Sections 425 to 429 of the Companies Act 1997 provide three separate routes to keeping a person out of company management.
Section 425 — the automatic prohibition
(a) conviction on indictment of any offence in connection with the promotion, formation, or management of a company; or
(b) conviction of an offence under sections 420 to 423, or of any crime involving dishonesty, whether within the country or outside it; or
(c) being an undischarged bankrupt.
The person shall not be a director or promoter of, or in any way, directly or indirectly, be concerned or take part in the management of, a company —
(d) where sentenced to imprisonment: during the imprisonment and for five years after release; or
(e) otherwise: for five years after the judgement or conviction —
unless the person first obtains the leave of the Court, which may be given on such terms as the Court thinks fit.
Section 425 operates automatically. Nobody applies; the disqualification follows from the conviction or the bankruptcy. A person who wants relief must apply for leave, and must give the Registrar not less than one month’s notice of the intention to apply (s 425(2)). The Registrar, and such other persons as the Court thinks fit, may attend and be heard (s 425(3)).
“Crime involving dishonesty” means a crime involving theft, conversion, robbery, burglary, fraud, receiving stolen property, or forgery, and “company” includes an overseas company (s 425(5)). Convictions outside Papua New Guinea count.
Acting in contravention is an offence, penalty under section 413(4).
Section 426 — disqualification by the Court
(a) conviction on indictment of an offence connected with the promotion, formation or management of a company, or conviction of a crime involving dishonesty, here or abroad; or
(b) the person has committed an offence for which they are liable — whether convicted or not — under this Part; or
(c) the person has, while a director and whether convicted or not, (i) persistently failed to comply with this Act, or, where the company failed to comply, persistently failed to take all reasonable steps to obtain compliance; (ii) been guilty of fraud in relation to the company or of a breach of duty to the company or a shareholder; or (iii) acted in a reckless or incompetent manner in the performance of his duties as director; or
(d) the person has become of unsound mind.
The Court may order that the person shall not, without the leave of the Court, be a director or promoter of, or be concerned or take part in the management of, a company for such period not exceeding ten years as the order specifies.
Paragraphs (b) and (c) both say “whether convicted or not”, and section 426(4) confirms that an order may be made even though the person may be criminally liable for the same matters. Disqualification is protective, not punitive, and does not wait on the criminal process.
Paragraph (c)(iii) — reckless or incompetent performance of the duties of a director — requires no dishonesty at all. It is the natural companion of the section 115 duty of care, diligence and skill.
One month’s notice of the intention to apply must be given to the person against whom the order is sought, who may appear, give evidence and call witnesses.
Applicants: the Registrar, the liquidator, or a person who is or has been a shareholder or creditor. On an application by the Registrar or liquidator — and on a later application for leave by a person disqualified on their application — the Registrar or liquidator shall appear and call the Court’s attention to any relevant matters, and may give evidence or call witnesses.
The Registrar of the Court shall notify the Registrar of Companies as soon as practicable, and the Registrar shall give notice in the National Gazette of the name of the person (s 426(5)). Contravention is an offence under section 413(4).
Section 428 — prohibition by the Registrar
A company (a) put into liquidation because of inability to pay its debts; (b) that has ceased to carry on business because of inability to pay its debts; (c) against which execution is returned unsatisfied in whole or in part; (d) over whose property a receiver has been appointed; or (e) that has entered into a compromise or arrangement with its creditors — and also a company whose liquidation has been completed, whether or not it has been removed from the register.
The Registrar may, by notice in writing, prohibit a person from being a director or promoter, or being concerned or taking part in the management, of a company for a period not exceeding five years. Every notice shall be published in the National Gazette.
It may be exercised against (a) a person who, within five years before a warning notice was given, was a director of or concerned in the management of one such company, where the Registrar is satisfied that the manner in which its affairs were managed was wholly or partly responsible for its position; or (b) a person who within that period was a director of or concerned in the management of two or more such companies — unless that person satisfies the Registrar (i) that the management of all, or all but one, of them was not wholly or partly responsible, or (ii) that it would not be just or equitable for the power to be exercised.
Where a person has been involved in the management of two or more failed companies within five years, the burden shifts: they must satisfy the Registrar. That is the Act’s answer to serial company failure.
Safeguards: the Registrar shall not exercise the power unless not less than one month’s notice that the exercise is being considered has been given, and the Registrar considers any representations made (s 428(5)). The Registrar may later revoke the notice or exempt the person in relation to specified companies, with publication in the National Gazette (s 428(8)).
But under section 428(7), where the person appeals or seeks judicial review, the notice remains in full force and effect pending determination. There is no automatic stay. Contravention is an offence under section 413(4).
Sections 427 and 429 — personal liability for the company’s debts
A person who acts in contravention of section 425, or of an order under section 426 (s 427), or of a notice under section 428 (s 429), is personally liable —
(a) to a liquidator of the company for every unpaid debt incurred by the company; and
(b) to a creditor of the company for a debt to that creditor incurred by the company,
for the period of the contravention.
There is no requirement of fault, insolvency, or loss. A banned person who takes part in management is liable for every unpaid debt the company incurs while they do so — and a creditor may sue directly.
That is a stronger civil sanction than section 348, which requires awareness of insolvency, a liquidation, and proof of the creditor’s loss.
| s 425 — automatic | s 426 — Court | s 428 — Registrar | |
|---|---|---|---|
| Maximum period | 5 years (plus any imprisonment) | 10 years | 5 years |
| Requires conviction | Yes, or bankruptcy | No | No |
| Who initiates | Nobody — automatic | Registrar, liquidator, shareholder or creditor | The Registrar |
| Notice required | 1 month, by the person seeking leave | 1 month, to the person | 1 month, before the power is considered |
| Publication | — | National Gazette | National Gazette |
| Personal liability | s 427 | s 427 | s 429 |
A person caught by any of these provisions is also disqualified from acting as a receiver (s 256(1)(j)) and as a liquidator (s 328(2)(j)), and cannot be a director under section 129.
Sources
- Companies Act 1997 — ss 115, 129, 256, 328, 348, 413, 420–423, 425–429
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.