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