Be Frank…The Importance Of Being Earnest!!!

In the recent decision of Australian Securities and Investments Commission v Bettles,1 the Federal Court of Australia dismissed an application by the Australian Securities and Investments Commission (ASIC) to cancel a liquidator’s registration and prohibit them from reapplying for registration for a fixed period pursuant to s 45-1 of the Insolvency Practice Schedule (Corporations) (IPS).2

Executive Summary

The Court worked through a 160 page statement of claim brought by ASIC, finding that there was a lack of evidence to support ASIC’s contentions and provided some illuminating views around the operation of accessorial liability (s 79 of the Corporations Act 2001 (Cth) (Act)), directors’ duties (ss 180-184) and s 45-1 of the IPS. Of the liquidator (Mr Bettles), the Court observed “he provided frank answers in cross-examination and was prepared to make concessions where appropriate” and “he struck me as someone who is earnest and attempted to do the right thing.”

The Court dismissed ASIC’s claim with costs, finding ASIC’s evidence did not support any breaches of directors’ duties, by extension, by the Liquidators.  Accordingly, there were no factors to consider under s 45-1 of the IPS.3

Background Facts

The conduct ASIC relied on arose out of a liquidator appointed to companies in the Members Alliance Group (MA Group), a group of 50+ companies of an unrelated company, Bradford Marine Pty Ltd (in liquidation).

ASIC alleged that Mr Bettles knew, or ought to have known, that a director of one of the companies of a group company  was developing a fraudulent strategy with his advisors.  The purpose of this strategy was to transfer companies’ assets and redirect income streams in order to defraud creditors, including the ATO.  ASIC’s alleged case against Mr Bettles arose from his apparent involvement and knowledge in transactions it alleges were entered into to implement the strategy. 

Issues and Legal Framework

The Court considered whether the conduct of Mr Bettles:

  • was in contravention of the common law and statutory duties of liquidators; and
  • consequently, warranted a direction under s 45-1 of the IPS to the effect that:
    • Mr Bettles licence would be suspended; and
    • he would be banned from holding a position as a liquidator for a period of time.

The Court considered whether the conduct fell short of directors’ duties encapsulated in ss 180, 181 and 182 of the Act, the ‘accessorial liability’ sections outlined in s 79 and in relation to the ARITA Code of Professional Practice for Insolvency Practitioners.

The Court observed s45-1 of the IPS was ‘relatively new’ and considered the provision in the light of its predecessor, s 536 of the Act.  The provisions, although not strictly the same wording, have the same statutory effect  – i.e., both a broad discretion on the Court to order as its thinks fit in relation to registered liquidators.  Correspondingly, the Court applied the case law developed in relation s 536.

The Decision

Generally, ASIC’s grounds related to the liquidators’  alleged knowledge and involvement in the fraudulent schemes.  All of these failed on fact – that is, ASIC failed to prove the requisite standard of knowledge required to breach directors’ duties laid out in ss 180-184 or that Mr Bettles was ‘involved in’ (per s 79) Mr Marlborough’s (alleged and not proven) breaches of directors’ duties laid out in ss 180-184.  The Court stated it ‘should not be quick to condemn a person in the difficult position of a liquidator, and, in particular, should not judge his or her conduct with wisdom born of hindsight’ , balanced against the ‘professional’ nature of the job of a liquidator.  Before finding a liquidator has been ‘involved in’ a breach of the Act (as per s 79), they must be found to be an intentional participant who had knowledge of the essential matters which make up the contravention in question.4

Two specific transactions  were substantively discussed:  

  • by failing to investigate the entitlement of a certain Mr McVicar to a payment; and
  • entry into a set of Management Deeds.

MacVicar payment:

ASIC argued that the liquidator  breached his director’s duties as outlined in s 180 (exercising due care and diligence) because he made a payment to a Mr MacVicar even though the Company owed substantial amounts (namely over $17 million) to creditors and the ATO.  The Court found there were no factors to take into account for purposes of s 45-1 of the IPS.

The Court went on to consider an interesting point; whether someone can be ‘involved in’ (under s 79 of the Corporations Act), a breach of s 180 (the standard of due care and diligence for directors) of the Act.  The Court found that they could not.  Thus, Mr Bettles could not be ‘involved in’ Mr Marlborough’s (as alleged by ASIC) substandard standard of care in relation to the administration of the Company.

Entry into Management Deeds

In essence, ASIC alleged that Mr Bettles was involved in an elaborate scheme intended to divert income from the insolvent companies he was liquidator of.  This scheme was facilitated by the entry into a set of Management Deeds alleged to be a ‘pretence’.

The Court dealt with this issue simply, finding that services were provided pursuant to those management deeds.  This was because of the existence of commissions for the Managers of the Management Deeds staff which, properly characterised, fell within the broad definition of ‘Management Services’ as provided in the deeds.  Mr Bettles adduced further supporting evidence of this fact. Once more, the ‘factual premise’ of ASIC’s case could not be made out.  Accordingly, this was not a fact that could be taken into account under s 45-1 of the IPS.

A breach of the ARITA Code?

Whilst failing on every other ground, ASIC did successfully claim that Mr Bettles acted contrary to the ARITA Code for insolvency practitioners.  This was because Mr Bettles failed to adequately disclose previous advice to related parties in declarations of independence, relevant relationships and indemnities.  ASIC’s success was short-lived. While the breach was a factor that could be taken into account under s 45-1 of the IPS, it was not determinative.  In fact, the breach of the ARITA Code was described as ‘minor’ in the circumstances.

Lavan Comment

This decision serves as a useful reminder to liquidators to ensure their compliance with directors’ duties and the ARITA Code of Conduct and ensure they are vigilant for, reporting and investigating, any suspicious conduct so as not be ‘involved in’ contraventions of the Act.

While an ‘innocent’ although ‘naïve’ liquidator can be exonerated by the Court, they are not immune to an almost ‘career ending’ investigation by ASIC.  It follows that liquidators should carefully monitor their actions and, when in doubt, seek legal advice as a matter of urgency.

If you have any questions about the responsibilities of liquidators, the experienced Lavan team are here to help.

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.