Combatting financial abuse perpetrated through coerced directorships

Moving from its militaristic combatting phoenix activity, the government is now going to crack down and combat financial abuse perpetrated through “coerced directorships”.[1]

Among the various options, defences will be available to “victim-survivors” for breaches of insolvency-related directors’ duties, such as insolvent trading, and rights given to extend the timeframe to respond to director penalty notices for unpaid taxes.

I won’t repeat my coverage of the issues given 12 months ago, written following a request for some background on the law in this area.    Coercive control and insolvency – Murrays Legal

Coerced directorships

The issue is more serious than the marketing slant suggests.  As the government explains:

“Perpetrators can use tax and corporate systems to financially abuse victim-survivors. One way is through coerced directorships. This is when a victim-survivor is forced or tricked into becoming the director of a company.

The perpetrator then runs the company and keeps the benefits. The victim-survivor can be left responsible for managing the company. This includes being responsible for debts.

This can lead to harm for other third parties that deal with the company. These parties include suppliers and other creditors”.

The government says it is

“difficult to quantify the prevalence and impact of coerced directorships, as the true scale of the issue is obscured by victim-survivors declaring bankruptcy, which can mask the underlying coercive circumstances.”

It seems that

“coerced directorships are generally observed in small to medium sized businesses and in the context of intimate partner relationships, however, they can also occur in other relationships where there is a power imbalance”. 

It also seems that the majority of victim-survivors are women.

Bankruptcy and small business

In the small business context, it is interesting to see that Treasury refers to resort to bankruptcy for the victim-survivor, which might be seen as

“leaping out of the frying pan into the fire”.

Bankruptcy imposes a minimum 3 year period of labelling and constraint.

There have been no moves to reform bankruptcy law in respect of small business.

Strengthened or new defences

In considering the legal options available, the government considers there may be opportunities to strengthen the defences of “not participating in the management of a company” by including coercion and financial abuse as valid reasons.

This could be done by reforming to the existing defences or by introducing a new defence.

Introducing an explicit reference to coercive control in the defences to insolvency-related directors’ duties may serve to increase awareness of the risk of financial abuse and coercion. That is, it may prompt more victim-survivors to raise a defence “in response to demands from liquidators, rather than negotiating a settlement or proceeding to bankruptcy”.

This may also prompt liquidators and creditors to consider evidence of coercion or financial abuse in determining whether to even take action to enforce debt or a liability.

A similar “some other good reason” defence exists for DPNs under the Taxation Administration Act 1953. It is intended that any reform to the “some other good reason” defences under the Corporations Act and TAA would occur in parallel.

Comment

The Courts have typically taken a strict approach to these types of defence.  In Coercive control and insolvency – Murrays Legal, I refer to DCT v Clark where the court rejected a director’s defence that while she signed company documents, they were not explained to her and that her signature occurred in situations in which

“I would usually have a frying pan in one hand and be signing with the other”.

More recently, the director’s caring for his ill daughter did not constitute ‘some other good reason’ under s 588H(4) for him to not take part in the management of the company: Re Wild K9 Pty Ltd (in liq) [2025] VSC 178.

While no criminal offence is intended, it may also be relevant that in November 2022, New South Wales became the first Australian jurisdiction to criminalise coercive control,[2] the offence being called ‘abusive behaviour towards intimate partners’ and which commenced operation on 1 July 2024.  But in doing so, it is “subject to an extensive and comprehensive statutory review requirement” under s 54J of the Crimes Act (NSW).

The 12-month review by the NSW Bureau of Crime Statistics and Research (BOCSAR) reported that while police recorded 297 incidents of coercive control, only 9 charges were laid, indicating the complexity of investigating and prosecuting this form of abuse. Only three coercive control charges were finalised in court – two were withdrawn and one was a plea of guilty. 

No law reform should proceed without such data supporting it, even if from a criminal law perspective, and even apart from the legal and other merits or otherwise of the reform.

As to the legal merits, the introduction of a coercive control defence would involve substantial matters of personal evidence and contest, and potentially additional parties and witnesses, in a commercial claim. 

As I have reported before, things are often not as they seem in legal proceedings: Ownership is sometimes but not always as it seems – presumptions for, presumptions against, and evidence – Murrays Legal

In a matter where a Judge found in favour of the wife over the trustee of the husband’s bankruptcy, the Judge said that, whatever the legal record may show, creditors should expect to be aware of the possibility of constructive trusts or of equitable interests existing when the debtor is married or in a de facto relationship. 

The same comment could be made in relation to any adoption of a defence of coercive control.  

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[1] Marketers/media/dramatists should not be involved in writing Treasury papers.

[2] See Wangmann, Jane — “Criminalising Coercive Control in New South Wales: Misunderstandings and Missed Opportunities” [2024] UNSWLawJl 28; (2024) 47(3) UNSW Law Journal 812