Liquidator impartiality: ASIC v Franklin, Horne and Stone (Liquidators), in the matter of Walton Construction Pty Ltd (In Liquidation) (Company)

//Liquidator impartiality: ASIC v Franklin, Horne and Stone (Liquidators), in the matter of Walton Construction Pty Ltd (In Liquidation) (Company)

ASIC has filed an appeal against the dismissal of a case in which it sought to have liquidators removed on the basis of an apprehension of impartiality: ASIC v Franklin, in the matter of Walton Construction Pty Ltd (in liq) [2014] FCA 68. The appeal has not yet been heard, but it indicates concerns by the regulator about the current Declaration of Relevant Relationships (DIRRI) which may result in legislative amendment if the appeal is unsuccessful.

Liquidators have a fiduciary duty to the creditors, shareholders and the court. This includes the duty to act honestly in the exercise of their powers for proper purpose at all times and not allow their private interests to come into conflict with their duty as liquidator.

The courts will not, however, exercise their discretion in the case of apprehended (rather than actual) impartiality of a liquidator (see Accord Pacific Holdings Pty Ltd v Gleeson v liquidator of Accord Pacific Land Pty Ltd (In Liquidation) [2011] NSWSC 1021) without finding a logical connection between such apprehension and matters which may impede or inhibit a liquidator in the performance of her functions.

Background

Mawson Group (Mawson) provided finance and restructuring advice to businesses. From time to time it referred clients to the Liquidators’ firm, Lawler Draper Dillon.

Mawson provided advice to the Company and assisted in the assignment of transactions and assets prior to the Company’s liquidation (Transactions). The Transactions were effected with entities associated with Mawson. Mawson subsequently referred the Company to the Liquidators, who were appointed administrators of the Company.

ASIC brought applications pursuant to the Corporations Act 2001 (Cth) (Act):

  1. to remove the Liquidators on the basis of a reasonable apprehension that the Liquidators may not be impartial, due to the referral of the Company and a history of 6 earlier referrals. ASIC argued that the Liquidators would need to investigate Mawson’s involvement in the Transactions (s.503); and
  2. a declaration of breach of s.436DA given the Liquidators’ failure to disclose in the DIRRI that they may need to investigate the Transactions and Mawson’s involvement.

 
The onus was on ASIC to prove to the Court that it should make the orders.

The Federal Court refused both applications on the basis that it was not satisfied there was an apprehension of lack of impartiality and that the DIRRI was compliant.

Lack of independence or impartiality

ASIC did not claim that the Liquidators’ lacked actual impartiality. Rather ASIC contended that a hypothetical observer would have a perception or apprehension that the Liquidators might not bring an impartial or unprejudiced mind to the Transactions due to:

  • the referrals by Mawson (including of the Company and historically), which generated significant fees for the Liquidators’ firm;
  • participation of entities associated with Mawson in the Transactions;
  • the need to investigate the Transactions for potential uncommercial transactions or unreasonable director-related transactions under s.588 of the Act and the potential liability of Mawson associated entities arising from such Transactions;
  • the Transactions related to a substantial part of the business of the Company;
  • 3 of the 6 other referrals to the Liquidators also involved similar activity such as the Transactions, prior to administration;
  • failure to disclose in the DIRRI that investigations of the Mawson associated entities’ involvement with the Transactions was required.

 
The Honourable Justice Davies stated:

  • It is a fundamental legal principle to the integrity of the winding up process that a liquidator be disqualified in circumstances where the liquidator is in a position of apparent conflict because of a connection;
  • S.503 of the Act requires a Court to exercise discretion to disqualify a liquidator where it appears that the liquidator is in such a position of conflict;
  • The test is objective, one of a hypothetical fair minded observer as to apprehend a lack of independence and impartiality of a logical connection between the matters which may impede the liquidator’s impartiality in acting in the interests of all creditors and apprehended failure to discharge the liquidator’s duties and responsibilities; and
  • The apprehension must be informed based on the actual circumstances.

 
Her Honour held that a logical connection could not be made by a fair minded observer in this matter, as to an apprehension of the Liquidators’ impartiality, such observer being informed as to

  1. liquidators’ functions, statutory duties and responsibilities and duty to discover voidable transactions and/or breaches of the Act;
  2. liquidators are commonly referred by business advisors (such as Mawson) and accountants, solicitors;
  3. Mawson’s involvement with the Company was of a professional nature;
  4. knowledge that there was no suggestion as to a lack of independence or impartiality in respect to the other insolvencies referred by Mawson to the Liquidators; and
  5. any deficiency, if any, in the DIRRI was inadvertent.

 
Disclosure in DIRRI

S.60 requires administrators to declare any relevant relationships and as to why such relationships do not compromise the administrator’s impartiality. The declaration is provided to creditors, to allow them to make an informed decision about whether to replace the administrators.

The Liquidators declared in the DIRRI (at that time they were administrators) that they were referred by Mawson, who refer insolvency work from time to time and, in particular, “Referrals from solicitors, business advisors and accountants are commonplace and do not impact on our independence in carrying out our function …”. No statement was made that it may be necessary for the Liquidators to investigate the involvement of Mawson associated entities.

ASIC contended that the DIRRI was insufficient pursuant to s.60(1)(b) of the Act, given the Liquidators omitted any statement that there was potentially a need to investigate the Transactions involving Mawson associated entities. S.436DA(5) of the Act requires that the DIRRI be updated upon becoming aware of additional matters required to be disclosed.

Her Honour held that the Liquidators complied with the requirements of s.60 by declaring the referral by Mawson to them and why the relationship did not create a conflict of interest.

Decision

ASIC was unsuccessful and the Court was satisfied that:

  1. from an objective standpoint, there was no apprehension that the Liquidators would not treat the Transactions and Mawson’s involvement in them any differently, regardless of the referral by Mawson of the Company, as well as previous and prospective referrals; and
  2. the Liquidators properly disclosed the referral by Mawson in the DIRRI.

 
ASIC lodged a notice of appeal with the Federal Court on 26 February 2014 and is listed for callover before Justice Marshall on 29 April 2014.

Conclusion

ASIC’s view is that a need to investigate entities associated with a referrer should be disclosed to creditors. The Court at first instance did not consider that the current legislation required such disclosure. It may, however, be prudent for liquidators to make such disclosure when appropriate.

If you have any queries about this matter, please contact Andrew Cox at Pointon Partners on 03 9614 7707.

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2014-04-02T09:22:59+00:00April 2nd, 2014|Categories: Insolvency|