It is common for liquidators (and all of us working in the insolvency industry) to work with a few firms or individuals and for referrals to predominantly be distributed amongst those. In the recent decision in Re Walton Construction Pty Ltd (In Liq); ASIC V Franklin [2014] FCA 68, the Federal Court considered when that relationship might amount to a conflict. 

The plaintiff was the Australian Securities and Investments Commission (ASIC). The fourth and fifth defendants were two companies in liquidation (Companies), and the first, second and third defendants (Liquidators) were the liquidators of the Companies, who had previously acted as administrators of the Companies.

The Liquidators were appointed as administrators of the Companies after referral from a business advisory and restructuring business (the Referrer). The Referrer had previously worked with the Companies prior to their collapse.

ASIC made an application for the removal of the Liquidators and further, sought a declaration that the Liquidators contravened section 436DA of the Corporations Act 2001 (the Act) because their “declaration of relevant relationships” was said to be deficient. The application was dismissed on both counts.

ASIC’s claims

ASIC contended that the Liquidators should be removed for a lack of independence and impartiality because:

  • Of an ongoing and prior relationship between the Referrer and the Liquidators’ firm.
  • It would be necessary for the Liquidators to investigate transactions of the Companies with other companies connected with the Referrer, and a need to determine if those transactions were uncommercial transactions, unreasonable director-related transactions, and whether the directors and/or personnel of the Referrer were involved.

ASIC’s contention was that the Liquidators had an ongoing commercial relationship with the Referrer, generating significant fees from that relationship. ASIC argued that this would give rise to “a reasonable perception or apprehension that the liquidators would not bring an impartial and unprejudiced mind to the investigation” of the subject transactions. In support of the declaration sought pursuant to section 436DA of the Act, ASIC contended that the Liquidators failed to disclose that transactions involving the Referrer may need to be investigated.

To this end, the Liquidators disclosed their firm’s association with the Referrer, and explained why this relationship did not compromise their independence. However, ASIC argued that the Liquidators had to address why the need for investigation did not result in a conflict.

Held

In dismissing the application, Davies J referred to the test for determining whether a hypothetical, fair minded observer would apprehend a lack of independence and impartiality mentioned in Accord Pacific Holdings Pty Ltd v Gleeson [2011] NSWSC 1021 and Ebner v Official Trustee in Bankruptcy (2000) 205 CLR 337. That is, that the test requires the “articulation of a logical connection between the matters which, it is said, may impede or inhibit the liquidators from acting impartially in the interests of all creditors in the discharge of their duties and the feared deviation from discharging their duties and responsibilities impartially.”

It was held that there was no logical connection made out to result in such a conflict and that a fair minded observer may reasonably conclude that the Liquidators would discharge their statutory duties and responsibilities impartially and as required by law.

Discussion

This case assists liquidators who invariably rely on their relationships including those with turnaround/restructuring businesses for referrals when external administration is required. From a liquidator’s perspective, standard commercial relationships between liquidators and referrers in circumstances outlined above are not likely to result in the liquidator being removed.

This decision is a great display of common sense being applied by the Court. With the reduction in the volume of court- appointments, referrals can be an essential part of an insolvency practitioner’s business – and such relationships should not affect a practitioner’s duty to act impartially and discharge their duties and responsibilities.

That being said, if circumstances go beyond a  normal  commercial  relationship  between referrer and practitioner, a Court may reach a different conclusion than the Court did in this case and could remove the practitioner.

This case also serves as a reminder to all insolvency practitioners to ensure that all relevant relationships are properly disclosed upon consenting to being appointed administrators or liquidators to a company. Failure to do so is an offence pursuant to section 1311 of the Act.