave of the court pursuant to section 206G of the Corporations Act 2001 ("the Act") to manage an Australian corporation following his automatic disqualification for five years as a director in Australia.

The automatic disqualification related to offences committed during his management of New Zealand based Capital+Merchant Finance Limited ("CMF") prior to its receivership in late 2007.

Automatic disqualification under the Corporations Act

Under section 206B of the Act, a person will be automatically disqualified from managing a corporation in Australia if the person:

  • is convicted on indictment of an offence in Australia or a foreign country relating to conduct within the decision-making capability of a business; or
  • is convicted on indictment of an offence in Australia or a foreign country relating to conduct which has the capacity to affect a corporation's financial standing; or
  • is convicted of an offence under the Act that is punishable by imprisonment of more than 12 months; or
  • is convicted on indictment of an offence in Australia or a foreign country involving dishonesty that is punishable by imprisonment of at least three months; or
  • is convicted of any offence in a foreign country that is punishable by imprisonment for a period of more than 12 months.

The five year period of disqualification will start on the day that the person is convicted if they do not serve a term of imprisonment or from the day they are released from prison.

Under section 206G of the Act, a person may seek leave of the court to manage a corporation or corporations if the person was not disqualified by the Australian Securities and Investments Commission.

Circumstances of offences leading to applicant's disqualification

In determining whether to grant leave to the applicant to manage a corporation in Australia, the presiding judge considered the circumstances surrounding his conviction in New Zealand as a non-resident director, as well as his general character and experience.

Justice Lyons considered the following circumstances of the conviction:

  • The three offences of which the applicant was convicted related to CMF prospectuses containing untrue statements.
  • The applicant was reliant on the three resident directors of CMF.
  • The applicant had an honest belief in the truth of the untrue statements despite not having reasonable grounds for the belief.
  • The applicant pleaded guilty to the offences.
  • The offences were not committed for the applicant's personal profit.

Punitive aspect of disqualification of directors

Justice Lyons noted there were many principles and relevant factors raised in the case law to date and he focused primarily on the policy consideration of the need for protection of the public rather than punishment of the offender.

Justice Lyons considered that the automatic disqualification and the requirement for leave to manage a corporation protected the public; however, he agreed with Justice Middleton in Australian Securities and Investments Commission v Healey & Ors (No 2) [2011] FCA 1003, that disqualification had a punitive aspect.

Further, albeit lesser, consideration was placed on the potentially less severe outcome that might have occurred if the offences had been committed in Australia and were subject to the Corporations Act.

Evidence of the applicant's integrity, diligence and skill

Of particular importance to Justice Lyons was the applicant's general character and track record as a successful director and manager of various entities since 1972. There was also significant evidence in favour of the applicant's integrity, diligence and skill, as well as there being support of the board of the prospective corporation which the applicant wished to be granted leave to manage.

Justice Lyons considered that the applicant's conduct with respect to CMF appeared to be significantly out of character and this was a factor in determining that there was little risk that he might reoffend.

Applicant would not be reliant on other directors and there was a lesser need for supervision

The court considered that the degree of control and influence in the prospective company as well as the level of supervision were also relevant factors. Lyons J noted that the applicant would be one of at least five directors, he would not have sole control of the prospective company, he would not be reliant on other directors and that his previous record as a director meant that there was a lesser need for supervision.

Furthermore, the prospective company operated in a different industry from CMF and as such there was little or no risk of loss of the same kind as that which occurred in CMF's case.

Court recognises benefit to prospective company and sets aside disqualification on limited basis

Justice Lyons noted that there was no evidence in support of the prospective corporation requiring or needing the applicant in its management and that evidence of such a need would provide strong support for the application. Rather, the applicant showed that there would be a benefit to the prospective company and that that benefit was recognised by the board.

His Honour qualified the grant of leave on the basis that he would not grant leave generally to manage corporations, but rather, it would be limited to one corporation.

Furthermore, leave was ultimately granted on a limited basis, that there be at least four other directors at all times and that the prospective corporation should not engage in business similar to that of the previous corporation in which the applicant committed the offences.

Possibility for disqualified directors to continue to manage companies

In light of the decision in Re Colin Gregory Ryan, disqualified directors may be able to continue to manage corporations provided that they can establish that the events leading to the disqualification were a "one-off" event and that the director otherwise has an unblemished history when it comes to managing corporations.

Lachlan Tassell Simone Farrugia
Directors and officers
CBP Lawyers

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Simone Farrugia
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