Declaring bankruptcy has significant effects on those who declare it. Although it may eliminate many of your outstanding debts, you’re limited in what you’re allowed to do while you’re declared bankrupt. The limitations also apply to running a business, particularly under a company structure.
If you’re a company director or plan to become one, you might be wondering, ‘ Can I be a company director if I’m Bankrupt? Being bankrupt will impact your ability to serve this role.
In this article, we’ll explain whether a bankrupt can be a company director and the rules company directors or those who wish to be company directors who have been declared bankrupt must follow.
Read along!
Can a bankrupt person be a company director?
If you are currently bankrupt, you are not legally allowed to be the director of a company.
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What Is Bankruptcy?
The Australian Government’s Australian Financial Security Authority (AFSA) defines bankruptcy as a legal process where an individual is declared to be unable to pay their debts.
The process releases an individual who’s bankrupt from the majority of their debts, and it provides relief and allows them to start over. Bankruptcy is a useful process as it allows individuals to regain control over their finances.
Due to debt accumulating interest, an individual’s debt will continue to grow if they fail to make their debt repayments. Therefore, bankruptcy is useful in helping people deal with their debts where there is no practical way of paying them off.
Although bankruptcy may sound like an attractive option, however, bankruptcy also comes with significant consequences.
Some consequences of being declared bankrupt include the following:
- Your ability to get credit can be impacted by being declared bankrupt
- Your declaration of bankruptcy will be publicly available on the National Personal Insolvency Index (NPII)
- Your declaration of bankruptcy will be reflected in your credit rating or report for five years or two years after bankruptcy ends
- You hand over control of your financial affairs to a trustee
- Your bankruptcy will last for three years, and one day
- You will need to get written permission from your trustee to travel overseas
How is bankruptcy declared?
There are two primary ways a person can be declared bankrupt. These are either through voluntary bankruptcy or a sequestration order. During voluntary bankruptcy, an individual enters into bankruptcy by completing and submitting a bankruptcy form to AFSA.
During a sequestration order, the court will declare your bankruptcy. During this process, a creditor that you owe money can file a creditor’s petition against you to have you declared as bankrupt.
How do company directors become bankrupt?
As a director of a company, you are bound by strict duties. Sometimes, you will sign a director’s guarantee when taking out a loan for the company. The issue here is if the company becomes insolvent, this debt then carries onto you personally. If this happens, you may have to file for bankruptcy, and therefore you can’t continue acting as the director of the company.
Under section 206B of the Corporations Act 2001 (Cth), a person who is bankrupt can’t be a company director. Additionally, this section states that an undischarged bankrupt under Australian legislation can’t manage a corporation. This extends to company directors. This disqualification also applies to undischarged bankrupts from other countries or external territories.
Furthermore, you should be aware that an individual won’t be allowed to manage a corporation under the following circumstances:
- Where a personal insolvency agreement has been executed by the individual under Part X of the Bankruptcy Act 1966 or similar legislation in a foreign country or an external territory
- An individual will also be prevented from managing a company if they haven’t completely adhered with agreement terms
- An individual will also be prevented from managing a corporation if they’ve disqualified under Part 6‑5 of the Corporations (Aboriginal and Torres Strait Islander) Act 2006 from managing Aboriginal and Torres Strait Islander corporations
What happens to your company when you enter bankruptcy?
When you enter bankruptcy, you give the trustee control of your finances. The trustee will have control of your assets, such as your house, income received outside of your ordinary income and any shares you own. When you declare bankruptcy, the company shares you possess will be provided to the trustee, and the trustee can choose to sell your shares or liquidate the company.
The trustee can sell the shares so that your creditors can be paid. Alternatively, the trustee can put the company into liquidation. If your company is liquidated, you will be required to assist the liquidator by giving them information regarding the company’s financial circumstances, affairs, property and business.
If your company doesn’t have any assets or has little or no value, the trustee can choose to do nothing. In this circumstance, a creditor will generally create a court application so that a liquidator is appointed so that your company enters liquidation.
Can you become a company director when you’re no longer bankrupt?
The Australian Securities and Investments Commission(ASIC) states that you can become a director of a company again after you have been disqualified when your period of bankruptcy ends. This is because after the discharge of your bankruptcy, you will no longer be an undischarged bankrupt, and you will become a discharged bankrupt instead.
To become a company director again, your company must re-appoint you in accordance with its company constitution. Additionally, your company must notify ASIC that you have been re-appointed through the online lodgement of form 484 within 28 days of your re-appointment.
Conclusion
Declaring bankruptcy can have a significant impact on many aspects of your life, including your commercial activities. It’s important to resign from your role as a company director if you become bankrupt and that you’re aware that you can’t become a company director if you’re bankrupt.
If you’re feeling unsure about the legal obligations you have as a company director who has been declared bankrupt, you should hire a lawyer for legal advice to avoid any legal consequences.
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