September 2024
The Corporations Act provides for automatic disqualification of a director if convicted of an offence. Do you think you can exclude a director from managing a company because they committed ANY offence? Think again.
A recent case in the Victorian Courts has confirmed that an offence by a Director involving “dishonesty” must be an inherent element of the offence in question. The decision handed down is relevant to the legislative provisions under the Corporations Act, affecting directors.
This insight demonstrates how courts may approach the concept of dishonesty when interpreting offences of Directors.
Key Takeaways
The term “involves dishonesty” requires dishonesty to be either an element of the offence itself, or inherent in the offence itself of which a director is being convicted.
- When considering automatic disqualification under section 206B(1)(b) of the Corporations Act, no consideration is to be taken to the circumstances of the offending itself.
- The term “dishonesty” itself is to be determined according to the standards of ordinary people.
- Given the serious consequences of disqualification, it is important to consider the circumstances in which a person may have been automatically disqualified.
The legislative provision in question
Section 206B(1)(b) of the Corporations Act 2001 (Cth) provides that:
“(1) A person becomes disqualified from managing corporations if the person:
……
(b) is convicted of an offence that:
(i) is a contravention of this Act and is punishable by imprisonment for a period greater than 12 months; or
(ii) involves dishonesty and is punishable by imprisonment for at least 3 months;…”
Recent Court Case- Water v Diesel Holdings Pty Ltd [2024] VSCA 77
The recent case dealt with Mr Baxter and Mr Waters, who owned Rock Solid Structural Developments Pty Ltd and purchased and developed property together as business partners. A property in Cranbourne West, Victoria, was purchased by their venture.
Mr Baxter was convicted of various offences involving domestic and family violence, and breached bail conditions, committing an indictable offence whilst on bail. In March 2022, Mr Baxter was sentenced to three years imprisonment. Mr Waters filed a notice shortly after, that Mr Baxter had ceased to be a director for Rock Solid and soon after, sold the Cranbourne Property, the proceeds of which went to Mr Waters’ entity only. Mr Baxter and his entity Diesel Holdings Pty Ltd commenced court proceedings against Mr Waters, claiming the removal of him as Director of Rock Solid, the sale of the Cranbourne Property, and payment of the proceeds to Mr Waters, constituted oppression and breach of duties owed to them by Mr Waters.
Mr Waters argued that the proceedings should be dismissed, as Mr Baxter had been automatically disqualified from his director roles under section 206(1)(b) of the Corporations Act, for the offences “involving dishonesty”.
Whether Mr Baxter was convicted of any offence that “involves dishonesty” within the meaning of section 206B(1)(b)(ii) of the Corporations Act.
The court concluded that an offence involving dishonesty is one that can be classified as ‘on the face’ of the relevant offence provision. Dishonesty is to be assessed according to the standards of ordinary people, meaning the only factors to consider is whether an ordinary person would consider the offence to involve “dishonesty”, where dishonesty is not an element of the offence itself. When determining whether section 206B(1)(b)(i) applies, a court would need to look at whether dishonesty is inherent, or an element of, the offence, and does not have regard to anything beyond this factor.
Section 206B(1)(b)(ii) captures offences in which dishonesty is inherent or an element of the offence (such as conspiracy to defraud). No broader approach or examination of how the offence is committed is necessary.
Court Decision
The court assessed dishonesty according to the standard of an “ordinary person” as required under the Corporations Act. The court held that Mr Baxter was not automatically disqualified and removed as a director because of these offences, despite being guilty of the offences, as it did not inherently involve dishonesty in the manner, for example, of an offence of conspiracy to defraud or deceit. The Court rejected Mr Water’s argument, stating that by the standards of an ordinary person, the offence of breaching a condition of bail, is not “dishonest”.
This case decision demonstrates why it is important to consider the circumstances that will satisfy the automatic disqualification of directors under the Act, and the importance of seeking legal advice about your duties as a Company director.
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If you need further information or advice on your obligations as a director and general company advice, contact us today on (02) 9189 5288
Craig Higginbotham and Nicole Sarraf
16 September 2024
