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How poor accounting can put directors on ASIC radar

Regulation

If company records are out of order or lodgement obligations remain unmet, alarm bells start ringing at the regulator.

By Trevor Withane 13 minute read

ASIC’s recent disqualification of several directors of insolvent companies illustrates how poor accounting practices can have far-reaching consequences, beyond the mere financial viability of companies.

Under s206F of the Corporations Act 2001, ASIC may disqualify company directors from managing corporations for up to five years. In this article I examine three recent examples in which ASIC exercised this power, highlighting the importance of good accounting practices and offering a cautionary tale to directors who fall foul of their responsibilities.

Director disqualification

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Section 206F of the act empowers ASIC to disqualify a person from the management of corporations for a period of up to five years if, within a seven year period of ASIC’s decision, that person has acted as an officer of two or more corporations and, while an officer (or 12 months after), each of the corporations has been wound up by a liquidator, lodging a report under s533 of the act.

An s533 report is issued by a liquidator where the company is unable to pay its unsecured creditors more than 50c in the dollar or if it believes that an officer of a company has:

  • Committed an offence in relation to the company.
  • Misapplied, retained or has become liable for any money or property of the company.
  • Acted negligently, defaulted, breached a duty (or trust) in relation to the company.

In disqualifying a director, ASIC must be satisfied that disqualification is a justified response and, in deliberating justification, may have regard to:

  • The conduct of the person in question in relation to their management.
  • Whether there is a public interest in disqualification.
  • Any other matters that ASIC considers to be appropriate for consideration.

While the director can challenge an ASIC decision, the regulator’s remit is intentionally broad, entitling it to take a holistic view of the conduct and competency of company officers when assessing their suitability to continue managing corporations.

The following three recent cases are illustrative of these considerations and demonstrate how ASIC will determine the length of the disqualification period.

Athina Bragiannis

Ms Bragiannis was the director of three companies. All three companies entered liquidation, owing a combined debt of over $8.6 million to unsecured creditors as at the point of her disqualification. The justifications for her disqualification fell into several categories. ASIC found that she had:

  • Used her director positions to execute finance agreements between the three companies to further the interests of a company in which she held shares, making payments between the companies for goods and services that were never supplied.
  • Not made sufficient provision for the payment of debts owed to the ATO.
  • Failed to adequately comply with statutory lodgement requirements and obligations to keep written financial records, placing too much reliance on others in their management without taking enough of an active role.
  • Permitted one of her companies to continue trading despite having reasonable grounds to suspect its insolvency.

Ms Bragiannis has been disqualified for three and a half years.

Stefano De Blasi

Mr De Blasi was director of three companies operating in the Sydney food industry. In disqualifying Mr De Blasi, ASIC expressed concern that he had traded two of the companies while they had been insolvent, failed to keep proper business records and had not properly managed the statutory lodgement requirements demanded by the ATO.

Mr De Blasi has been disqualified for four years.

Sam Casella

Mr Casella, also a director of three companies, had been under review by ASIC following the failure of all the companies under his directorship. ASIC’s case for disqualification against Mr Casella was particularly severe, alleging that he acted as a “straw director” by:

  • Failing to exercise due diligence in establishing what his role would be before accepting it.
  • Being unaware of the fact that he was indeed a director of one of the companies and having no knowledge of its affairs.
  • Signing documents at the behest of an alleged shadow director without reading them.
  • Failing to exercise due care and control.
  • Failing to keep adequate records.
  • Transferring assets without consideration.
  • Insolvent trading.
  • Owing large debts to statutory bodies.

Given the egregious nature of Mr Casella’s negligent conduct, ASIC imposed the maximum disqualification period of five years.

Takeaways

Each of these examples illustrates how important it is for directors to ensure that all company accounting records are kept in good order, that they must be in carriage of the financial affairs of their companies (without over-reliance on others), and that they ensure that they meet their ATO lodgement obligations.

In each of the examples, poor accounting records and insolvent trading played a large role in ASIC’s decision. This is precisely where the involvement of accountants and tax agents is vital. The expertise of accountants and tax agents, who proactively engage with their clients, can play a significant role in preventing these circumstances from occurring. And, beyond merely protecting the interests of a certain director, such expertise could assist in helping a company to navigate any solvency issues.  

Finally, while ASIC can impose a disqualification, there are defences available. Directors who are faced with a disqualification investigation should take immediate legal advice.

Trevor Withane is a partner at Ironbridge Legal.

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