Don’t be too harsh on non-compliant directors of failed companies?

The laws regulating the conduct of directors of companies in liquidation and laws regulating persons who go bankrupt exist in two different universes, consistent with the relative influence of the stakeholders behind each.

Past reform ideas to lessen time and expense in liquidations, and address phoenix activity, were rejected by directors as being ‘unjustifiably harsh’.

One way to address directors’ non-compliance is to make them bankrupt, which, according to recent figures, will more often occur.

How does personal and corporate insolvency compare?

There are other comparisons but these are enough to explain the point.

Person who is bankrupt Person who is director of liquidated company
Consequences of not filing statement of affairs (SOA) or report on company activities and property (ROCAP/RATA) The 3 period of bankruptcy does not commence until the SOA is filed; if it is never filed, the bankruptcy continues indefinitely.

Subject to potential criminal prosecution

Nil, subject to potential criminal prosecution
Other consequences Restrictions on travel, unable to be a company director, continued income contributions, etc. Nil


Bankruptcy dealt with the problem of persons not filing their statement of affairs by simply providing that the bankruptcy would continue until they did. Further penalties weren’t going to help, or strong letters.


ASIC reports that between 30 June 2015 and 30 June 2019, it conducted internally between 350 and 450 prosecutions annually but mainly [90-95%] of what ASIC describes as the

‘less serious, strict liability, summary regulatory offences’

of directors failing to provide a RATA/ROCAP to a liquidator and otherwise failing to assist a liquidator.[1]

ASIC elsewhere says[2] that it regards

‘failure to provide a ROCAP or to disclose and deliver up books and records as a serious breach of the Corporations Act. Penalties imposed by the court may include fines of over $10,000 or imprisonment for breach of certain obligations by an officer’.

An opportunity lost

Corporate insolvency has taken a soft approach, apparently in response to its more influential constituents, and its tendency to conservatism.

The Explanatory Memorandum to the Insolvency Law Reform Bill 2015, commencing at [9.325], wrestled with no less than five options to address the same issue that confronted personal insolvency – the problems associated with liquidators obtaining the then report as to affairs [RATA] and books of the company from the company’s directors.

  1. The first option was to retain the then status quo involving, as was explained, the IP continuing to expend additional time and expense identifying the company’s assets and liabilities and getting directors to comply with their statutory obligations; with the IP able to apply to ASIC under the then corporate insolvency practitioner assistance program (LAP). And ASIC could prosecute the director.
  2. A second option was to require the RATA be provided on the appointment of the liquidator, such that if a RATA were not provided, the practitioner would not accept the appointment.
  3. A third option was to administratively suspend a director for failure to provide the RATA or books of the company; described as a ‘contingent disqualification’ provision. The process could be used by ASIC either as an alternative or in addition to criminal prosecution. ASIC would provide a warning notice to the director. If the director did not comply or had no reasonable excuse, ASIC could then formally demand compliance. If the director still did not comply, ASIC would be required to file a notice of disqualification on the public record, upon which, the director would be prohibited from managing a company. Judicial review would be available. The disqualification would come to an end upon a person complying with their lodgement obligations; upon the completion of the insolvency administration; or after three years of non-compliance.
  1. A fourth option was to improve the RATA form to make it more user-friendly and easier for directors to understand and complete. We now have the ROCAP.
  2. A fifth was to increase the penalty level for failure to provide a RATA, to 50 penalty units and aligned across all forms of insolvency.

In assessing the likely net benefit of each option, 1, the status quo, was rejected.

Option 2 was not a new obligation on directors but rather a bringing forward the point in time at which the directors were to provide the RATA. However, it would not address issues regarding the non-provision of the RATA in a court-ordered winding up.

As to option 4, improving the RATA form, which was the same as it was in 1961, was considered a good option.

As to 5, an increase in the penalty would, it was said, provide a better disincentive for breaches.

Option 3

As to 3, administrative suspension, this would be comparable with personal insolvency with the regulator assisting insolvency practitioners secure compliance – see s 77CA of the Bankruptcy Act and the s 267B offence provision.

Phoenix activity

The Memorandum said that this option may also assist in addressing phoenix activity in circumstances where a director has transferred assets out of their initial company (OldCo) into a new company (NewCo), placed OldCo into liquidation, is then refusing to assist the liquidator in completing the winding up of OldCo and is off managing NewCo.

Influence of directors and liquidators

But this option was criticised by company directors as being ‘unjustifiably harsh’ in imposing a penalty that was not proportionate to the misconduct and did not provide appropriate court oversight. And it failed, the directors said, to recognise the significance of disqualifying them.

Liquidators also criticised this for not addressing a director’s perverse incentive to breach their obligations. In particular, in a no-assets, no-records matter, a director who is attempting to avoid providing information ‘may be able to avoid disqualification by delaying the process and ensuring that the company administration finishes before the disqualification starts’.

That proposal was removed from the draft Bill.

Three easy options

It was recommended that what were the easy options be implemented – 2 and 5 by way of legislative amendments concurrently with ASIC taking action to implement option 4. These were attended to, in a fashion.


Given the intertwining of liabilities in business between the director personally, and their company, the bankruptcy of the director would assist them in avoiding the need to comply, given that bankruptcy would end their directorships.

But there may be other more harsh and effective options available.

A review?

The Memorandum said that to review the effectiveness of these changes it was proposed that the Treasury, Attorney-General’s Department, ASIC and AFSA undertake a review five years after their ‘implementation’, in 2017, to assess the impact of the changes and their effectiveness: [9.381].

Given the confined nature of the legal obligations involved, Treasury, AGD, ASIC and AFSA would have much data from trustees and liquidators to assess these options now, and act on reforms, rather than waiting until 2022, and passing anti-phoenix laws in the meantime – during which time liquidators will

‘continue to expend additional time and expense identifying the company’s assets and liabilities and getting directors to comply with their statutory obligations.’


[1] ALRC Corporate Criminal Responsibility Discussion Paper 87, November 2019, 3.65, 11.3.

[2] Providing assistance to external administrators – Books, records and ROCAP –



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2 Responses

  1. It’s a no-brainer – Choose Box No. 3!! Anything less shifts the burden of non-compliance to either insolvency practitioners (to pursue the ROCAP, report and assist prosecution for non-compliance), to the regulator (enforcement / prosecution costs) and to the tax payer (court time and costs). I have yet to see a fine which would equate to the actual costs of enforcement.

    As with the SOA the onus should be on the director who wants to move forward to provide the assistance which is already statutorily required. If suspension follows notification from the Liquidator and/or ASIC, plus judicial review, there are sufficient safeguards.

    I would only remove the automatic expiration of the discqualification, but allow for an application to be made to court if there are exceptional circumstances. Failure to comply with the statutory obligations of directors would seem to demonstrate a valid basis to question the ability of a person to be a director. It is difficult to see how this question is answered simply by the effluxion of time.

    Great work again Michael.

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