Three strikes and you’re out?
How many companies can fail before a directors actions are called into question and the Company Registrar seeks to ban them from being a director? Is it a three strike rule or is it more complicated than that?
Well, as you probably guess, its a little more complicated. Under section 385 of the Companies Act, the Registrar or the FMA “may prohibit” a person from being a director of a company but they must be satisfied, and be able to demonstrate, that the director is wholly or partly responsible for the failure of the company. The level of proof is high and we, as liquidators of companies have been asked to provide such evidence and have, in extreme cases, asked the Registrar to consider banned certain persons from being a director.
It need not be multiple failed companies. One or more will do but they can take into account any such company failures within the past 5 years.
Directors of such companies have the right to be heard and defend their actions. If they can demonstrate they have taken all reasonable steps to avoid the company failing and mitigate the losses sustained by the creditors, then they will likely not be banned.