The recent decision of Australian Securities and Investment Commission v Franklin (liquidator), in the matter of Walton Construction Pty Ltd (in liq) [2014] FCA 68 provides useful guidance to insolvency practitioners about the test for independence and the disclosure requirements for a Declaration of Independence, Relevant Relationships and Indemnities (DIRRI).
It is also a reminder that disclosure is not a substitute for an appropriate assessment of whether taking an appointment carries with it any actual or perceived lack of independence in the eyes of the hypothetical fair minded observer.[1]
The case involved an application by the Australian Securities and Investments Commission (ASIC) under section 503 of the Corporations Act 2001 (Cth) (Act) for the removal of the defendant liquidators as liquidators of Walton Construction Pty Ltd and Walton Construction (Qld) Pty Ltd because of an apprehension that the liquidators may lack independence and impartiality.
ASIC also claimed that the DIRRI made by the liquidators upon their appointment as the administrators was deficient and sought a declaration that they had contravened section 436DA of the Act.
ASIC argued that the failure by the liquidators to disclose in their DIRRI:
created in the mind of the hypothetical fair minded observer a “heightened sense” that the liquidators lacked independence.
The Court found that it was 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.
The test is to determine whether a hypothetical fair minded observer would apprehend a lack of independence and impartiality. This requires a logical connection between the matters said to 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 those duties and responsibilities impartially.
ASIC said that the character and nature of the liquidators’ business association with the Mawson Group was 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 needed to be investigated.
Applying the test of how a hypothetical fair minded observer would apprehend the matter, Justice Davies considered that such a person would understand that referral relationships, such as occurred in this case, are a common business practice, that liquidators have a duty to remain impartial and independent, and that liquidators have a responsibility for investigating voidable transactions.
As to the DIRRI argument, Justice Davies was satisfied that the DIRRI met the standard for disclosure noting that the content of a DIRRI is prescribed by section 60 of the Act. Contrary to ASIC’s view, there was no obligation under the Act to disclose any potential impending investigation which, in the Court’s view, did not objectively add anything to the question of whether the existence of an association with the Mawson Group might undermine the independence of the liquidators.
It was held to be sufficient that the DIRRI made known to creditors the referral relationship with the Mawson Group – which, Justice Davies found, was the point at which any conflict would arise.
It is important to note that ASIC did not challenge the liquidators’ independence and impartiality in the performance of their duties either as administrators, or later as liquidators, of the companies.
Rather, it was a matter of the appearance to the hypothetical fair minded observer.
In finding against ASIC, the Court noted that 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.
This case provides a reminder that the DIRRI should be completed to the best of a practitioner’s ability and at least to the minimum standard required by the Act.
However, it remains important, as it has always been, for practitioners to assess whether an appointment does, or is likely to, impinge upon their ability to carry out their duties in a manner acceptable to the hypothetical fair minded observer.
The decision has already been appealed by ASIC and the full Federal Court heard the matter on 5 May 2014 with its decision reserved.
We will provide a further update once the decision is handed down.
[1] Sometimes called the man on the “Clapham Omnibus” or the “Bourke St. Tram” (allowing for regional differences).
