FEDERAL COURT OF AUSTRALIA

Australian Securities and Investment Commission v Franklin (liquidator), in the matter of Walton Construction Pty Ltd (in liq) [2014] FCA 68

THE COURT ORDERS THAT:

1.    The proceeding is dismissed.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

1    The first, second and third defendants (“the liquidators”) are the liquidators and former administrators of the fourth and fifth defendants (“the companies”). The plaintiff (“ASIC”) has applied to the Court for an order under s 503 of the Corporations Act 2001 (Cth) (“the Act”) for the removal of the liquidators as liquidators of the companies because of an apprehension that the liquidators may lack independence and impartiality. ASIC also claims that the “declaration of relevant relationships” (commonly known as a “DIRRI”) made by the liquidators upon their appointment as the administrators was deficient and seeks a declaration that they contravened s 436DA of the Act.

Should the liquidators be removed for apprehended lack of independence and impartiality?

2    It is settled law that a liquidator may be disqualified from continuing to act in the winding up of a company where the hypothetical fair minded observer would perceive a lack of independence or impartiality on the part of the liquidator in the discharge of his or her functions, even where independence and impartiality have in fact been maintained: Re Biposo Pty Ltd (1995) 17 ACSR 730; Domino Hire Pty Ltd v Pioneer Park Pty Ltd (in liq) [2003] NSWSC 496; Accord Pacific Holdings Pty Ltd v Gleeson [2011] NSWSC 1021. The disqualification principle gives due recognition to the requirement that liquidators must not only be independent and impartial, they must be seen to be independent and impartial, which is fundamental to the integrity of the winding up process: Bovis Lend Lease Pty Ltd v Wily (2003) 45 ACSR 612. Thus, the discretion under s 503 of the Act will commonly be exercised in favour of removing a liquidator where it appears that the liquidator is in a position of apparent conflict because of some relationship (direct or indirect) or connection: Wood v Targett (1997) 23 ACSR 291 at 298; Re National Safety Council of Australia [1990] VR 29.

3    ASIC has not challenged the liquidators’ independence and impartiality in the performance of their duties either as administrators, and then as liquidators, of the companies but contends that a reasonable apprehension of lack of independence and impartiality exists because of the following matters:

a.    the liquidators were appointed the administrators of the companies on the referral of the Mawson Group, which provides business advisory and restructuring services to companies in financial difficulty;

b.    the Mawson Group, as advisors, had worked with the companies prior to their collapse;

c.    the companies transacted asset sales and debt assignments shortly before they went into administration that the liquidators will need to investigate, where:

i    it appears from company searches that the other parties to the transactions were companies connected with the Mawson Group; and

ii    the asset sales and debt assignments effectively resulted in the transfer of a significant part of the businesses of the companies;

d.    there is a need to investigate whether those transactions can be challenged as uncommercial transactions or unreasonable director-related transactions, whether the directors have breached their duties and whether Mawson Group personnel were involved in such breaches, where:

i    the Mawson Group was involved in the appointment of the insolvency practitioners who will ultimately investigate transactions to which entities connected with the Mawson Group are parties;

ii    the liquidators’ firm, Lawler Draper Dillon (“the firm”) has been referred six other voluntary administrations by the Mawson Group;

iii    the referrals from the Mawson Group have generated a material volume of work with significant fees for the firm; and

iv    in three of the other administrations, there were antecedent transfers of assets and debt assignments by the companies to entities connected with the Mawson Group.

4    The significance of these matters, ASIC contended, is that the liquidators must investigate the Mawson Group’s involvement in the transactions, and the conduct of persons and entities connected with the Mawson Group in regard to those transactions, in circumstances where the liquidators’ firm has an ongoing commercial relationship with the Mawson Group which generates significant fees for the firm and where the persons who will be the subject of the investigations by the liquidators include those who referred the appointments to them. ASIC argued that these circumstances give rise to a reasonable perception or apprehension that the liquidators would not bring an impartial and unprejudiced mind to the investigation of the pre-appointment transactions, and would favour interests associated with the Mawson Group at the expense of the interests of creditors, whether consciously or not, because of their interest or concern not to damage the referral relationship – as ASIC colloquially put it, “not to bite the hand that feeds them”.

5    Additionally, ASIC contended that it was relevant that the liquidators, in breach of s 436DA of the Act, failed to disclose in their DIRRI that transactions involving the Mawson Group may need to be investigated and further, in breach of s 6.15.1 of the Insolvency Practitioners Association Code of Professional Practice for Insolvency Practitioners, failed to include in the DIRRI “significant facts” pertaining to the circumstances of their appointment as administrators. ASIC contended that the failure to disclose matters that the liquidators were required to disclose created in the mind of the hypothetical fair minded observer a “heightened sense” that the liquidators lacked independence, and that this was another fact to take into consideration.

6    The test for determining whether a hypothetical fair minded observer would apprehend a lack of independence and impartiality 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: Accord Pacific Holdings Pty Ltd v Gleeson [2011] NSWSC 1021 at [35]-[38], citing Ebner v Official Trustee in Bankruptcy (2000) 205 CLR 337 at 347, [16]. The test is an objective test viewed through the legal fiction of the hypothetical fair minded observer, and the apprehension of lack of independence must be reasonably formed. For the apprehension to be reasonable, it is axiomatic that the apprehension must be informed and arise upon an understanding of the actual circumstances in which the claim of apprehended lack of independence is made.

7    ASIC points to the character and nature of the liquidators’ business association with the Mawson Group as the “logical connection” giving rise to a reasonable apprehension that the liquidators may not act impartially in the discharge of those duties and responsibilities, where the Mawson Group was involved in the very transactions that will need to be investigated. Particular emphasis was placed on the material volume of work and fees generated from Mawson Group referrals coupled with the fact that some of those referrals involved antecedent transfers of assets involving the Mawson Group. ASIC argued that it was inappropriate for the investigations, which will be a key aspect of the liquidations, to be conducted by the liquidators selected by, or with the involvement of, the Mawson Group where the subject of the investigations will include the lawfulness of the conduct of the Mawson Group. It would unquestionably be inappropriate if the liquidators have an apparent conflict. However I do not think that the logical connection is made out.

8    In the present case, the knowledge attributed to the fair minded observer would include an awareness about the functions and duties of liquidators as that provides the context for the consideration. The fair minded observer, appropriately informed, would be aware that liquidators have statutory duties and responsibilities that they must discharge. The fair minded observer, appropriately informed, would also be aware that it is the liquidators’ duty to discover whether any transactions are voidable and whether there was any conduct by any person involved in those transactions in breach of the Act, or giving rise to some other civil or criminal liability.

9    The fair minded observer, appropriately informed, would know that the liquidators’ firm is commonly referred voluntary administrations and other insolvency work by solicitors, business advisors and accountants and would know that this was the nature of the firm’s business relationship with the Mawson Group. The fair minded observer would also know that the Mawson Group is a business advisory firm providing corporate restructuring advice to troubled companies, and that its relationship with the companies was a professional one. The fair minded observer, appropriately informed, would also know that there is nothing about the conduct of the other insolvencies referred by the Mawson Group to the liquidators’ firm that brings the firm’s independence and impartiality into question having regard to their professional relationship with the Mawson Group. With such an appreciation, the fair minded observer may reasonably conclude that the liquidators would similarly discharge their statutory duties and responsibilities impartially and as required by law in the conduct of the liquidations in issue, uninfluenced by their relationship with the Mawson Group. Moreover, the fair minded observer, appropriately informed, would also know that if there was any deficiency in the DIRRI, such deficiency (if that be the case) was inadvertent and not intended. It is therefore difficult to perceive how in that circumstance, there should be some “heightened” apprehension of lack of independence and impartiality.

10    Accordingly, I am not persuaded that there is any substance in the claim of apprehended lack of independence and the application to remove the liquidators is therefore refused.

Disclosure

11    The liquidators made a DIRRI on their appointment as administrators, as required by s 436DA(2) of the Act and provided the declaration to the companies’ creditors, as required by s 436DA(3). Relevantly, the liquidators declared as follows:

i.    Circumstances of Appointment

Mr Franklin had one meeting with Mr C Walton, the company director, on 27th September 2013 for the purposes of discussing the financial position of the company and the insolvency options available.

We received no remuneration for this advice.

This does not affect our independence for the following reasons:

•    The courts and the IPA’s Code of Professional Practice specifically recognise the need for practitioners to provide advice on the solvency process and the options available and do not consider that such advice results in a conflict of interest or is an impediment to accepting the appointment.

•    This meeting… set out the insolvency options available, the process involved in each option and the ramifications under alternative options. The advice will not influence our ability to be able to fully comply with the statutory and fiduciary obligations associated with the voluntary administration of the company in an objective and impartial matter.

ii.    Relevant relationships (excluding professional services to the insolvent)

….

iv.    No other relevant relationships to disclose

The [companies were] referred by Mr P McCurry of Mawson Group, who refers us insolvency type matters from time to time. Referrals from solicitors, business advisors and accountants are common place and do not impact on our independence in carrying out our function as Administrators.

Other than this, there are no other known relevant relationships, including personal, business and professional relationships, from the previous 24 months with the company, an associate of the company… that should be disclosed.

12    Section 60 of the Act sets out what is required to be disclosed in a DIRRI. Section 60(1) relevantly provides that:

(1)    In this Act, a declaration of relevant relationships, in relation to an administrator of a company under administration, means 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 – a 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)    ….; 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.

13    ASIC contended that the DIRRI was deficient because s 60(1)(b) required the liquidators to address why they did not believe that the referral relationship with the Mawson Group resulted in any actual or perceived conflict of interest or duty in the context of the potential need to investigate transactions involving the Mawson Group, whether or not the relationship did give rise to a perceived lack of independence and impartiality. It was argued that the breach of the DIRRI requirements did not depend on the Court concluding that there was a perceived lack of independence, as the object of the DIRRI provisions is to alert creditors to relationships that may not give rise to a conflict but which may be relevant in considering whether to replace the administrator: see explanatory memorandum to the Corporations Amendment (Insolvency) Bill 2007 (Cth) at [4.73]. ASIC also contended that there was a breach of s 436DA even if the liquidators had not been aware at the time that they made the DIRRI that transactions involving the Mawson Group called for investigation, because they were nonetheless required by s 436DA(5) of the Act to update the DIRRI with that information when they did become aware of it.

14    The starting (and end) point is s 60 of the Act, which defines what is meant by a “declaration of relevant relationships” for the purposes of s 436DA of the Act. Section 436DA is the substantive provision, requiring administrators to make a “declaration of relevant relationships” as soon as practicable after appointment and to provide creditors with a copy of the DIRRI before the first meeting of creditors, along with the tabling of the DIRRI at that meeting. Section 60 requires the administrator to state if he/she has or has had (within the preceding 24 months) “a relationship” with the company or associates of the company and the administrator’s reasons for believing that “none of the relevant relationships” result in the administrator having a conflict of interest or duty.

The evident policy of the provision is to ensure the integrity and transparency of the appointment process by requiring administrators to disclose to creditors any existing or prior associations with the company or its associates. Disclosure serves to alert creditors to associations that may be a ground for disqualifying the administrator. This policy objective is made clear by the explanatory memorandum to the Corporations Amendment (Insolvency) Bill 2007 (Cth). The explanatory memorandum explained that the 2004 Parliamentary Joint Committee on Corporations and Financial Services Report, Corporate Insolvency Laws: A Stocktake (“the PJC Report”) and the 1998 Corporations and Markets Advisory Committee Report, Corporate Voluntary Administration (“the CAMAC Report”) had both recommended that the Government should consider introducing new disclosure requirements to address concerns about the independence of administrators. The specific recommendations were to the effect that administrators should be required, upon their appointment, to disclose any professional, business or personal association with the company. Recommendation 1 of the PJC Report stated:

The Committee recommends that the law should require administrators to make available a statement of independence before the first meeting of creditors disclosing any professional, personal or business relationship between the administrator or his/her firm and the company or its officers, members or creditors. There should be provision for appropriate sanctions for false or misleading statements.

Further, the Committee recommends that the administrator be under an obligation to disclose conflicts of interest if and when they arise.

Recommendation 36 of the CAMAC Report stated:

All administrators (whether appointed under s 436A, 436B or 436C) should be required to table a statement of interest at the first meeting of creditors. The statement should disclose any professional, personal and business relationships of the administrator and his or her firm with the company or its officers, members or creditors that the administrator knew or should have discovered upon reasonable inquiry, including as an accountant or other professional adviser (other than the relationship arising merely from the company’s request that the person be an administrator).

15    The explanatory memorandum stated that it was proposed “to address concerns about the independence of administrators by requiring administrators to declare any ‘relevant relationships’” which “will allow creditors to make a more informed decision about whether to replace the administrator”: at [4.71]. Paragraphs [4.72] and [4.73] state:

4.72    The declarations will be provided to creditors with the notice of the first meeting of creditors. The categories of relationship that an administrator is required to declare are targeted around those parties that have the power to initially appoint an administrator. While conflicts may arise due to relationships with other parties, it considered that a relationship with these parties would pose a particular concern for creditors, and as such the administrator should be required to disclose them and explain why they do not amount to a conflict of interest or duty. While a conflict may not arise at law, the existence of such a relationship may be one factor for creditors to take into account when considering whether to replace the administrator. A key theme of the reforms in this Bill is to provide creditors with better information and more power to manage external administration processes.

4.73    The question of whether a ‘relevant relationship’ exists between an administrator and another person will be a matter of fact and degree. However, the term should be interpreted in light of the object of the provision to alert the creditors to relationships that may not give rise to a conflict, but which may be relevant in considering whether to replace the administrator. This would include relationships where a conflict might be perceived to exist in the absence of full disclosure. It does not require the disclosure of trivial interpersonal connections.

16    The legislation enacted gives effect to that policy by imposing the duty on administrators to disclose relationships, whether or not they are potentially disqualifying, coupled with the duty to provide reasons as to why those relationships do not, in the administrator’s view, result in a conflict of interest or duty. The declaration thus provides an important safeguard for creditors, if only because they are entitled to assume that any professional, personal or business relationship between the administrator or his/her firm and the company or its associates will be disclosed to them.

17    The issue in the present case concerns the adequacy of disclosure in the DIRRI in view of the likely need to investigate the involvement of the Mawson Group in transactions entered into by the companies in administration, of which the liquidators were, or became, aware whilst the companies were still under administration. ASIC argued that the DIRRI was deficient because creditors were not alerted to the fact that there may be a need for the liquidators to investigate the firm that referred them work. ASIC argued that the creditors “needed to know” that the Mawson Group may be investigated to enable them to make an informed decision about whether to replace the administrators. In written submissions ASIC argued that:

The provisions [of s 60] require administrators, amongst other things, to address a situation where there may be a perceived or apprehended lack of independence or impartiality (even if the administrators themselves did not consider there is one), as that would provide a basis for the removal of insolvency practitioners from office….. The disclosure is to be made as soon as practicable after being appointed. It is to assist creditors in determining whether to replace the administrators at the first creditors’ meeting… (emphasis added).

Reference was made to the explanatory memorandum including paragraph [4.73].

18    The resolution of the issue lies not in looking at what the explanatory memorandum said but in construing the text of s 60. As the High Court cautioned in Commissioner of Taxation v Consolidated Media Holdings Ltd (2012) 91 ACSR 359 at 370, [39], whilst it is legitimate to have regard to extrinsic materials to assist in elucidating the purpose of the legislation, resort to extrinsic materials must not displace the language of the text nor is examination of those materials “an end in itself”. Whilst it may be accepted that a primary purpose of the DIRRI is to enable creditors to make informed decisions about whether to replace an administrator, the content of the DIRRI is a matter prescribed by statute and it is necessary to examine what the section requires.

19    The text of s 60 prescribes in clear language that a DIRRI must state whether the administrator or his or her firm has, or has had (within the preceding 24 months), “a relationship” with the company or, relevantly, its associates. “If so”, the administrator must state his or her reasons for believing why that “relationship” does not “result in” the administrator “having a conflict of interest or duty”. The section thus contains two requirements: (1) the requirement to disclose relationships with the company or its associates; and (2) the requirement to explain why those relationships do not disqualify the administrator from acting as administrator.

20    In the present case, the liquidators disclosed their firm’s business association with the Mawson Group and explained why the referral relationship did not compromise their independence in carrying out their function as administrators. ASIC’s argument that the liquidators had to address why the need for investigation did not result in any conflict was no more than to state a conclusion about the possibility of a conflict of interest or duty because there was the relationship with the Mawson Group.

21    The need to investigate the Mawson Group was a matter pertaining to the performance of their duties, and in my view, did not objectively add anything further as to whether the existence of the association with the Mawson Group may give rise to any conflict of interest or duty or, to put it another way, might be seen to undermine the independence and impartiality of the liquidators in the discharge of their duties as administrators. If there be any conflict of interest or duty, it was founded in the referral relationship, the nature of which was disclosed.

22    Accordingly, the declaration sought by ASIC is also refused.

Associate:

Dated:    13 February 2014