It is well-known that liquidators must be independent. If there is a reasonable apprehension that Liquidators lack independence, a Court may remove and replace them pursuant to the Corporations Act 2001 (Cth) (CA).

Australian Securities and Investments Commission v Franklin (liquidator), in the matter of Walton Constructions Pty Ltd [2014] FCAFC 85 (Walton) clarifies the standard of independence required by administrators and liquidators, and highlights important considerations for referrals and the selection of insolvency practitioners, particularly where there are pre-appointment transactions involving a referrer which will be investigated.

Background

Walton Construction Pty Ltd and Walton Construction (Qld) Pty Ltd were placed into voluntary administration in October 2013 and subsequently went into liquidation.

Shortly before the appointment of administrators, the companies entered into a number of transactions, including various asset sale agreements with entities associated with the Mawson Group. The Mawson Group provides business advisory and restructuring services. The companies retained the Mawson Group who had a referral relationship with the administrators.

In December 2013, the Australian Securities and Investment Commission (ASIC) commenced proceedings in the Federal Court of Australia seeking the removal and replacement of the Liquidators of the Walton Constructions group on the grounds of a lack of independence. The action failed at first instance, but succeeded on appeal.

Lack of independence

The decision confirms that administrators and liquidators can be removed if there is an actual or apprehended conflict of interest. The test is whether a fair-minded lay observer might reasonably apprehend that the practitioner might not bring an impartial mind to their duties.

Here the Court considered that the liquidators’ firm received significant remuneration from referrals by the Mawson Group and the circumstances surrounding the appointment of the administrators. The Court held the view that a fair-minded observer might apprehend that the liquidators may not wish to put this income from referrals in jeopardy and therefore the facts gave rise to a reasonable apprehension of bias.

The liquidators were subsequently removed and replacement liquidators were appointed, with costs awarded against the liquidators.

The Walton decision has prompted changes to the Code of Professional Practice (the Code) by the Australian Restructuring Insolvency and Turnaround Association in respect of disclosure of referrers in the Declaration of Independence, Relevant Relationships and Indemnities (DIRRI) required by the CA.

A new section 6.6.1 has been added to the Code which requires practitioners to disclose in the DIRRI:

  • the referring entity (firm/organisation name); and
  • the practitioner’s reasons for believing that the relationship with the referring entity does not result in the practitioner having a conflict of interest or duty.

Although the Code cannot be directly taken into account in construing legislation, it has a very important place in regulating insolvency practitioners.

To be mindful of…

Practitioners should be wary about accepting an appointment in circumstances where:

  1. there is a substantial referral relationship between the practitioner and the person who referred the matter to the practitioner; and
  2. the person who referred the matter was involved in pre-appointment transactions that the practitioner may need to investigate.

Liquidators should take care to disclose any relevant referral relationships to fulfill obligations. If there is potential conflict it may be best to seek legal advice.