The recent decision of the Federal Court of Australia in Australian Securities and Investments Commission v Dunner [2013] FCA 872 has resulted in an order that Melbourne insolvency practitioner Andrew Dunner repay over

$600,000.00 in remuneration and be prohibited from practicing as a liquidator for a period of five years.

The decision reiterates the stringent duties of liquidators and receivers (and managers) to properly investigate the circumstances of a company, draw remuneration only where permitted to do so and comply with ASIC and creditor reporting obligations.

The Facts

Mr Dunner had been a registered liquidator for over 26 years and was the proprietor of the firm “Andrew Dunner & Associates”. Aside from Mr Dunner, the firm employed an accountant and another person not qualified as an accountant.

In October 2008, Mr Dunner was appointed as the receiver and manager of several companies owned and controlled by Mr Di Pietro. The appointment was pursuant to a charge granted in favour of Mr Di Pietro by each of the relevant companies (a fact the Court regarded as one which “should ring alarm bells”).

Following these appointments, Mr Dunner was also appointed as the liquidator of these companies despite there being apparent conflicts of interest due to inter-company transactions.

The liquidations had proceeded to an advanced stage when ASIC intervened, challenging both the validity of Mr Dunner’s appointment and his conduct throughout the liquidation. In the same proceedings, ASIC also brought attention to the conduct of Mr Dunner in numerous other administrations.

Failure to Investigate Circumstances of Company

Amongst other assertions, ASIC alleged that Mr Dunner had failed to investigate the circumstances of several companies diligently, or at all. It was argued that upon his appointment as receiver and manager of the Di Petro group of companies, Mr Dunner should have made enquiries into the validity of the charges in Mr Di Petro’s favour.

It was apparent from a review of Mr Dunner’s records that no such enquiries were made and that Mr Dunner had inappropriately relied upon information provided to him by Mr Di Petro’s family and lawyers.

On examination, Mr Dunner conceded that the charges were invalid as they had been granted by Mr Di Pietro to defeat the unsecured creditors. Nevertheless, Mr Dunner argued that it was not reasonably apparent at the time of appointment that further investigations of the companies’ circumstances were necessary.

 In rejecting this argument, the Court found that Mr Dunner’s failure to investigate the charges adequately (or at all)    was a “serious breach of his duty as a receiver and manager”.

The  Court  highlighted  that  this  failure  was  particularly  serious as  it  had  resulted  in  the  paying  out  of  over

$250,000.00 to Mr Di Pietro and $48,500.00 to Mr Dunner for fees.

As a consequence of the charges being void, the Court held that Mr Dunner’s appointment as receiver and manager was invalid.

As such, the $48,500.00 in fees Mr Dunner had received were ordered to be repaid.

Appointment as liquidator where acting as receiver and manager of group of companies

In relation to the same group of companies, ASIC argued that:

  1.   Mr Dunner’s role as liquidator of one of those companies presented a real or potential divergence of interests from his role as receiver and manager of the other companies;
  2.   In his application for the company’s winding up and his appointment as liquidator, Mr Dunner did not disclose his role as receiver and manager;
  3.   Mr Dunner failed to disclose the potential existence of preference payments and other potentially voidable transactions as between the companies; and
  4.   Mr Dunner ought to have been aware of the potential for conflicts of interest. It was irrelevant that Mr Dunner had instructed his lawyers to inform the Court of his role as receiver and manager of the other companies.

In the circumstances, it was found that Mr Dunner ought to have personally taken steps to ensure the potential conflict was disclosed.

Drawing remuneration without approval or adequate documentation

In respect of twelve liquidations, ASIC also argued that Mr Dunner had drawn remuneration without approval or adequate documentation.

With reference to his records, ASIC submitted that Mr Dunner had routinely exceeded approved remuneration limits without authorisation.

In relation to one of the liquidations, ASIC argued that although the remuneration claimed appeared to have been approved by two votes on the face of Mr Dunner’s records, the documentation was not sufficient to support the claim. Specifically, there was no proof of debt in relation to one of the votes, and the other was by an invalid proxy.

In relation to this, the Court highlighted that even if it did accept that such documentation existed at some point, Mr Dunner had still failed in his obligations to maintain adequate records.

An exchange between Justice Middeton, Mr Woodward SC (senior counsel appearing for ASIC) and Mr Dunner at trial highlights Mr Dunner’s billing practices:

His Honour: But how would you work out which amount? Was it just how much you needed for your running your practice, or-?

Mr Dunner: Well, basically – yes. (…)

Mr Woodward SC: So you would just dip into various administrations that had money at that time? Is that – I’m just trying to get a sense-?

Mr Dunner: No. Well, you can’t dip into ones that don’t have money, so they’ve got to have funds available to draw against.

The Court indicated that it was this focus on cash flow that provided for an inherently ineffective and unsatisfactory remuneration system.

The Court ordered that unapproved remuneration which totalled over $600,000.00 be paid into Court pending further submissions.

Inaccurate reporting to creditors and ASIC

Along with the above allegations, ASIC argued that Mr Dunner had also failed to:

  1. adequately investigate significant matters and report on these to ASIC and the creditors;
  2. render accurate reports as to the value of work done; and
  3. hold required annual meetings for creditors and submit the associated reports to ASIC.

In relation to all the above allegations, the Court found that Mr Dunner had failed to fulfill his relevant obligations. The Court highlighted the need for liquidators and receivers and managers to be prudent in the discharge of their reporting duties to both creditors and ASIC.

The Court noted that Mr Dunner’s failure to undertake basic inquiries into potential issues and otherwise take reasonable steps to ensure the proper liquidation of companies was a real and apparent threat to the image of the Courts.

These along with his other breaches went to the heart of Mr Dunner’s ability to adequately perform his obligations as a liquidator.

The Court ordered that Mr Dunner be prohibited from practicing as a liquidator for a period of five years.

Lessons to take away

The decision highlights the importance of:

  1. looking critically and thoroughly at the affairs of a company over which an insolvency practitioner is appointed;
  2. ensuring potential conflicts of interest are disclosed to the courts or others when applying for appointment as a liquidator;
  3. following  the  necessary  procedures  surrounding  remuneration  including  the  maintenance  of  records contained in the Corporations Act 2001 (Cth); and
  4. fulfilling reporting and other obligations to creditors and ASIC.