Background
Insolvency practitioners regularly obtain referrals of work from
sources including lawyers, business advisors and accounting firms.
Indeed, repeat referrals from such sources are commonplace - and
are the primary source of work for practitioners in the insolvency
industry.
A recent decision in the Federal Court has confirmed there is no
inherent apprehension of impartiality or lack of independence where
an insolvency practitioner takes an appointment on referral from
another party with whom the insolvency practitioner has a
pre-existing commercial relationship. The court found that the test
for determining whether a hypothetical fair minded observer would
apprehend a lack of independence and impartiality was an objective
test viewed through the legal fiction of the hypothetical fair
minded observer. The knowledge attributable to a 'fair minded
observer' would include, among other things:
- awareness about the function and duties of liquidators;
- awareness of the statutory duties that liquidators must
perform, including the liquidators' duty to investigate potential
voidable transactions and whether any actions might give rise to
some liability under the Corporations Act, or criminal or civil
law; and
- knowledge that liquidators' firms are commonly referred
voluntary administration and other insolvency work by solicitors,
business advisors and accountants.
Facts
The fourth and fifth respondents, Walton Construction Pty Ltd
and Walton Construction (Qld) Pty Ltd (Walton)
were experiencing financial difficulty and were placed in
administration. Prior to going into administration, Walton
transferred assets and assigned debts to companies connected with a
group called the Mawson Group. Walton also appointed the first,
second and third respondents, who were each liquidators from the
firm Lawler Draper Dillon, as administrators on the recommendation
of the Mawson Group.
ASIC alleged that the Mawson Group had been involved in the
administration of three other companies, where there were
antecedent transfers of assets and debt assignments to entities
connected with the Mawson Group. In all three of the
administrations, persons from Lawler Draper Dillon had been
appointed as administrators.
In the declarations of relevant relationships (known as a
'DIRRI'), the liquidators declared that Walton was referred to them
by the Mawson Group. The DIRRI stated: 'Referrals from solicitors,
business advisors and accountants are commonplace and do not impact
on our independence in carrying out our functions as
Administrators'.
ASIC applied to the Federal Court for an order under s 503 of
the Corporations Act 2001 (Cth) (Act) for
the removal of the liquidators on the grounds that the liquidators
lacked independence and impartiality.
ASIC also sought declarations that the liquidators had
contravened s 436DA of the Act by making deficient DIRRI on their
appointment as administrators.
Relevant legislation
Section 503 of the Act provides that: '[t]he Court may, on cause
shown, remove a liquidator and appoint another liquidator'.
Section 436DA of the Act provides:
(2) As soon as practicable
after being appointed, the administrator must make:
(a) a declaration of relevant relationships; and
(b) a declaration of indemnities.
Failure to comply with s 436DA is an offence under s 1311(1) of
the Act.
A 'declaration of relevant relationships' regarding an
administrator of a company is defined under s 60(1) as:
(1) … a written
declaration:
(a) stating whether any of the following:
(i) the administrator;
(ii) if the administrator's
firm (if any) is a partnership--a partner in that partnership;
(iii) if the administrator's firm
(if any) is a body corporate--that body corporate or an associate
of that body corporate;
has, or has had within the preceding
24 months, a relationship with:
(iv) the company; or
(v) an associate of the
company; or
(vi) a former liquidator, or
former provisional liquidator, of the company; or
(vii) a person who is entitled
to enforce a security interest in the whole, or substantially the
whole, of the company's property (including any PPSA retention of
title property); and
(b) if so, stating the
administrator's reasons for believing that none of the relevant
relationships result in the administrator having a conflict of
interest or duty.
The Federal Court decision
Her Honour Justice Davies noted that s 503 gives the court a
discretionary power to remove a liquidator where it appears that
the liquidator is in a position of apparent conflict. A liquidator
must be independent and impartial and be seen to be independent and
impartial. The discretion to remove a director may be exercised
where a hypothetical fair minded observer would perceive a lack of
independence or impartiality on the part of the liquidator.
ASIC argued that the asset sales and debt assignments to
companies connected with the Mason Group effectively resulted in
the transfer of a significant part of the Walton business to those
companies. There was a need to investigate these transactions to
determine whether they were uncommercial transactions or whether
the directors had breached their duties. There was also a need to
determine whether the Mawson Group was involved in any breaches of
the Act.
ASIC said it was not appropriate for the liquidators to
investigate the Mawson Group's involvement because Lawler Draper
Dillon had an ongoing commercial relationship with the Mawson Group
through which they generated their work. There was a perception
that the liquidators could not be impartial when investigating the
transactions and would favour interests associated with the Mawson
Group at the expense of the interests of the creditors.
Her Honour noted that there must be a logical connection between
the matters that are said to impede or inhibit the liquidators from
acting impartially in the interests of all creditors. She noted
that liquidators are commonly referred work by solicitors, business
advisers and accountants. There was nothing about the referral that
would cause a fair minded observer to believe that the liquidators
were not impartial. Moreover, liquidators have statutory duties and
responsibilities that they must discharge.
ASIC also argued that the liquidators were required to disclose
in their DIRRI the circumstances of their appointment as
administrators by referral of the Mawson Group. In particular, ASIC
said the liquidators had to explain why they believed the referral
relationship with Mawson Group did not result in any actual or
perceived conflict of interest, pursuant to s 60(1)(b) of the
Act.
Davies J considered the language of s 60. Her Honour noted that
the section contains two requirements: first, the requirement to
disclose relationships with the company or associates; and second,
the requirement to explain why those relationships do not
disqualify the administrator from acting as administrator.
In this case, the liquidators had met these requirements. They
had explained why the referral relationship did not compromise
their independence. Section 60 did not require the liquidators to
go further in explaining why the possible need to investigate the
Mawson Group did not result in any conflict. Davies J considered
that if there were any conflict of interest or duty, it was to be
found in the referral relationship that had been disclosed.
Davies J was not convinced there was any substance in the claim
of apprehended lack of impartiality and independence. Her Honour
also declined to provide the declaration sought by ASIC regarding
the DIRRI.
Comment
The decision illustrates that the courts appreciate the
commonplace nature of referral of business services and that a lack
of impartiality or independence does not necessarily follow from a
referral relationship.
The case reaffirms that a liquidator or administrator will not
be removed on the basis of apprehended impartiality or independence
merely because the liquidator has been referred by an entity
connected with the company in liquidation.
Administrators should not be afraid of forming strong commercial
relationships with lawyers, business advisers or accountants who
may refer them work, so long as those relationships are properly
disclosed in the DIRRI.