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31 Jan 2019

A bankrupt can’t be a director


3 min

Or can they...

Most readers would know that once a person is subject to a bankruptcy or personal insolvency agreement (Part X), they are restricted from acting as a company director. In theory this seems straightforward; however, there is a quirk in a crossover of legislation and a practicality that requires careful consideration.

The general position under the Corporations Act 2001 is that pursuant to:

  • Section 206B(3): A person is disqualified from managing corporations if they are an undischarged bankrupt under Australian law, its external territories, or another country.

  • Section 206B(4): A person is disqualified from managing a corporation if a person has executed a personal insolvency agreement under Part X of the Bankruptcy Act 1966 ; or a similar law of an external Territory or a foreign country, and the agreement terms are not satisfied.

However, automatic disqualification can have far-reaching consequences especially for persons who are a director of a self-managed super fund (SMSF). Under the Superannuation Industry (Supervision) Act 1993 (SIS Act) provisions, if the trustee of the fund is a corporate entity, then every fund member must be a director of the corporate entity otherwise the fund is non-complying.

Being disqualified may not be a great problem where the SMSF’s only asset is cash, because cash can be easily rolled over into a public super fund (e.g. Sunsuper, Rest).

But what if the SMSF’s only asset is real property given the time to realise such an asset. It is not possible, as far as the author is aware, to roll a part interest in real property into a public super fund. Generally, the property would have to be sold and then its sale proceeds paid as cash into a public fund.

Under section 206G of the Corporations Act, the court can grant leave to allow certain disqualified persons to act as a director of a corporation. The section states: a person who is disqualified from managing corporations (unless disqualified by the ASIC), may apply to the court for leave to manage either:

  • corporations

  • a particular class of corporation (financial products or services)

  • a particular corporation.

Recently, the Supreme Court of Western Australia granted leave to a bankrupt, who was a member of a SMSF, to act as a director of its corporate trustee, to enable the fund to meet its requirement under SIS Act. The case was GRD-v-BJD (2018) WASC 374.

Interestingly, another member of the fund (the bankrupt’s ex-wife), objected to the bankrupt being granted leave on the basis that the bankrupt lacked business acumen and honesty. The objection was dismissed by the court, on the following basis:

  • A Family Court agreement allowed for the defendant to roll out of the fund.

  • The plaintiff’s evidence (ex-wife) made it difficult to see on what basis she raised the objection to the plaintiff being a director.

  • Not having the plaintiff as a director equates to a non-compliant fund and that may have adverse consequences, including taxation concessions, for both parties (plaintiff and the defendant).

  • The SMSF has a very limited role with no prospect of it being a trading corporation.

  • Imposed ASIC conditions offers protection to any persons who might be affected by the plaintiff being involved in the management of the corporation (SMSF).

A spokesperson for the Australian Taxation Office commented on this case by stating that this decision, “does not preclude the Commissioner of Taxation from making the fund non-compliant if it is considered appropriate to on the facts. This would have taxation implications for the fund.”

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