Bankruptcy not an absolute bar: Applications for leave to manage a corporation

Section 206B(3) of the of the Corporations Act1 states that a person is disqualified from managing corporations if the person is an undischarged bankrupt.  However, section 206G of the Act provides the Court power to grant leave to a disqualified person to manage a corporation if the person is not also disqualified by ASIC.

The recent Federal Court case of Elan, in the matter of Guild Enterprises Australasia Pty Ltd v Cohen [2020] FCA 79 considers the circumstances where leave may be granted to a bankrupt director to manage a corporation.

The facts

Mr Guy Elan (Mr Elan) is an undischarged bankrupt and the sole director of Guild Enterprises Australasia Pty Ltd (Guild Enterprises).  One effect of Mr Elan’s bankruptcy was to remove his capacity to manage Guild Enterprises under section 206B(3) of the Act.

Guild Enterprises is the plaintiff in litigation in the Supreme Court of Queensland in which Guild Enterprises is claiming approximately $800,000 in unpaid monies under a contract for Guild Enterprises to sell one of its subsidiary companies.   Mr Elan applied under section 206G of the Act for leave to manage Guild Enterprises to enable it to continue conduct of those proceedings.

Legal argument

Mr Elan’s counsel submitted that a primary consideration in an application under Section 206G of the Act was the protection of the public.  He claimed that the public would be protected if the application were to be granted because of the limited nature of the leave sought and that Mr Elan was willing to agree to the conditions proposed by ASIC.2

Further, Mr Elan’s counsel made the following points:

  • neither ASIC nor the trustee in bankruptcy opposed the application;
  • Guild Enterprises did not have the financial means to hire a director or find anyone willing to act as director; and
  • nothing in Mr Elan’s conduct or background warranted that leave ought not be granted to him.

The defendants (who were also the defendants to the Guild Enterprises claim) submitted that the application should not be granted for the following reasons:

  • Guild Enterprises’ sole shareholder had been struck off the UK Register of Companies which meant that Guild Enterprises did not comply with section 114 of the Act which states that “a company needs to have at least one member”;
  • Mr Elan had deposed to several “false understandings” in the affidavits filed;
  • it was possible that Mrs Hila Elan might be willing and able to act as director of Guild Enterprises;
  • Mr Elan had not shown that he would suffer any personal hardship if the leave was not granted; and
  • Guild Enterprises had an outstanding judgment against it in the District Court of NSW and would be unlikely able to pay any costs order made against in the Supreme Court proceeding.


Justice Reeves confirmed that the primary consideration in an application for leave under section 206G is protection of the public.

Reeves J then cited Adams v Australian Securities and Investments Commission3 as summarizing the relevant considerations for an application for leave under section 206G of the Act:

  • The applicant bears the onus of establishing that the Court should make an exception to the legislative policy underlying the prohibition.
  • The policy is one of protecting the public, not punishing the offender.
  • The legislation also has the objective of deterring others from engaging in prohibited conduct or from abusing the corporate structure to the disadvantage of stakeholders.
  • The prohibition itself contemplates that there will be hardship to the bankrupt.  Therefore, hardship alone is not a persuasive ground for the granting of leave.
  • The court in exercising its discretion will have regard to the nature of the offence of which the applicant has been convicted, his involvement, and the general character of the applicant. 
  • Where the applicant seeks leave to become a director and to take part in the management of companies the court will consider the nature of the applicant’s offence (including the applicant’s involvement and general character), and the structure of those companies, the nature of their businesses and the interests of their shareholders, creditors and employees.  The court will also consider the assessment of any risks to those persons or to the public which may appear to be involved in the applicant’s assuming positions on the board or in management.

When considering the application Reeves J noted there was no evidence that Mr Elan abused his position as a director of Guild Enterprises to the disadvantage of any member of the public who had dealt with the company, and that his bankruptcy had resulted from a personal guarantee given to a US entity in 1996 which had resulted in a claim against him which he was unable to pay at the time.

Reeves J also considered the confined scope of activities that Mr Elan intended for Guild Enterprises to undertake, and the further protection provided by the conditions proposed by ASIC.

Finally, Reeves J commented on the Respondents’ submissions as follows:

  • the fact that Guild Enterprises’ sole shareholder had been deregistered in the UK did not mean that Guild Enterprises ceased to exist as a company in Australia;
  • even if Guild Enterprises was liable to be wound up under section 461(1)(d) of the Act, there was no evidence that any application had been made; and
  • none of the other factors mentioned posed any risk to the public if Mr Elan were to be given leave to manage Guild Enterprises for the purpose of conducting the Supreme Court proceeding.

The court granted leave to Mr Elan to manage the affairs of Guild Enterprises for the purpose of continuing to conduct the Queensland Supreme Court Proceedings, subject to the conditions proposed by ASIC.

Lavan comment

The case of Elan, in the matter of Guild Enterprises Australasia Pty Ltd v Cohen follows on from other recent cases in which the courts have granted leave to a director to manage a corporation under Section 206G of the Act.

This and those other decisions show that the Courts are, despite the general prohibition on bankrupts managing corporate affairs, prepared to be flexible particularly where there is specific value to be derived in the company which cannot otherwise be realized and where ASIC has imposed conditions on the grant of leave.

Disclaimer – the information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.
Lawrence Lee
Restructuring & Insolvency


[1] 2001 (Cth)

[2] Those conditions included that Guild Enterprises was not to engage in activities other than those required for or incidental to the litigation in the Supreme Court of Queensland, maintaining its status as a registered company, or winding up or deregistration.

[3] Adams v Australia Securities and Investments Commission [2003] FCA 557 (Adams) at [8]