Concerns about liquidator misconduct hearings – no lawyer’s quibble

Concerns about the new processes to review the professional conduct of liquidators, and bankruptcy trustees, are discussed in light of the litigation approach taken by ASIC in a recent hearing before the existing disciplinary board.  

 

There has been limited debate about the forthcoming new processes under the Corporations Act for the review of the professional conduct of liquidators, introduced by the Insolvency Law Reform Act 2016 (ILRA 2016).[1]  These changes involve the replacement of the role of the Companies Auditors and Liquidators Disciplinary Board (CALDB) with ad hoc committees, aligned with the existing disciplinary processes for bankruptcy trustees. The operation of the bankruptcy regime, in place now for over a decade, gives some comfort for the value of the parallel regime being introduced in corporate insolvency, including in relation to liquidator registration. Nevertheless, some concerns have been raised about whether the new process will accommodate different issues confronting liquidators.

These concerns may be heightened by a recent CALDB decision – ASIC and Joubert[2] – involving an application by ASIC in relation to the conduct of a liquidator.

The current legal background

Liquidators’ conduct is presently subject to review on the application of ASIC before the CALDB, under s 1292 of the Corporations Act. That body comprises experienced liquidators and other professionals, and importantly, it is required to be chaired by an experienced lawyer: s 203(2) ASIC Act. The Board is not bound by rules of evidence but it nevertheless must accord procedural fairness and is required to abide by principles of natural justice – s 218(2). It has detailed written guidance and rules for its proceedings. It is generally required to publish its reasoning and reasons for its decision and these are provided as an on-going resource on its website. While a decision of the Board can have serious impact on a practitioner, it is nevertheless an administrative decision maker and not a court.[3]

Separately a liquidator’s conduct can be impugned by ASIC (or a creditor or other person) before the Federal or Supreme Courts, in particular under s 536 of the Corporations Act.

It appears to be a matter of the degree of seriousness of the misconduct as to, in ASIC’s case, which review avenue is chosen – the CALDB or the Court.

The outcome of Board or Court proceedings can result in the termination of the liquidator’s right to practise and hence in many cases involve a serious financial and other impact on the livelihood of the practitioner concerned.

In whichever forum the disciplinary proceedings are taken, certain legal standards are required of ASIC itself as a Commonwealth agency and in its role as a disciplinary regulator.

 ASIC and Joubert

Aspects of ASIC’s conduct of the matter discussed in the Board’s reasons for decision raise the concern that is the focus of this article. The ultimate findings and outcome are not relevant to this concern and these are not the subject of comment.[4]

The Board decision records that ASIC made numerous allegations of dishonesty against the liquidator in its pleadings, in relation to claimed misconduct extending over a period of several years.

On being challenged by counsel for the liquidator, some of these allegations were withdrawn by ASIC, but many others remained.

As the Board explained in detail in its reasons, a fundamental obligation of any lawyer pleading fraud or dishonesty is to ensure that a high degree of particularity clarity is given. “Unequivocal” legal authority, including from the High Court, was cited in support.

This is enshrined in the Board’s Practice Manual, and in all court rules.[5] As well, under the Model Litigant policy, by which ASIC is bound, Commonwealth agencies, as parties to litigation, are required to “act with complete propriety, fairly and in accordance with the highest professional standards”, a standard which “goes beyond the requirement for lawyers to act in accordance with their ethical obligations”.[6]

While the Board is an administrative body, and is to conduct its proceedings with some informality, it is a fundamental expectation that any respondent is to be given a clear and particularized statement of any charge against them.

In Joubert, the Board found that the claims of dishonesty were inadequately pleaded, compounded by imprecise language and unclear differentiation between levels of dishonesty. The Board therefore dismissed all allegations of dishonesty made by ASIC against the practitioner.

While that resolved that particular aspect of ASIC’s claim, and the matter proceeded on other claims, in which ASIC “succeeded”, it may only have been by virtue of the high legal standards of the Board and the experience of its members that ASIC’s approach was properly dealt with.

 The new regime – ILRA 2016

This aspect of the Board’s reasons illustrates a concern about the change in the law, operative from 1 March 2017, whereby such disciplinary proceedings against liquidators will now be brought by ASIC before an ad hoc committee, in the same way that the Inspector-General in Bankruptcy has done for some time in relation to bankruptcy trustees, apparently successfully, although not without challenge.[7]

That new regime, including for bankruptcy, has generally received support, though qualified by the need to see the detail in the Insolvency Practice Rules in which the processes will be contained: s 50-25.

A three-member committee

Under the changes made by the ILRA 2016, the liquidator disciplinary committee will comprise three people – a liquidator nominated by an ‘industry’ (professional body) based on its ‘belief’ that its nominee is appropriate, a person from ASIC and a person appointed by the Minister: s 40-45.

The liquidator

Section 50-5 requires the nominated liquidator to have certain prescribed knowledge or experience.[8] If that is not prescribed in the Rules, and it may not be, the person is to have “the knowledge and experience necessary to carry out the person’s functions as a member of the committee if appointed”.

That statement of what is required of a liquidator who is hearing, with others, a disciplinary action brought by ASIC may be a step up from the current law. The current bankruptcy regime, used as a model for corporate, merely requires a trustee with 5 years or more experience as a trustee.[9]

Now, both for trustees and liquidators, the nominated practitioner appears to need more attributes – a level of knowledge and experience that is necessary for them to carry out their functions as a member of a disciplinary committee. This is not a pre-condition of the other two appointees.

The “functions” are, under the existing law, set out in s 204 of the ASIC Act, which simply refers to the Corporations Act provisions. Although that section will no longer apply, attending to the functions of being on a disciplinary committee involves not only bringing one’s insolvency experience and knowledge to bear, but also one’s expected understanding and knowledge of hearing processes and decision making, and writing reasons for that decision. Assessment of the professional conduct of an insolvency practitioner – a role that is legally complex – requires some refined thinking and analysis. The new law also introduces ethical expectations of practitioners (s 1-1), not necessarily consistent with the standard of conduct set by the rule in ex parte James.

Importantly, the person must have an appreciation of the considerations that need to be taken into account in ordering an appropriate sanction, including the need to protect the integrity of the regime, and creditors, but also to offer some rehabilitative and supportive outcome that might improve the practitioner’s conduct. The person must apply the extensive statutory criteria set out in s 40-40, and 40-55, which are to be addressed and weighed up in the committee’s report setting out its reasoning and reasons for decision. Decisions on sanction may now impact, including adversely, all other liquidators.

Apart from the higher requirements of the new regime, the understanding and knowledge of the liquidator may need on occasion to be at a level sufficient to address and respond to a broadly pleaded case such as that of ASIC’s in Joubert, and to make decisions about the significant legal issues involved – the pleading of dishonesty and fraud, ASIC’s statutory obligations, its litigation conduct standards, determination of the onus and appropriateness of the Briginshaw standard of proof,[10] and rights of natural justice.  While these may not reasonably be contemplated as arising in the context of what will be a ‘show cause’ notice issued by ASIC, that notice should properly abide by the standards in pleadings.  That is not difficult nor an unduly legalistic approach; any charge against a person should be clearly stated, and particulars given of the alleged default.

While liquidators and trustees are often themselves required to make many significant demands and decisions, and to act quasi-judicially at times, the work of an insolvency practitioner does not generally involve the conduct of hearings, legal arguments about process and administrative decision making. Also, their more commercial focus means that they do not have to meet the higher standards of a model litigant.[11]

While that interpretation of s 50-5 may be too expansive and not in accord with the intention of the drafter, the wording does at least bring under scrutiny the nomination process and the qualities of the nominated liquidator, beyond merely requiring a practitioner with at least 5 years of practice. A less expansive and better view may be that the experience and knowledge of the liquidator is relevant only in so far as it is satisfactorily complemented by the backgrounds of the other members, such that the committee as a whole has the relevant knowledge and experience. In any event, the Insolvency Practice Rules may give a clearer standard of what is expected.

 The Minister’s nominee

As to the Minister’s appointee, s 50-10 is drafted more narrowly, such that the nominee need only have knowledge of or experience in, for example, business and accounting.  Again, that may only be an (important) aspect of the experience needed for the committee as a whole.

ASIC officer

As to the ASIC officer, there is no statutory requirement for their qualifications or experience or knowledge. However, ASIC officers are well versed in making administrative decisions and imposing sanctions.  Knowledge of the legal and other considerations set out earlier should be well familiar to any ASIC legal officer.

The combined knowledge and experience of the committee

The point made is that the ILRA 2016 contemplates that an ad hoc committee should have at least an experienced lawyer as is presently required of the CALDB.  While it is an administrative decision only that is involved, it is one that can have a substantial impact on a person’s livelihood, income and reputation. Indeed, a ten-year cancellation is a possible outcome.

Much may therefore depend on the combined qualities of the persons on the committee.

[It is here noted, for others’ comments, that a committee’s membership may be re-constituted and proceedings transferred to another committee, both in mid-hearing: s 50-20].

ASIC …..

The Board’s comments on ASIC’s conduct of the Joubert case raise issues about the new process.  The Board in fact referred to earlier High Court admonishment of ASIC for a similar issue, in Fortescue, where ASIC’s statement of claim had confused allegations of fraudulent and of negligent misrepresentations.[12]  The High Court pointed out that this was

“no pleader’s quibble. It is a point that reflects fundamental requirements for the fair trial of allegations of contravention of law. It is for the party making those allegations (in this case ASIC) to identify the case which it seeks to make and to do that clearly and distinctly. The statement of claim in these matters did not do that”.

Continued pursuit of that approach before ad hoc committees may not auger well for the integrity and success of the new regime.

Indeed, one would think that a government regulator bringing a proceeding before a disciplinary board, as opposed to a court, should give extra attention to avoiding contentious pleadings and evidence, or disputed legal interpretation. Such issues that might test a legal or complex claim are better heard by a court, where the rigours of legal process and pleading serve to protect from any possible injustice.

If all this raises any concerns, can they be addressed?

There are responses to these concerns and other more sympathetic views open on how the new arrangements will work.

Firstly, and importantly, the government’s 2011 Proposals Paper explained that the new committee based approach

“would reflect an expectation that more legally complex matters; matters where extensive use of coercive examination powers are (sic) required; and matters where disciplinary remedies alone are insufficient (for example, where compensation orders should be sought), are matters that should not be referred to Committees but should instead proceed directly to court”.[13]

Matters of complexity, certainly ones raising dishonesty, should properly go before a court; as might cases involving extensive documentation, witnesses and issues over a long period of time. That assessment needs to be carefully made. Joubert involved a period of claimed misconduct extending from 2009, over a series of administrations and issues, with a large volume of documents. While the Board is used to such proceedings, it may not be the best forum for them. Courts are more adept at, and have the resources for, large scale documentary claims. Judges also have greater control over the litigation process, and enforce parties’ and their lawyers’ standards of litigation conduct set out in court rules.

However, in a Board hearing involving 26 separate contentions by ASIC concerning breaches of various statutory and other duties and responsibilities, the Federal Court considered that no particular issues of legal or factual complexity arose. They generally related to the content of various broad duties, including duties to act with care and diligence, or in good faith, or specific provisions with which one would expect an experienced liquidator to be familiar.[14]  The Court did emphasise the need for conduct issues concerning liquidators to be dealt with promptly.

Second, in practice, the qualifications and experience of the nominees of the Minister and of the ASIC officer may well address the need for at least one person qualified in law and administrative decision making to be on any given committee. The same applies in the bankruptcy context, where the Inspector-General assumes ASIC’s role.

A third and final comfort is one referred to by the government, although in fact expressed as a discomfort.  In support of the change to more informal ad hoc committees, the Explanatory Memorandum to the Bill referred to what it saw as a problem that liquidators often engaged senior barristers to represent themselves at Board hearings, and ASIC then considered there was a need to be likewise represented.[15] A view whether, and in what order, that is a reality is not offered. A board panel chaired by a senior lawyer and comprising experienced professionals with authority to deregister a practitioner might properly expect to have senior counsel appearing. ASIC might likewise require this, in view of the apparent complexity of its cases, and likewise expect this from the liquidator.

Contrary to the government’s view, in the circumstances of the concerns raised here, a continued scenario of senior legal representation at ad hoc committee hearings may well only serve to protect and strengthen and improve the integrity of the process.

What is needed?

More is needed to reinforce the integrity of the ad hoc committee processes.  In my view, there should be:

1. Publication of reasons for decision of the committees, for several reasons:

• as a means of education of the profession, and of stakeholders, in relation to what is expected of them;
• as a matter of transparency of the decision making process of the committee; and
• as a further matter of transparency of the conduct of the parties, in particular the regulator. But for the publication of the Board’s reasons in Joubert, this article might not have been written. Under the new law, publication lies within the authority of ASIC: s 40-55(1)(h), or the Inspector-General. Based on current practice of both regulators, a mere media release will hardly suffice. This does not accord with an initial government view that in the interests of “transparency, committees would be required to publish their decisions and reasons in relation to disciplinary matters”.[16]

2. A clear set of principles and processes, some of which may appear in the Rules, with others contained in hearing manuals and guidance for members on decision making.
3. A dedicated website or home for these committees, virtual or actual, as a place of permanent and public record. The committees’ ephemeral ad hoc nature does not lend itself to building up a central body of knowledge, both for the profession, academics and others, on matters of professional practice and on the interpretation of what is now a complex range of issues any committee has to consider.   This would also promote consistency in approach by committees on an on-going basis.  As well, these decisions will be instructive in recording the process of decision making, assessing the relevant and the irrelevant considerations, and taking into account the discretionary issues in the particular case.

A larger issue

The larger issue raised by Joubert is ASIC’s approach to the regulation of insolvency practitioners.  High standards are required of practitioners, and their on-going education, monitoring, regulation, and support, is needed in order to maintain the operation and integrity of the regime.

Any conclusion on that issue is beyond the scope of this commentary, and a finding is reserved.

Comments on this article are welcome and will be taken into account in its further publication.

Michael Murray

[1] However, see these two useful articles by David Castle, a former chair of the CALDB: Insolvency Law Reform – liquidator alert (2016) 17(4) INSLB 56; Insolvency Law Reform – resignation versus cancellation (2016) 17(5) INSLB 73. These are the only real analyses of the new regime available at present. They followed a public discussion conducted by Mr Castle, with others, at the Traill Insolvency Conference, Sydney, March 2016.

[2] 11 May 2016, released by order of the AAT, 21 July 2016.

[3] Albarran v Members of the Companies Auditors and Liquidators Disciplinary Board [2007] HCA 23.

[4]The matter is on application to the AAT

[5] For example, rule 16.42 of the Federal Court Rules 2011 provides that “a party who pleads fraud, misrepresentation, unconscionable conduct, breach of trust, wilful default or undue influence must state in the pleading particulars of the facts on which the party relies”. A more particular obligation is imposed under 21.4 of the Legal Profession Uniform Law Australian Solicitors’ Conduct Rules 2015.

[6] Judiciary Act 1903, s 55ZG

[7] Bankruptcy Act 1966

[8]Nothing is yet prescribed.

[9] Bankruptcy Regulation 8.18

[10] See Sullivan v CASA [2014] FCAFC 93; Bronze Wing v SafeWork NSW [2017] NSWCA 41. 

[11] In the matter of St Gregory’s Armenian School (in liq) [2012] NSWSC 1215

[12]Forrest v ASIC; Fortescue Metals Group v ASIC [2012] HCA 39

[13] A modernization and harmonization of the regulatory framework applying to insolvency practitioners in Australia, [164.1]

[14] Fiorentino v CALDB [2014] FCA 641

[15] [9.33].

[16] A modernization and harmonization of the regulatory framework applying to insolvency practitioners in Australia, [166].