ASIC Civil Penalty Claim Against Liquidator ends in Consent Orders

A recent case considered the breadth of the Court’s power to make orders where it has been alleged that a registered liquidator is not faithfully performing his or her duties to the relevant legal requirements. 

The Proceedings

In December 2015 ASIC commenced proceedings in the Federal Court against a liquidator in relation to his performance of his duties as a registered liquidator, voluntary administrator and deed administrator (The Defendant) of 26 companies to which he had been appointed.[1]

ASIC sought orders that an enquiry be held into The Defendant’s conduct in a number of appointments, that The Defendant be prohibited from being appointed for a period of time, and that after the inquiry The Defendant be removed from and handover any ongoing appointments.

The conduct ASIC was concerned with included The Defendant’s alleged:

  • relationship with his appointer or referrer, and the influence of this relationship on The Defendant’s conduct in external administrations;
  • failure to act independently, free of actual, apparent or potential conflicts of interest or with the appropriate degree of care and diligence required of a registered liquidator;
  • acceptance of appointments in circumstances where The Defendant was in a position of actual or potential conflict of interest;
  • failure to lodge with ASIC, reports of suspected offences by officers of companies to which he was appointed in a timely manner, or at all; and
  • failure to inform creditors of the basis for remuneration The Defendant was claiming, and drawing down that remuneration without properly informed creditor approval.

ASIC did not suggest that any of this conduct was dishonest.[2]

Defendant negotiated agreement with ASIC

Earlier this month consent orders between the parties were made by His Honour Justice Moshinsky.  The orders were made on the basis that The Defendant undertook to:

  • have 10 of his administrations selected and reviewed by ASIC and a written report (identifying any matters of concern) be made by a registered liquidator approved by ASIC;
  • upon receipt of the written report The Defendant endeavor to address any matters of concern raised in the reviewers written report;
  • endeavor to successfully complete the ARITA Advanced Certification Course;
  • apply to the Court for another liquidator to be appointed in relation to any companies which he was appointed to, which did not have a meeting convened within three months of the order.

The consent orders involved The Defendant’s removal from a number of liquidations, and an additional administrator appointed jointly to other administrations to which he had previously been the sole administrator.  Also, The Defendant was restricted to accepting future appointments only in relation to voluntary liquidations of proprietary companies and ordered to resign if any of those future appointments became creditors’ voluntary liquidations.   

Relevant Principles

In determining whether to make the orders, Moshinksky J discussed the principles applicable to the calling of an enquiry.

The Court’s jurisdiction arises pursuant to s 536 of the Corporations Act 2001 (Cth) (Act) where “it appears... that a liquidator has not faithfully performed or is not faithfully performing his or her duties”,[3] is not observing a requirement of the Court, the Act, or a complaint is made to the Court or ASIC by any person regarding the conduct of the liquidator.

His Honour highlighted that s 536 of the Act grants the Court a “broadly expressed supervisory jurisdiction over the conduct of persons in control of the affairs of a corporation, in circumstances where normal market forces and the exercise by shareholders of their rights to control are attenuated or non- existent”.  His Honour pointed out that while the Court’s position under s 536 was clear, this was not the case in relation to s 447E of the Act.[4]

Section 447E relates to the administrator of a company under administration, or of a deed of company arrangement (DOCA).  The Court’s power to make an inquiry into the conduct of a defendant under s 447E has previously been challenged[5] in particular in relation to whether circumstances that were “prejudicial to the interests of some or all of the company’s creditors or members”[6] existed. 

Moshinsky J noted that while ‘prejudicial’ conduct is a precondition to the Court making an order pursuant to s 447E(1), it is not a precondition to the Court determining the existence of such conduct, and more importantly, it is accepted that the Court may inquire into a liquidators relevant conduct as an administrator as an incident of the Courts inquiry under s 536.[7]

His Honour discussed the Court’s interpretation of its power to “take such action as it thinks fit”[8] or to “make such orders as it thinks just”[9] and pointed out that this has previously been construed as including the power to order the cancelling of a liquidator’s registration or to order that a person does not act as a liquidator for a specified period. 

Consent orders for penalty

Moshinsky J confirmed that in civil penalty proceedings a Court may entertain joint submissions from ASIC and a defendant, having regard to the public interest (which includes recognition of the benefit of the settlement of the enforcement proceedings).

Additionally, the Court must consider whether the agreed penalty is within an appropriate range, but not whether the penalty is the same as what the Court would itself have imposed.[10]

Lavan Legal Comment

This case highlights:

  • Vigilance in ensuring that referral or appointer relationships are not seen to affect a liquidator’s independence.
  • the breadth of the Courts power to make orders in relation to a liquidator (and perhaps also administrators) who appear to not be faithfully carrying out their duties;
  • the importance for liquidators of adhering to codes of conduct; and
  • the ability of a defendant to negotiate consent orders with ASIC where civil penalty proceedings have been commenced.

[1] Australian Securities and Investments Commission v McDermott, in the matter of Conalpin Pty Ltd (in liq) [2016] FCA 1186

[2] Ibid, [39]

[3] s 536(1) of the Corporations Act 2001 (Cth)

[4] Australian Securities and Investments Commission v McDermott, in the matter of Conalpin Pty Ltd (in liq) [2016] FCA 1186, [14]; Hall v Poolman (2009) 75 NSWLR 99, [53]

[5] Australian Securities and Investments Commission v Edge (2007) 211 FLR 137

[6] s 447E(1) of the Corporations Act 2001 (Cth)

[7] Australian Securities and Investments Commission v Edge (2007) 211 FLR 137, [98]

[8] s 536 of the Corporations Act 2001 (Cth)

[9] s 447E of the Corporations Act 2001 (Cth)

[10] Australian Securities and Investments Commission v McDermott, in the matter of Conalpin Pty Ltd (in liq) [2016] FCA 1186

Disclaimer – the information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.