Do we play ‘Hide and Seek’ or ‘Show and Tell’ with a director’s bankruptcy and insolvency history in prospectus disclosure law under the Corporations Act?
It is an aim of insolvency law to provide mechanisms that assist in removing directors from the management of companies where they have been found to have been involved with the failure of a number of companies. Often in this area insolvency law will support other mechanisms that exist in the corporate law. Therefore, the most recent consultation paper from ASIC on prospectus disclosure (Consultation Paper 155) deserves the insolvency industry’s attention and support.
ASIC is proposing that details of any criminal convictions, declarations under s1317E of the Corporations Act, personal bankruptcies, disqualifications or disciplinary action within Australia or other jurisdictions that are less than 10 years old and are relevant to the role to be undertaken and the investment decision should be disclosed in the prospectus. Additionally ASIC are proposing disclosure if the person has been an officer of a company that entered into a form of external administration because of insolvency and this occurred during the time when the person was an officer or within a 12 month period afterwards. They are seeking comment on these proposals and any practical difficulties that may arise, by June 7th. Further they are asking whether the ‘window’ should be 7 rather than 10 years.
The rationale presented by ASIC is that a person’s previous management of a company that has gone into external administration due to insolvency is an important aspect of their experience and so this will usually be relevant to an investor’s assessment when they assess the management expertise and governance of a potential investee.
Apart from a ‘dampening of entrepreneurial spirit’ argument it is hard to see a great deal of opposition to these proposals, particularly as most of these matters are already in the public arena, although perhaps not conveniently located in the one spot for retail investors to carry out a ‘search’. The piquant question is whether the disclosure should reveal the last 10 years or just the last 7 years of the director’s life. We could draw a loose parallel by looking at the spent convictions legislation. Under such legislation serious convictions [with some exceptions] can ‘disappear’ from a person’s life after 10 years. One example is the scheme known as the Commonwealth Spent Convictions Scheme which came into force on 30 June 1990 under Part VIIC of the Crimes Act 1914 (Cth). Based on this, why should the fact that a director who was once bankrupt or disqualified from managing a corporation a while ago be disclosed in a prospectus ?
The National Personal Insolvency Index will record the bankruptcy of a person forever, so having to ‘reveal’ for only 10 years would not mean that investors cannot find out beyond the 10 years window that a director had been bankrupt.
What could be the rationale for a 7 years argument? Could it be likened to a concept of the statute of limitations? Perhaps, although a quick survey will find different time periods for different matters in different countries (eg US Military matters are 5 years, Irish actions for recovery of land are 12 years!) and the closest is the 6 years limitation period under legislation such as the Limitations Act 1969 (NSW). Perhaps it could be argued there is a connection to other business type periods such as maintaining tax records or corporate records where in Australia its 7 years , for example, the Corporations Act s286(2).
So we will have mandatory ‘show and tell’ if the insolvency involvement is within 10 (or perhaps 7) years, and with a good search engine, memory and the help of other official records such as NPII there will then be ‘hide and seek’ after the mandatory period.