Australian Securities and Investment Commission v Franklin

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.