Disqualification of director by ASIC reversed – 3 key lessons

It is not often the Administrative Appeals Tribunal (AAT) overturns a banning order issued against a director by ASIC. Lawyer Sarah Sherman explores a recent decision where the AAT overturned ASIC’s disqualification of a director and features three key lessons for directors which may afford protection if their company is ultimately wound up.

Three key lessons

• Lesson 1: A director is not ‘passive’ just because they delegate their day-to-day duties.
• Lesson 2: Directors should be diligent in dealing with co-directors.
• Lesson 3: The detrimental impact of a banning order on other companies may be relevant grounds to oppose disqualification.

Background

Wang was the director of, among others, four companies that entered liquidation throughout 2019. The liquidators for each company estimated the distributions to unsecured creditors to be zero cents in the dollar.

On 21 January 2022, ASIC disqualified Wang from managing corporations for five years because Wang contributed to the failure of the companies by-

• delegating his duties and relying heavily on his co-directors
• not appropriately involving himself in the management of the companies, and
• failing to understand the obligations, duties, and responsibilities of a director.

ASIC said it was against the public interests to allow a director of multiple failed companies to continue managing corporations. Wang sought a stay of ASIC’s decision, with the AAT ultimately setting aside the banning order.

This article explores three key learnings arising out of the decision.

Lesson 1: A director is not ‘passive’ just because they delegate their day-to-day duties

Wang argued he delegated day-to-day management of one of the companies to his co-directors over the first two years of his directorship and was more involved with making high-level decisions about the overall performance of the business.

ASIC said this was an admission Wang was a ‘passive’ director and was completely uninvolved in managing the company in question, and this contributed to its failure.

The AAT disagreed, finding directors are entitled to delegate certain duties to others. Because Wang always participated in board meetings, considered company financial statements, and satisfied himself the company maintained proper books and records, the Tribunal said he had taken reasonable steps to monitor company affairs and was not merely a passive director.

Directors can take comfort in knowing they are unlikely to be penalised if they delegate or divide some duties between themselves, provided they remain aware of their overarching responsibilities and the financial position of the company.

Lesson 2: Directors should be diligent in dealing with co-directors

ASIC argued Wang’s delegation of his duties created an ‘oversight vacuum’ which allowed two of his co-directors to engage in misconduct, including falsifying sales through duplicate invoices and increasing their own wages when the company was not profitable.

Despite concluding there was insufficient evidence the co-directors had breached the Corporations Act, ASIC argued Wang was still liable because he failed to manage the company’s financial affairs.

The Tribunal said Wang applied an ‘enquiring mind’ in dealing with information provided by the co-directors. Wang had consistently raised discrepancies with financial reports and ultimately reported the co-directors to the police following their resignation. The Tribunal said the co-directors, not Wang, failed to discharge their duties in good faith and in the best interests of the company.

Directors should ensure they maintain a high level of diligence and scrutiny when dealing with co-directors and other company executives, including taking action where appropriate, to best protect against allegations of breach of duty.

Lesson 3: The detrimental impact of a banning order on other companies may be relevant grounds to oppose disqualification

Wang relied on evidence about his role as director of a separate company, Advanced Circular Polymers (ACP). This included evidence:

• Wang had engaged a business coach to give him management training and subsequently formed an advisory board to provide advice on company strategy, budgeting, and risk management.
• If upheld, Wang’s disqualification would have adverse consequences not only for his personal reputation and financial interests, but also for ACP, its stakeholders, and its 81 employees.

ASIC did not object to this evidence but said Wang’s disqualification would not prevent him from working in the business of ACP, albeit in a different capacity.

The Tribunal placed importance on the fact Wang was the principal and guiding mind of ACP. Even if Wang maintained an alternative role in the company, disqualification would limit the tasks and functions he could undertake which would be harmful to the viability of the business.

Wang’s effective management of ACP convinced the Tribunal he did understand his obligations, duties, and responsibilities as director, and therefore (in combination with other factors) the banning order should be overturned.

Final words

Wang’s ongoing diligence in the day-to-day management of the companies and his dealings with the co-directors, coupled with his effective and skilful management of ACP, ultimately spared him from disqualification.

This decision provides directors with comfort that to fulfil their duties as directors they do not have to personally undertake every task expected of a director. Directors should note this was considered in the context of a banning order and may not apply in the case of an action for breach of director’s duties.