In reporting breaches of the law to ASIC, and triggering action by ASIC, liquidators are not required to express any particular views or conclusions; or if they do so, they are not required to set out the basis for their views or conclusions, or even to have reasonable grounds for holding them before reporting. The function of a breach report is to promptly alert ASIC to potential problems with particular companies. All that the liquidator is required to do is comply with the terms of the law.
The responsibility of an insolvency practitioner, to investigate and report on any offences they come across in the particular insolvency administration is fundamental. It is said to remain an obligation even if there are no funds in the estate to pay the for the time spent in doing so. Hence, the responsibility is also not unquestioned.
In the current climate of seeing business failure as often being a precursor to eventual success, it is perhaps inconsistent to assume the existence of possible offences in a business failure. Nevertheless, in view of the concession to the debtor that insolvency offers, it remains an important element of an insolvency.
Section 533 reports
But there is no focused approach to this, at least in corporate insolvency. Section 533 of the Corporations Act places an obligation on the liquidator to lodge a report with ASIC that extends to whether an officer or employee of the company in liquidation, or a member or contributory, ‘may have been guilty of an offence under a law of the Commonwealth or a State or Territory in relation to the company’. While the offence must be ‘in relation to the company’, that still brings in tax, environmental, WHS, privacy and many other offences. It is not, as the Judge said in the decision about to be discussed, “limited to company law”: O’Sullivan v ASIC  FCA 228
The nature of s 533 reports came up in that decision which involved an appeal from the AAT affirming an ASIC decision to prohibit a Mr O’Sullivan from providing financial services for 7 years; and that he be disqualified from managing a corporation under s 206F of the Corporations Act for a period of 5 years. On review the Tribunal varied this latter decision by allowing him to be involved in the management of three family companies. O’Sullivan v ASIC  FCA 228
One argument in the Federal Court was that neither the Tribunal nor ASIC could prohibit Mr O’Sullivan from managing corporations under s 206F in circumstances where the s 533 report was in fact known by ASIC to be incorrect, as it was in that case.
But this is not relevant. Section 206F has 3 elements:
1. a trigger mechanism in s 206F(1)(a);
2. a procedural fairness requirement in s 206F(1)(b); and
3. a decision on the merits that disqualification is or is not appropriate, in s 206F(1)(c) read with s 206F(2).
As to the trigger, s 206F(1)(a) simply provides that ASIC may disqualify a person who has been an officer of 2 or more companies that ended up in insolvent liquidation and a liquidator’s report under s 533 was lodged with ASIC. The Court said that:
“the liquidator is not required to express any particular views or conclusions in a s 533 report. If opinions or views on the part of the liquidator are expressed in the report, the liquidator is not required to set out the basis for such opinions or views. Nor is the liquidator obliged to have reasonable grounds for holding such opinions or views before articulating them. The function of the report is to alert ASIC to potential problems with particular corporations and to do so promptly after the potential problems have been identified by the liquidator. All that the liquidator is required to do is comply with subpars (d) and (e) of s 533(1)”.
And, even if the liquidator’s report is wrong, it does not matter that ASIC knew this.
“The mere existence of the two reports under s 533 is the jurisdictional fact upon which the provision rests. The section does not say that the reports must be right, reasonable or even sensible. The power is enlivened when two such reports have been lodged”.
The correctness of information, assertions and opinions contained in the report is (at best) only relevant to the third stage of the process ie the decision stage (s 206F(1)(c))”.
The Court said that if there is to be consideration of the substantive merits of what appears in a s 533 report, that is to occur at the level of the exercise of the discretion conferred on ASIC by the provision.
‘Hence, ASIC is not obliged to satisfy itself of the validity and correctness of the relevant s 533 report before it is permitted to issue a show cause notice. Even if ASIC knew the report was wrong this would not matter for the purposes of s 206F. Only the fact of the report matters. That is not to say that it may not be possible to contend in some circumstances that a s 533 report is invalid. It suffices for present purposes only to observe that no such contention was made in this case’.
The matter was sent back to the AAT for a rehearing.
It all sounds odd, and it may be.
It does put in perspective the criticisms that ASIC receives thousands of s 533 (and related) reports each year, with action taken on only a minute fraction of those.
Those claims need themselves to be put in the perspective that if, conceivably, ASIC were to ‘audit’ every SME or large company on a given day, a similar percentage of lack of compliance and breach of the law would probably be reported.
A comparison with bankruptcy
Trustees in bankruptcy have, of course, different reporting responsibilities. They are required to report only offences under the Bankruptcy Act. The trustee’s knowledge that the bankrupt has been involved in tax fraud, or is alleged to have threatened the petitioning creditor, is not legally relevant. In practice, those offences should be reported to the other relevant authorities, and at least raised with AFSA through its useful pre-referral inquiry process.
While the law in the decision of O’Sullivan has to be read carefully, the decision does highlight the mechanical reporting process under s 533, and its unsatisfactory comparison with bankruptcy. The aim of offence reporting and the extent of a liquidator’s duty to do so, even where funds are available, needs a review.
As the final anti-phoenix report of Professor Helen Anderson and her team says,
“if liquidators are to be charged with the primary responsibility for investigating
wrongdoing – in addition to their important enforcement role in bringing asset
recovery actions – these investigatory responsibilities should be expressly stated in
the Corporations Act and adequate funding should be provided”.
Likewise in personal insolvency.
My earlier comments on this topic are here.