How statutory body members can easily lose their royalties and even property in 2014 (Part II)

January 6, 2014  |  Alica Stegmannová

In Part I, we looked at the consequences of breaching the duty to act with due care. The new legislation also brings changes and clarifies the penalties to be faced by statutory body members in the event of a company bankruptcy. It must be emphasized from the outset that the penalties will be far from trivial.

Statutory bodies and their members should always consider whether the company should file for bankruptcy in the event a real threat exists. One reason has to do with a very significant new feature introduced this year by the Corporations Act, which sets forth that where insolvency proceedings are instigated by a person other than the corporation itself, the insolvency administrator may call on the statutory body members to forfeit all benefits obtained from the company in the last two years following the bankruptcy ruling. This is conditional on the fact that the statutory body members knew or must have known that the corporation was insolvent and failed to do everything reasonably foreseeable and necessary to remedy the situation. Moreover, members will have to prove that they actually did everything reasonably foreseeable and necessary, which will not be easy.

Liability for companies

Along with the possibility of losing two years of remuneration, under certain conditions the insolvency court may decide that a statutory body member is responsible for the corporation’s liabilities. As such, the member is in danger of losing his own assets. Again the test is whether all that was reasonably foreseen and necessary was done. Unlike in the previous situation, however, the court is entitled to make such a decision even if the company filed for bankruptcy itself. Liability is important, in particular for creditors, who would not otherwise be able to seek their claims from the bankrupt company. A court decision on liability may be sought by the bankruptcy administrator as well as by creditors.


If a company goes bankrupt, the court may also decide to expel the statutory body members from their positions for up to three years. The court may also extend the period repeatedly, specifically for up to ten years. Statutory body members are not the only ones eligible for expulsion, however; the law also mentions persons in similar positions. The expulsion is conditional on the fact that the member, taking into account all circumstances, contributed to the corporation’s bankruptcy or, in the case of a person who became a statutory body member after insolvency proceedings had already started, if he/she contributed by his/her conduct to reducing the bankruptcy assets and thus harmed creditors.

The same decision can also be made if a statutory body member has repeatedly and grossly breached the duty to act with due care, or, as the case may be, other care connected with his/her position. The member may, however, exculpate him/herself from the charge if he/she proves that he/she acted with best practice, i.e. that he/she exerted the care that any other reasonable and careful person in a similar position would exercise in a similar situation. It should be noted that an effort by the statutory body member to avoid penalty by resigning will be of no use. The rules relate to former statutory body members, as well. Also note that a motion to expel can be submitted by any person with substantial interest. Thus, we can only hope that the courts will be reasonable in considering such motions and that prevent bullying and personal vendettas. 

Part I can be found here.