The Corporations Amendment (No.1) Act 2009 represents a significant step towards the implementation of a single trans-Tasman economic market based on common regulatory frameworks with the introduction of a mechanism for the mutual recognition of director disqualifications.

These new provisions, which will apply to foreign disqualifications occurring on or after 25 February 2009, further increase the scrutiny placed on directors of Australian corporations by regulators and the courts.

Background

In New Zealand, provisions allowing for the recognition of disqualification of directors under Australian law have already been in force since 18 June 2007.

However, prior to the amendments, in Australia a degree of ‘mutual disqualification’ only existed in respect of convictions for serious criminal activity.  The new provisions have a very broad reach.  As an example, the disqualification of directors in New Zealand as a result of becoming bankrupt will now be recognised in Australia.

Provisions prior to the amendment

Prior to the amendments coming into effect, directors could only be disqualified from managing corporations for breaches of Australian laws.  Disqualification was either automatic (on the happening of certain events), by a court order or at the direction of ASIC.

A person was automatically disqualified from being a director:

• upon conviction for certain types of offences involving the management of a corporation, contraventions of the Corporations Act or fraud;
• upon becoming bankrupt or subject to an arrangement under Part X of the Bankruptcy Act 1966; or
• if a court order disqualifying the person from managing a corporation was in force under the Trade Practices Act 1974.

An Australian court had the power to disqualify a person for:

• contravention of civil penalty provisions;
• being wholly or partly responsible as an officer, within a 7 year period, for the failure of 2 or more corporations; or
• repeated contraventions of the Corporations Act.

In addition, ASIC had the power to disqualify a person from being a director if within a 7 year period, the person was an officer of 2 or more corporations and while he was an officer, (or within 12 months after ceasing to be an officer) each corporation was wound up and a report was lodged by a liquidator about the person’s conduct.

These provisions were not amended by the Act and remain in force.

Summary of the new provisions

The new provisions introduced into the Corporations Act have the following effect:

• They allow for the automatic disqualification of directors from managing corporations in Australia if they are disqualified from being a director, or from being concerned in the management of a foreign company by a court in a foreign country.
• They extend the power of Australian courts to disqualify people from managing corporations if they have been disqualified under the law of a foreign country (either by operation of the law or by a regulator) from being a director, or taking part in the management of a corporation, provided that the court considers disqualification to be appropriate and justified.  In determining the period of disqualification, the court may consider the period of disqualification imposed in the foreign country.

The significant difference between these new provisions is that while the first one results in automatic disqualification, the second one may result in disqualification if an Australian court considers it appropriate.

Currently New Zealand is the only foreign country to which the amendments apply, however, it is intended that the reach of the new provisions will be extended to other countries in the future.

The Act also makes a number of consequential amendments to the Corporations Act to ensure consistency and reflect the effect of the new provisions.