Chapter 5
Management of Companies
Chapter Summary
1
INTRODUCTION
Before the Company Law Review Act 1998 commenced on 1 July 1998, all companies had a
memorandum of association and articles of association. The internal management of companies registered
on or after this date is now governed by replaceable rules, by a constitution or by a combination of both: s
134.
1.1
Memorandum of association
Before 1 July 1998, ss 117(1) and (3) of the Corporations Law required the following to be included in
the memorandum of association of each company:
 the company’s name
 if the company was limited by shares: the amount of share capital to be registered and the
division of share capital into shares of a fixed amount, & a statement that the liability of the
shareholders was limited
 if the company was limited by guarantee: statements that the liability of the members was limited
& that each member undertook to contribute to the company’s property in the event of winding
up, & details of the amount that each member guaranteed to contribute
 if the company was an unlimited company, a statement to that effect
 the full names, addresses and occupations of the subscribers to the memorandum
 if the company had share capital, the number of shares to be taken by each subscriber
 the address of the principal place of business and the registered office.
The memorandum could also state the objects of the company: s 117(2) - optional after 1 January 1984.
1.2
Articles of association
The concept of the articles was based on the deed of settlement company, where the deed set out the
trustee’s obligations and therefore governed the company’s internal management.
Table A of the Corporations Law set out standard articles that could be adopted by companies limited by
shares. Table B contained the standard articles for no-liability companies. Companies could adopt the
standard articles, modify them or write their own rules.
1.3
Replaceable Rules
Any future amendment to the replaceable rules automatically applies to companies that have not replaced
them. The replaceable rules do not apply to a proprietary company with one shareholder who is also the
only director. Such a company does not need to adopt either the replaceable rules or a constitution: s
135(1).
Headings in the Corporations Act specify which sections are replaceable rules: s 135(1). The s 141 table
sets out the provisions which are replaceable rules. The replaceable rules apply:
 to all companies registered on or after 1 July 1998 (subject to s 135(1)(b)): s 135(1)(a)(i)
 to any company registered before 1 July 1998 that repeals its memorandum and articles on or
after 1 July 1998: s 135(1)(a)(ii)
Some replaceable rules apply mandatorily to public companies and as replaceable rules to proprietary
companies to which the replaceable rules apply: section 135(1)(b).
2
THE COMPANY CONSTITUTION
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Companies may use the replaceable rules, a constitution or a combination of both: s 134.
Section 136(1) provides that a company may adopt a constitution:
 on registration if each person specified in the application for registration agrees in writing to the
terms of the constitution
 after registration, if a special resolution is passed adopting the constitution or a court order is
made under s 233 requiring the company to adopt a constitution.
Where a public company adopts, modifies or repeals its constitution, the company must lodge a copy of
the special resolution within 14 days of it being passed (s 136(5)) or adopted / modified (s 136(5)(a) and
(b)). The penalty for contravention is five penalty units: s 1311, Sch 3 item 7. ASIC may also direct the
company to lodge a consolidated copy of the constitution with ASIC: s 138.
Members can ask the company to provide them with a copy of the constitution if the request is in writing
and the prescribed fee is paid: s 139.
2.1
What is the company constitution?
For a company registered before 1July 1998:
 the memorandum and articles of a company constitute its constitution if the company does not
modify or repeal it by special resolution: s 136(2);
 if it repeals its constitution on or after 1 July 1998:
o and does not adopt a new constitution, the replaceable rules apply.
o and adopts a new constitution, the replaceable rules apply to the extent that they are not
modified by the new constitution.
All of the replaceable rules apply to companies registered on or after 1 July 1998 unless the rules are
replaced or modified by the company’s constitution (however, the mandatory rules applying
to public companies cannot, of course, be replaced or modified).
Companies registered on or after 1 July 1998 might also adopt a constitution to add to the replaceable
rules.
2.2
Amendment of the constitution
Where the change to a constitution is the result of a special resolution, the adoption, modification or
repeal takes effect on the date of the resolution if no later date is specified in the resolution: s 137(a).
Where the change is the result of a court order, the change takes effect on the date of the order if no date
is specified in the order: s 137(b).
2.3
Failure to comply with constitution / replaceable rules
There is no contravention of the Corporations Act: section 135(3) hence no criminal or civil liability.
Injunctions are also not available. Under s 140(1), however, the replaceable rules and the constitution
have the effect of a contract between:
(a) the company and each member
(b) the company and each director
(c) a member and each other member.
Section 140(2) provides that unless a member of a company agrees in writing to be bound, they are not
bound by a change to the company’s constitution, made after they became a member, so far as the change:
(a) requires the member to take up additional shares; or
(b) increases the member’s liability to contribute to the company’s share capital or to otherwise pay
money to the company; or
(c) imposes or increases restrictions on the right to transfer shares already held by the member.
In DING V SYLVANIA WATERWAYS LTD [1999] NSWSC 58; (1999) 46 NSWLR 424; (1999) 150 FLR
239; (1999) 17 ACLC 531; (1999) 30 ACSR 301, the court held that a constitutional amendment to
impose a levy on shareholders was valid against could be imposed on existing members who agreed to it,
or to those who became members after article 103(1) was adopted. The levy did not apply to existing
members who did not agree to be bound by it. Furthermore, s 516 did not make the article invalid.
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3
THE BOARD OF DIRECTORS AND THE MEMBERS
3.1
Division of power
The division of authority between the board of directors and the members in general meeting results in a
separation of company ownership and management.
The general principle is that the members may either change the management powers given to the board or
may change the composition of the board. However, the members cannot interfere with any management
decision made by the board, even if a board decision is contrary to the wishes of a majority of members:
AUTOMATIC SELF-CLEANSING FILTER SYNDICATE COMPANY LTD V CUNINGHAME [1906] 2
CH 34. This principle is accepted as the position in Australia: NRMA V PARKER (1986) 6 NSWLR 517;
(1986) 11 ACLR 1; (1986) 4 ACLC 609.
3.2
Role of the board
The chief executive officer is responsible to the board for day-to-day company management, but the board
has responsibility for strategic direction and achievement of objectives. Unless fulfilling the role of
managing director or being part of a committee, the function of an individual director is solely to act as
part of the board. The primary role of the board is to monitor the day-to-day management performance of
the chief executive officer and other senior management personnel. It is not possible for the board of
directors of a large publicly listed company to get involved in day-to-day decisions of management.
4
DIRECTORS’ MEETINGS
4.1
Resolutions and declarations without meetings
It is a replaceable rule that directors may pass a resolution without formally holding a meeting, if all of the
directors of the company entitled to vote on a particular resolution sign a document stating that they are in
favour of the resolution: section 248A(1). Separate copies may be signed: s 248A(2). The resolution is
passed when the last director signs: s 248A(3). The resolution must be recorded in the minute books: s
251A(1)(d).
In a single-director proprietary company, the director may pass the resolution by recording and signing it:
s 248B(1). It must still be recorded in the minute books of the company: s 251A(1)(d).Under s 248B(2),
the sole director of a proprietary company may make a declaration that conforms to the requirements of
the Corporations Act if they record the declaration and sign it. Any such declaration must be recorded in
the minute books of the company: s 251A(1)(e).
4.2
Calling meetings of directors
A director may call a directors’ meeting by giving reasonable notice individually to every other director to
ensure each director has a reasonable opportunity to participate in the meeting: s 248C (replaceable rule).
The notice to directors does not have to be in writing. An accidental omission to give notice does not
automatically invalidate the meeting: s 1322(3).
Where a director has appointed an alternate director under s 201K(1), the company must give the alternate
director reasonable notice of the meeting if requested to do so by the appointing director: s 201K(2)
(replaceable rule).
In JENASHARE PTY LTD V LEMRIB PTY LTD (1993) 11 ACLC 768, a directors’meeting was invalid
because the notice was inadequate. It was inadequate because:
 it failed to clearly & fully summarise the business of the meeting is convened to deal. The court
noted that recipients must be able to decide whether it is worthwhile to attend the meeting; and
 it was not given within the seven days required by the articles, and it was delivered in a manner
inconsistent with the articles (which provided for post / hand delivery, not for fax).
4.3
Procedure at directors’ meetings: technology & quorum
A directors’ meeting may be called or held using any technology consented to by all of the directors: s
248D (not a replaceable rule). The consent can be standing consent and can only be withdrawn by giving
reasonable notice.
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Section 248E(1) (replaceable rule) provides that the directors may elect a director to chair a directors’
meeting for a particular time period. If the directors do not elect a chairperson prior to a meeting, or if a
person is elected but is unavailable or declines to act as chairperson, the directors must elect a director
who is present at the meeting to be chairperson: s 248E(2) (replaceable rule).
The quorum of a directors’ meeting is two directors present at all times during the meeting: s 248F
(replaceable rule). (note: irrelevant to single-director proprietary companies: s 248B(1)).
Under s 195(1) any director of a public company who has a material personal interest in a matter being
discussed must not be present or vote on the matter unless the other directors and ASIC approve and the
interest does not need to be disclosed under s 191. If a quorum cannot be formed due to s 195(1), one or
more directors may call a general meeting of members to pass resolution to deal with the matter: s 195(4).
4.4
Passing of directors’ resolutions
A resolution must be passed by a majority of the votes cast by directors entitled to vote on the resolution:
s 248G(1) (replaceable rule). If the votes for and against the resolution are equal, the chair of the meeting
has a casting vote (in addition to any vote the chairperson may have as a director): s 248G(2) (replaceable
rule). Section 195(1) may prevent the chair from voting at the meeting because of a personal interest. If
so, it may be necessary to elect another chair.
5
DIRECTORS
5.1
Requirements for director
A proprietary company must have at least one director, with at least one director ordinarily residing in
Australia: s 201A(1).
A public company must have at least three directors with at least two ordinarily residing in Australia: s
201A(2). It is an
offence not to comply with s 201A: ss 1311, 1312.
Section 9 defines a director as including:
 a person who is appointed to the position of director or alternate director regardless of the name
of the position (de facto director); and
 unless the contrary intention appears, a person who is not validly appointed as a director if they
act in the position of a director or the directors of a company are accustomed to act in accordance
with the person’s instructions or wishes (shadow director).
The s 9 definition of a director includes ‘de facto’ directors and ‘shadow’ directors.
In CORPORATE AFFAIRS COMMISSION V DRYSDALE (1978) 141 CLR 236; (1978) 3 ACLR 760;
(1978) 22 ALR 161, the High Court held that a “de facto” director was a director within the s 9 definition.
Although the articles provided that he should have been re-elected at the next meeting, he was not; yet he
continued to attend board meetings, vote and participate in management. He was held to be a director.
5.2
Executive and non-executive directors
Executive directors are full-time employees of the company and occupy positions of senior management.
These directors take detailed operational knowledge to board meetings. An important role of an executive
director is to argue, when necessary, a particular case in the interests of the company, even though the
position taken might be contrary to the views of other board members.
Non-executive or ‘independent’ directors are not part of senior management. They are appointed to the
board without becoming employees. Their
important role is to provide the board with particular skill, experience and independence whilst also
monitoring the performance of executive board members on behalf of the shareholders.
Although the minimum number of directors required by s 201A must be complied with, there are no legal
requirements concerning the actual number of executive directors compared to non-executive directors on
a board. However, this ratio is now considered to be important factors indicating acceptance of the need
to adhere to principles of proper corporate governance. Arguably, there should be a majority of
independent directors.
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5.3
Managing director
The managing director is also known as the chief executive officer. The directors may appoint one or
more directors of the company to act as managing director(s) for such period and on such terms as they
think fit: s 201J (replaceable rule). This appointment automatically terminates if the person ceases to be a
director or if the directors revoke or vary the appointment: s 203F (replaceable rule). The directors may
confer upon a managing director any of the powers they can validly exercise: s 198C(1) (replaceable rule)
and also revoke or vary any of the managing director’s powers: s 198C(2) (replaceable rule).
5.4
Chair of the board of directors
The role of the chair of the board of directors of a listed public company was examined in ASIC v Rich
[2003] NSWSC 85, in which Austin J of the Supreme Court of New South Wales noted that ‘the
Corporations Act provides little guidance as to the responsibilities of the company chairman’. He also
noted that although voluntary codes of corporate governance do not amount to legal duties, they may be
relevant in ascertaining the responsibilities of a chairman of the board of directors. The court noted that
the role of a reasonably careful and diligent chairman of a listed public company when acting with usual
practice in Australia included:
 adopting a leadership role of the conduct of the board’s responsibilities and lead and manage the
board in the discharge of its duties, by ensuring that the board is in a position to perform and
does perform its responsibilities;
 setting the agenda for the performance of the board’s responsibilities, ensuring board meetings
take place with sufficient frequency and adequate information and that the board is kept properly
informed of the company’s financial position and performance;
 leading the board in the monitoring of management, the assessment of the company’s financial
position and performance and the detection and the assessment of any material adverse
developments;
 directing, if so advised by the audit committee, and requiring, the provision of material financial
information to enable the board to discharge its responsibilities;
 ensuring that the board is informed as to the adequacy of cash reserves, including, especially
where debtors outstanding are very substantial, and analysis of debtors including an aged listing;
 if the chairman has an experienced financial background, ensuring that the person appointed as
finance director has appropriate qualifications, expertise and experience;
 the chairman will be concerned to be personally satisfied about the accuracy of public statements
made on a company’s behalf, and the company’s compliance with the ASX Listing Rules;
 where the business of the company is being established, and expenditure exceeds and is expected
to continue to exceed income, the chairman will take a close and active interest in the cash
reserves, including the steps that should be taken to ensure that cash reserves are maintained so
as to enable the company to pay its debts as and when they fall due.
The chair is also responsible for the selection of matters to be considered at board meetings. In this regard,
investors in a listed public company are entitled to expect that the chair of the board maintains high
standards of honesty at all times: ASIC v Whitlam [2002] NSWSC 591.
5.5
Governing director
Governing directors often occur in proprietary companies formed for the purpose of running a family
business. In this situation, the articles typically nominate a person to act as governing director for the
duration of the existence of the company, with wide powers including: total control and management of
the company; authority to appoint and remove directors at any time; and exclusive control over voting
rights through the ownership of a particular class of shares. Due to the extent of power and control
associated with the position of governing director, it would not be possible to have such a director in a
listed public company where the interests of shareholders would be at risk.
In WHITEHOUSE V CARLTON HOTEL PTY LTD (1987) 5 ACLC 421, it was held that the governing
director’s power to allot shares did not include the power to allot shares for the purpose of manipulating
the voting power of shareholders, even if he considered it in the best interests of the company. (In this
case the purpose was to ensure that his former wife’s shareholding was sufficiently diluted so that his sons
would control the company after his death).
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5.6
Associate director
The board of directors may appoint a junior executive with certain expertise to act in an advisory capacity
as an associate director. The constitution would usually provide that their right to attend or vote at board
meetings is subject to the invitation and consent of the board.
5.7
Alternate director
Subject to the board’s approval, a director may appoint an alternate director to exercise some or all of the
director’s powers for a specified period: s 201K(1) (replaceable rule). The alternate director may, but
need not, be a member. An appointing director may terminate the appointment at any time: s 201K(4)
(replaceable rule). The company must notify ASIC of the appointment and removal of an alternate
director: ss 205B(2), (5).
If the appointing director is not present at the meeting, the alternate director is entitled to attend and vote
in the appointing director’s place and exercise all of the powers of the appointing director at a meeting: s
201K(3) (replaceable rule). The purpose of an alternate director is to enable compliance with the quorum
requirements for the holding of directors’ meetings, notwithstanding the absence of one or more directors.
5.8
Nominee director
The interests of particular shareholders and creditors may be protected by the appointment of a nominee
director.
6
APPOINTMENT OF DIRECTORS
A proprietary company must have at least one director and a public company must have at least three
directors: s 201A.
6.1
Who may act as director?
A director must be at least 18 years old: s 201B(1) and have given prior written consent: s 201D(1).
6.2
Who may appoint a director?
A members’ resolution may appoint a director: s 201G (replaceable rule). The other directors of a
company may also appoint a director (s 201H(1) (replaceable rule)) but such an appointment must be
confirmed by member resolution within two months: s 201H(2) (replaceable rule). If the company is a
public company, the appointment must be confirmed by resolution at the company’s next AGM: s
201H(3) (replaceable rule). Under s 201H(3), if the appointment is not confirmed by resolution at the
AGM, the person ceases to be a director.
In a single-director/single-shareholder proprietary company, the sole director and sole shareholder can
appoint another person as director if they record the appointment and sign a record to that effect: s
201F(1). If a sole director and shareholder dies or becomes unable to manage the company due to mental
incapacity, a personal representative or trustee of the person may appoint a director: s 201F(2). If they
become bankrupt, a trustee in bankruptcy appointed to administer the person’s estate may appoint a
director: s 201F(3).
At a shareholders’ general meeting, it is possible to pass a resolution appointing two or more directors if
no votes are cast against the resolution: s 201E(1). The resolution is void if any votes are cast against it.
Even if the appointment of a director is invalid, an act undertaken by the director in their capacity as a
director is effective: s 201M(1). The issue of whether an act is effective is different from whether an
effective act binds the company in its dealings with others or renders the company liable: s 201M(2).
6.3
Remuneration of directors
The company determines directors’ remuneration by resolution: s 202A(1) (replaceable rule). The
company may also pay travelling and other expenses incurred by the directors in attending meetings: ss
202A(2)(a)(b)(replaceable rule). Under s 202A(2) expenses properly incurred in connection the
company’s business are also payable. Chapter 2E makes special provision for the payment of
remuneration to the directors of public companies.
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In a proprietary company with a sole director who is also the sole shareholder, that person determines the
remuneration and payment of travelling and other expenses: s 202C.
In accordance with corporate governance principles, shareholders with at least 5 per cent of the votes that
can be cast at a general meeting or at least 100 members who are entitled to vote at a general meeting may
direct the company to disclose all of the remuneration paid to each director: s 202B(1). This disclosure
includes any amounts paid to a director for acting in a capacity other than that of director. In addition, the
annual directors’ report of listed public companies must provide details of remuneration and other
payments to directors: s 300A (not a replaceable rule).
6.4
Resignation of directors
A director may resign at any time by giving written notice to the company: s 203A (replaceable rule). If
the director has a fixed-term contract with the company, resignation may breach that contract.
6.5
Removal of a director of a proprietary company
The members in general meeting can remove and/or replace a director: s 203C (replaceable rule).
In HOPKINS V FOYSTER [2001] NSWSC 915; (2002) 20 ACLC 396, the Court held that this s 203C
power could not be exercised if it would breach contractually agreed arrangements for the composition of
the board (in this case, removal of the particular director would breach the agreed ratio of independent to
executive directors).
6.6
Removal of a director of a public company
Under s 203D(1), the members in general meeting of a public company may remove a director of the
company despite:
 anything contained in its constitution (if any); or
 any agreement between the company and the director; or
 any agreement between shareholders and the director.
Any resolution that is passed by the directors of a public company to remove a director from the board is
void: s 203E. Section 203D(1) also provides that if the director was appointed to represent the interests of
particular shareholders or debenture holders, the resolution to remove the director does not take effect
until a replacement to represent their interests has been appointed.
Two months’ notice of the proposed resolution must be given: s 203D(2). As soon as practicable after the
notice is received by the company a copy of the notice must be given to the director: s 203D(3). The
penalty for contravention of s 203D(3) is five penalty units: s 1311, Sch 3 item 41. The director then has a
right to give the company a written statement to be forwarded to all of the shareholders: s 203D(4)(a). The
company is under no obligation to send a director’s statement to the shareholders if it exceeds 1000 words
in length or if it is defamatory: s 203D(6). The director may also put their case to the shareholders at the
meeting at which the resolution to remove is voted upon: s 203D(4)(b).
DICK V COMVERGENT TELECOMMUNICATIONS LTD [2000] NSWSC 331; (2000) 18 ACLC 442;
(2000) 34 ACSR 86 is an example of how this provision works in practice. Because insufficient notice
was given, the court restrained the company from calling the meeting. The notice was held to be invalid.
In NRMA LIMITED V SCANDRETT [2002] NSWSC 1123; (2003) 21 ACLC 176, it was held that this
provision applies equally to the removal of one or more directors. A separate resolution is not required in
respect of each director: directors can be removed as a group.
6.7
Retirement of directors
Section 203D(7) provides that if a person is appointed to replace a director removed under s 203D, the
time at which the replacement director is to retire is to be worked out as if the replacement director had
become a director on the day on which the replaced director was last appointed as a director.
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7
COMPANY SECRETARY
7.1
Appointment
Every public company must have at least one company secretary to be appointed by the directors: ss
204A(2), 204D. Proprietary companies may, but need not, appoint a company secretary: s 204A(1). ASIC
must be notified of the appointment within 28 days: s 205B(1).
The secretary or one of the secretaries must ordinarily reside in Australia: s 204A(2) and each secretary
must at least 18 years of age: s 204B(1) and give a signed consent to the company before the appointment:
s 204C(1). The company must keep the consent: s 204C(2).
If the appointment of a company secretary is invalid, an act undertaken by the secretary is effective: s
204E(1). This is different to whether an effective act binds the company in its dealings with others or
renders the company liable: s 204E(2). The directors determine the terms and conditions of appointment
for the company secretary: s 204F (replaceable rule).
7.2
Role of the company secretary
The role of the company secretary is concerned with the administration of the company rather than
company management. However, a company secretary does have implied authority to enter into contracts
on behalf of the company.
In PANORAMA DEVELOPMENTS (GUILDFORD) LTD V FIDELIS FURNISHING FABRICS LTD
[1971] 2 QB 711; [1971] 3 ALL ER 16; [1971] 3 WLR 440, The English Court of Appeal held that
Bayne, as company secretary, had implied authority to enter into contracts on behalf of the company, who
then had to pay outstanding car hire charges (even though the secretary used the hire car for personal
business, not (as was represented) for company business).
7.3
Public information about directors and secretaries
The public can gain access through ASIC’s website at www.asic.gov.au.
7.4
Notice to ASIC
A company director, secretary or alternate director may notify ASIC in writing that they have resigned or
retired: s 205A. This must include a copy of the person’s letter of resignation: s 205A(2). The company is
still required to notify ASIC of the resignation or retirement: s 205A(3).
If a director, company secretary or alternate director is appointed, s 205B(1) obliges the company to lodge
a notice of personal details with ASIC within 28 days of the appointment: s 205B(1), (2). Notice of the
appointment of an alternate director must also state the terms of appointment. The company must notify
ASIC of any changes to the details provided within 28 days of the change: s 205B(4). ASIC also must be
notified by the company within 28 days when a person ceases to be a director, company secretary or
alternate director: s 205B(5). The penalty for contravention of s 205B is 10 penalty units or imprisonment
for three months, or both: s 1311, Sch 3 item 44.
To assist a company in complying with the obligations under s 205B, a director, company secretary and
alternate director must give the company their personal details within seven days of an appointment: s
205C(1). Notice of any changes to personal details must also be given to the company within seven days
of the change: s 205C(2). The penalty for contravention of s 205C is 10 penalty units or imprisonment for
three months, or both: s 1311, Sch 3 item 44.
7.5
ASIC’s power to request information
ASIC has the power under s 205E to request a person in writing to advise whether the person is a director
or company secretary of a particular company.
8
DISQUALIFICATION FROM MANAGING CORPORATIONS
8.1
Managing a corporation
Under s 206A(1), a person who is disqualified from managing a corporation commits an offence if they:
 participate in making decisions that affect at least a substantial part of the business; or
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 are able to significantly affect the financial position of the corporation; or
 give instructions or wishes to directors knowing or intending that the directors will act upon them.
The penalty for contravention of s 206A(1) is 50 penalty units or imprisonment for one year, or both: s
1311, Sch 3 item 49. The offence for contravention of s 206A(1) is a strict liability offence: s 206A(1A).
Under s 1274AA, ASIC is required to keep a record of persons disqualified from managing corporations.
8.2
Automatic disqualification
A person is automatically disqualified from managing a corporation under s 206B(1) if they are convicted:
 of an indictable offence concerning the making of decisions affecting the business of the corporation
or the corporation’s financial position; or
 (b)(i) of an offence against the Corporations Act with a penalty of over 12 months imprisonment, or
 (b)(ii) of an offence involving dishonesty with a penalty of imprisonment of at least three months; or
 of an offence against the law of a foreign country with a penalty of imprisonment exceeding 12
months.
Section 206B(2) provides that the person is disqualified for five years from the day they are convicted (if
they do not serve a prison term) or release (if they serve a prison term).
Under s 206BA, on application by ASIC, the court may extend the period of disqualification by up to an
additional 15 years: s 206BA(2). In determining whether an extension is justified (and if so, how long),
the court may have regard to any matters that it thinks appropriate: s 206BA(5).
A person is automatically disqualified from managing a corporation if they are an undischarged bankrupt,
if they have entered into a Part X deed of arrangement or composition under the Bankruptcy Act 1966: ss
206B(3), (4). ASIC v Parkes [2001] NSWSC 377 is an example of the application of a former equivalent
of this section.
8.3
Disqualification resulting from contravention of civil penalty provision
The court may disqualify a person from managing a corporation upon the application of ASIC if the
person has contravened a civil penalty provision and the court is satisfied that the disqualification is
justified: s 206C(1). In making its decision the court may take into account the person’s conduct in and
any other matter it considers appropriate: s 206C(2). Under s 206C, the court has discretion regarding the
period of disqualification. The court is not restricted in this regard.
The court may relieve the person either wholly or partly from liability for contravention of a civil penalty
provision if the person has acted honestly: s 1317S(2)(b)(i). The court will not make a declaration of a
contravention of a civil penalty order unless the contravention is serious: s 1317G(1)(b)(iii).
ASIC v Whitlam [2002] NSWSC 591 is a case illustrating the disqualification resulting from the
contravention of a civil penalty provision. In that case, Gzell J of the Supreme Court of New South Wales
believed that although the general purpose of the disqualification was to protect the public, the issue of
deterrence from future conduct necessitating disqualification is also relevant in determining whether to
make an order.
In ASIC V RICH (NO 2) [2004] NSWSC 836; (2004) 22 ACLC 1,232, the court found that even if
disqualification orders have an exclusively protective purpose, the approach to be taken in relation to
disqualification orders is:
 The court, not the parties, is to determine whether a disqualification is justified, and, if so, for
what period; however the parties’ agreement as to a period of disqualification within the
permissible range, should not necessarily be rejected because it would have selected a different
period;
 The court examines all of the circumstances of the case and may act on agreed statements of fact
if it is satisfied that it is appropriate to do so; however, the court is not bound to do so. The court
may request the parties to provide additional evidence, and if the parties refuse, the court may not
be satisfied that the proposed period of disqualification is within the permissible range.
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8.4
Disqualification for insolvency and non-payment of debts
Section 206D(1) provides that upon application by ASIC, the court may disqualify a person from
managing a corporation for up to 20 years if:
 within the last seven years the person has been an officer of at least two corporations that have failed;
and
 the court is satisfied that the manner in which the corporation was managed was wholly or partly
responsible for the failure and that the disqualification is justified.
Under s 206D(2), a corporation fails if:
 a court orders the corporation to be wound up on the grounds of insolvency
 the corporation enters into voluntary liquidation or executes a deed of company arrangement and the
creditors are unlikely to be fully paid
 the corporation ceases to carry on business and the creditors are unlikely to be paid in full
 a receiver or provisional liquidator is appointed, or it enters into a compromise or deed of
arrangement with its creditors
 the corporation is wound up and a liquidator’s report is lodged in relation to the company’s inability
to pay its debts.
The court may look at the person’s conduct in respect of the management of the corporation and any other
relevant matter in deciding whether the disqualification is justified: s 206D(3). This situation of a
‘corporation failing’ is wider than the circumstances covered by s 206F(1).
8.5
Disqualification for repeated contraventions of the Corporations Act
Upon the application of ASIC under s 206E(1), the court may disqualify a person from managing a
corporation for a specified period if it is satisfied that the person has:
 at least twice being an officer of a corporation that has contravened the Corporations Act and the
person failed to take reasonable steps to prevent the contravention;
 at least twice contravened the Corporations Act while being an officer of the corporation.
The court has discretion in relation to the period of disqualification.
Section 9 defines ‘officer of a corporation’ to include:
 a director or secretary of the corporation
 a person who participates in the decision-making process of the corporation, or who can affect
the corporation’s financial position, or whose wishes or instructions the directors are accustomed
to take into account
 a receiver, administrator or liquidator of the corporation.
The court may take into consideration the person’s conduct in managing the corporation and any other
relevant matter: s 206E(2). In ASIC v Adler [2002] NSWCS 483, Santow J of the Supreme Court of New
South Wales identified the following guiding principles to take into account:
 disqualification orders are designed to protect the public by ensuring the suitability of directors;
 although disqualification orders are intended as deterrence, they are not punitive in character;
 directors must understand the proper role and duties of the director;
 in assessing the length of disqualification, the seriousness of the contraventions, the chance that the
defendant may engage in similar conduct in the future and the likely harm that may be caused to the
public must be taken into account;
 the personal hardship to the defendant must be balanced against the public interest and the need for
protection of the public from any repeat of the conduct;
 in making a disqualification order it is necessary to assess the character of:
– Character of the offenders;
– Nature of the breaches;
– Structure of the companies and the nature of their business;
– Interests of shareholders, creditors and employees;
– Risks to others from the continuation of offenders as company directors;
– Honesty and competence of offenders;
– Hardship to offenders and their personal and commercial interests; and
– Offenders’ appreciation that future breaches could result in future proceedings.
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Factors leading to longest periods of disqualification (ie disqualifications of 25 years or more) are:
– Large financial losses;
– High propensity that defendants may engage in similar activities or conduct;
– Activities undertaken in fields in which there was potential to do great financial damage such
as in management and financial consultancy;
– Lack of contrition or remorse;
– Disregard for law and compliance with corporate regulations;
– Dishonesty and intent to defraud; and
– Previous convictions and contraventions for similar activities.
Cases including a disqualification period of seven years to 12 years include the following factors:
– Serious incompetence and irresponsibility;
– Substantial loss;
– Defendants had engaged in deliberate courses of conduct to enrich themselves at others’
expense, but with lesser degrees of dishonesty;
– Continued, knowing and wilful contraventions of the law and disregard for legal obligations;
and
– Lack of contrition or acceptance of responsibility, but as against that, the prospect that the
individual may reform.
Factors leading to the shortest disqualifications (ie disqualifications for up to three years) are:
– Although the defendants had personally gained from the conduct, they had endeavoured to
repay or partially repay the amounts misappropriated;
– The defendants had no immediate or discernible future intention to hold a position as
manager of a company; and
– The defendant had expressed remorse and contrition, acted on advice of professionals and
had not contested the proceedings.
ASIC V PARKES [2001] NSWSC 377; (2001) 38 ACSR 355 is an example of where the court disqualified
a director from managing a corporation for 25 years. The court took into account the following:
 the director had managed three companies while being an undischarged bankrupt; and had committed
several serious breaches of his statutory duties as an officer of the companies. These breaches
included failing to act honestly, making improper use of position and intending to defraud;
 Companies and investors suffered loss as a consequence of the contraventions.
 The defendant made repeated contraventions across three companies, did not display any contrition,
and there was a high possibility that the defendant would engage in the conduct again in the future;
 although the 25-year disqualification would effectively prevent the defendant from ever managing a
 corporation again, the court considered it would not prevent him from obtaining employment.
8.6
ASIC’s power of disqualification
ASIC has the power under s 206F(1) to disqualify a person from managing a corporation for up to five
years if:
 within the past seven years the person has been an officer of at least two corporations and, whilst an
officer or within 12 months afterwards, a liquidator’s report is lodged under s 533(1) regarding the
 corporation’s inability to pay its debts; and
 ASIC has given the person notice requiring them to demonstrate why they should not be disqualified
and an opportunity to be heard in response; and
 ASIC is satisfied the disqualification is justified.
The disqualification under s 206F(1) commences on the date the notice is served: s 206F(4). ASIC has the
power under s 206F(5) to grant leave to a person disqualified from managing a corporation to manage a
particular corporation or corporations subject to certain conditions.
BYRNES V ASIC (2000) 34 ACSR 320 is an example of where the AAT substituted a disqualification
period of 3 years for the 5 years initially decided by ASIC under s 206F.
8.7
Court power to grant leave
A disqualified person may apply to the court to manage corporations, a particular class of corporation or a
particular corporation: s 206G(1). ASIC must be notified at least 21 days in advance: s 206G(2). In
granting leave, a court may specify conditions to be followed: s 206G(3). ASIC may apply to the court for
an order revoking the leave: s 206G(5).
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