It is common for liquidators to work with a few firms or individuals, and for referrals to be predominantly distributed among those parties. In the recent decision in Re Walton Construction Pty Ltd (In Liq); ASIC v Franklin,(1) 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, and the first, second and third defendants 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 had previously worked with the companies before their collapse.
ASIC made an application for removal of the liquidators. It also sought a declaration that the liquidators had contravened Section 436DA of the Corporations Act 2001, because their "declaration of relevant relationships" was said to be deficient. The application was dismissed on both counts.
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. ASIC also argued that it would be necessary for the liquidators to investigate transactions of the companies with other companies connected with the referrer in order to determine whether those transactions were uncommercial transactions or unreasonable director-related transactions, and whether the directors and/or personnel of the referrer were involved.
ASIC contended 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 under Section 436DA of the act, ASIC contended that the liquidators had 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.
In dismissing the application, Justice Davies 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(2) and Ebner v Official Trustee in Bankruptcy.(3) 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 no logical connection was made out to result in such a conflict, and that a fair-minded observer could reasonably conclude that the liquidators would discharge their statutory duties and responsibilities impartially and as required by law.
This case assists liquidators who invariably rely on their relationships, including those with turnaround or restructuring businesses, for referrals when external administration is required. From a liquidator's perspective, standard commercial relationships between liquidators and referrers such as in the circumstances outlined above are unlikely to result in the liquidator being removed.
This decision demonstrates a great display of common sense on the part of 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 his or her duties and responsibilities. However, if circumstances go beyond a normal commercial relationship between referrer and practitioner, a court may reach a different conclusion from that reached by the court 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 as administrator or liquidator to a company. Failure to do so is an offence under Section 1311 of the act.
For further information on this topic please contact Warren Jiear, Sarah Drinkwater or Tim Logan at Piper Alderman by telephone (+61 2 9253 9999), fax (+61 2 9253 9900) or email (firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). The Piper Alderman website can be accessed at www.piperalderman.com.au.