The views of Justice Brereton of the NSW Supreme Court have not prevailed following the decision by the High Court in the Carter Holt Harvey decision, but his findings in dismissing ASIC’s application for a court inquiry into the conduct of two liquidators going back to 2009, and for their registrations as liquidators to be cancelled, may have a significant on-going impact.
The Judge’s decision[1] raises issues, both for ASIC in its role as a regulator, and for insolvency practitioners (IPs) in relation to his findings on a range of matters in insolvency practice.
These include IP independence and referral relationships, the standard of conduct expected of an IP in assetless administrations, the nature of phoenixing, the responsibilities of joint appointees, and more.
The outcomes for ASIC, and for insolvency practice, are potentially significant and the constraints under which IPs operate may be re-assessed.
- ASIC
Briefly, ASIC brought NSW Supreme Court proceedings in 2016 in relation to the claimed misconduct of two liquidators – Wily and Hurst – concerning companies to which they were appointed in 2009, and which companies were deregistered in 2011. The application was brought under s 536 of the Corporations Act (CA), applicable at the time,[2] for the court to conduct the inquiry, although the section also allows ASIC to do so, and then report to the court.
ASIC’s conduct of the litigation, in particular its delay caused by its deferring the investigation while it investigated other matters concerning the liquidators – “in effect, holding it in reserve – until the others had come to nothing” – was criticised to the point of being described as “vexatious”. That is a serious finding against any regulator, in particular one with model litigant obligations.[3]
ASIC had attempted to deflect criticism by arguing that it was the liquidators who had caused the delay by not reporting sufficient details to it under s 533 CA. But, as the Judge said, they had reported insolvent trading offences to which ASIC had responded that no action would be taken; and what other offences ASIC claimed they should have reported, in relation to phoenixing and shadow directors, were not in fact required or to the point.
The application was for the termination of the liquidators’ registrations, but not on the basis that they “were implicated in unlawful phoenixing, but only that they ought to have discovered and reported the possibility of it”.
ASIC had also continued with the proceedings after one liquidator – Wily – had decided to retire, and the other – Hurst – had practised since 2009 without complaint and “with no suggestion of a systemic or continuing pattern of misconduct”. In such circumstances, the
“prospects of establishing present unfitness by reference to the conduct complained about, are remote in the extreme.[4]
Also, Justice Brereton saw that ASIC had other options. It could have applied to the former Companies Auditors and Liquidators Disciplinary Board for the cancellation of the liquidators’ registration.[5]
More significantly, Justice Brereton said that, by reference to the section
“ASIC has not conducted an inquiry under s 536; it has chosen not to do so itself, but instead to ask the Court to do so”.
That comment may have an impact on how ASIC brings such matters in the future because ASIC now has more regulatory powers since the ILRA changes, such that its ‘inquiries’ can be conducted by other means.
- Issues for Insolvency Practitioners
Other aspects of the decision are useful for IPs in that they offer guidance on some areas of law that have been much in focus, in particular from ASIC and ARITA, and AFSA, applicable to both large and small practices and their respective markets.
- Referral relationships
While there can be unhealthy referral relationships that can raise independence concerns, that an IP may tend to, or be perceived to, serve the interest of the referrer’s clients, such relationships are a reality in any competitive market.
While written in the context of anti-phoenix law reform, Treasury has explained that a liquidator’s appointment will generally occur
“as a result of a referral by a lawyer, accountant or other pre-insolvency adviser. In order to compete for work, a registered liquidator forms, and builds on, relationships with lawyers, accountants and other pre-insolvency advisers who might refer work to them”.[6]
The fact that there is an acknowledged process of this occurring supports the reality that referral relationships of themselves need not raise any reasonable apprehension of bias.
In his decision, Justice Brereton examines a series of referral scenarios claimed by ASIC to have occurred and found none that would cause any such reasonable apprehension.
The “fair-minded observer … as opposed to the uncharitably-minded observer”
An important issue there is who the law designates as the one to test that reasonable apprehension.
This is where the law may be changing in favour of a more commercial approach to independence, one more accepting of changing professional and commercial environments.
As the WA Court of Appeal recently said, the test is that of the “fair-minded observer … as opposed to the uncharitably-minded observer”.[7] The latter might be someone who would see a lack of independence just because the director chose the liquidator.
In contrast, the fair-minded observer is taken to understand how insolvency professionals get their work –
“that voluntary administrators may be appointed both by the board of directors of the company … and by a secured creditor and that the administrator is required to make a declaration of relevant relationships and indemnities, and provide a copy to creditors…”.
That observer would also be taken to understand they are
“accountants and professional insolvency practitioners in a competitive market.”
Another Judge said that
“the fair-minded observer, appropriately informed, would know that the liquidators’ firm is commonly referred voluntary administrations and other insolvency work by solicitors, business advisors and accountants …”.[8]
Given the increased reporting and disclosure requirements of the 2017 law reforms, supported by the range of information offered by the regulators and the insolvency professional bodies, one might well expect that the fair-minded observer would have a heightened understanding of the insolvency environment and assess questions of independence accordingly.
- Assetless companies
The other useful issue coming out of the decision is the approach taken by Justice Brereton in assessing the extent of attention required of an IP in administering an assetless company. ASIC’s expectation of what was required in that case went beyond what the law requires.[9]
Justice Brereton cites a number of court decisions that limit the tasks expected of an IP, one Judge[10] neatly explaining that:
“the situation will often occur that there will be little money in the winding up and the liquidator will have to cut corners that he might not otherwise cut, and the court must be very careful not to impose too strict a duty which would stop that happening”.
Justice Brereton also refers to recent judicial comments about s 545 CA, that even though its words – that “a liquidator is not liable to incur any expense in relation to the winding up of a company unless there is sufficient available property” – do not refer to “remuneration”, it is arguable that the principle it reflects should “inform an understanding of the liquidator’s role”,[11] meaning, in my view, that a liquidator’s conduct, particularly in not investigating more deeply into an issue, has to be assessed in the context of the IP not being paid. And the section does leave it open to a creditor to fund further tasks being undertaken.
- The Judge’s approach
The Judge took a rather “legal” approach to an IP’s duties, referring to sections of the Corporations Act rather than the broader statement of the law or the guidance of ASIC, or of ARITA’s 2014 Code.
Some, including lawyers, may not agree with that approach in the context of assessing an IP’s professional conduct where strict reliance on the law is often not enough. But Justice Brereton’s reference to the letter of the law can serve to remind IPs of what the law requires, as opposed to what guidance suggests, for example under s 533 CA.
In fact, the 2014 ARITA Code and its guidance on referrers was not raised, perhaps because ASIC itself did not refer to the Code in its submissions. As I shortly explain, the Code is being referred to less and less by judges in independence judgments.
- Particular issues
Phoenixing
The Judge queried whether there can be phoenixing of labour hire companies, when they generally have no marketable goodwill or fixed assets. And the
“mere fact that when a company goes into liquidation, another with the same ownership and directors commences to provide the same services to the same customers does not amount to “illegal phoenixing””.
ASIC may need to take a more refined focus to alleged phoenix misconduct.
Resignation of an IP
It is accepted that IPs should not be able to escape discipline by resigning; for example, in relation to a fraud, or a more recent act of misconduct whereby creditors have suffered.
But there are limits to this. Wily had offered to resign from insolvency practice completely in 2017; he had done so from bankruptcy practice in 2015. Given the long period of time that had elapsed, and what turned out to be matters of limited or no concern, perhaps ASIC should have accepted that offer. And while as the Judge said the deregistration of the companies in 2011 was not determinative in ASIC’s taking the action, nor was the lack of benefit to creditors, in this case those issues perhaps were.
The Judge also saw as a valid approach the option of letting an IP resign but noting that the issues and concerns could be raised in any later re-application for registration as a liquidator.
Responsibility of both joint appointees for the job
The statement that “a liquidator appointed joint and severally must have an adequate and proper involvement in the liquidation in order to execute the function of the office of liquidator, even if there may be an agreement or practice for one liquidator to have the day-to-day running of the liquidation” appears consistent with the law.[12] But this has to be balanced against the extra costs incurred as a result.
Justice Brereton noted that Hurst’s subsequent firm had procedures, policies and practices in place which served to ensure that joint appointees were appropriately across the details of any matter.
IPs should note that ASIC can demand such documents of an IP’s firm under its new power under s 30B ASIC Act 2001. It assists any firm to have such processes recorded and applied; they can provide a valid defence even if an error in administration occurs. AFSA has similar powers under s 12(2) Bankruptcy Act.
Can’t afford to defend?
The Judge said that the fact that an IP does not have sufficient financial resources to defend an inquiry into their conduct is not relevant. Nevertheless, if an IP takes no part, or is there without representation, ASIC would still have to put on evidence and make its case. The court, and lawyers, have certain responsibilities in respect of an unrepresented party.[13]
Also, the case in hand involved evidence from ASIC in “17 heavily-laden lever arch folders” going back many years. It would have been an expensive action for ASIC to bring, and more expensive for the IPs to respond to it, even if they had funds.
In that respect, there can be a certain unfairness in an IP being confronted with the prospect of time, cost and reputation in defending a matter, or, as often used by ASIC, an enforceable undertaking being reluctantly accepted.
Costs recovery
ASIC was ordered to pay the costs of the IPs. These will be substantial. As a matter of principle, those costs would come out of ASIC’s own funding and may reappear in its levy.[14] While some might see that as unfair, it should properly be seen as an inevitable consequence of ASIC’s regulatory role.
- Some potential outcomes
ASIC
ASIC has a tendency of bringing large disciplinary matters covering many issues over a long period of time, of which this is an example.[15]. Under the new post-ILRA law, it has been given a range of non-litigious options that would allow it to act on individual matters promptly and firmly, including to bring matters before a disciplinary committee within a short period.[16]
If there are matters of major concern, in particular where creditors have suffered, ASIC still has the court option. But even then, it will need to heed Justice Brereton’s comment that it could itself investigate and then apply to the court for orders, under s 45-1 IPSC; rather than apply to the court for it to conduct the investigation/inquiry, under s 90-15.
Independence
As to independence and its associated issues, this decision seems to be part of an on-going trend for courts to take a more commercial approach to the reality of insolvency practice, and perhaps professional work generally.
There are now a series of cases, of which this is the latest, that have resulted in no findings of a lack of independence which in years past might have done so.
For example:
- while the lack of objection of creditors is said not to excuse a lack of independence, the views of creditors were found relevant in Walley, in the matter of Poles & Underground, even as to the creditors’ not objecting to a prior advisory role of the IPs for the company;[17]
- the Court in Queensland Mining Corporation v Butmall allowed a prior audit relationship of the appointee’s firm with a major creditor;[18]
- the Court in Icicek Holdings Pty Limited allowed liquidators and trustees from the one firm to be appointed;[19] and
- in BC39 v Rambaldi, separation of issues between state offices of the one national firm were held to suffice.[20]
The Judges seem to have taken assurance from the fact that an IP can manage conflicts and are under an obligation to come back to the court for directions if anything arises or changes.[21] In that last case, the Judge said that:
“Professional standards anticipate the possibility of the appearance of conflict arising because of events occurring in the course of an administration. They contemplate that there will be circumstances in which the trustees may continue to perform their duties notwithstanding such events especially when the events were beyond their control. Remedial steps may be taken to obviate the ongoing appearance of partiality”.
None of this is to discount the continued importance of independence but to see its place not only in insolvency but also in the wider context of more complex societal and business relationships.
Too strict a focus
Too strict a focus by the regulators and the profession can be counter-productive, and may only serve to prompt undue and unfair community and political concern about the standards of integrity of IPs. In finding that there was “really no issue at all” in an independence decision, a Court noted that the
“burdening of the creditors with further costs of new Administrators getting themselves up-to-speed with the administration is unjustifiable unless absolutely unavoidable”.[22]
Like many an aspect of the pursuit of justice, that does come at a price – for example, the effective exclusion of experienced IPs from fully advising insolvent or financially troubled companies. There is an argument that this creates a vacuum which allows unregulated and unethical advisers to fill the space.
As the Australian Treasury explains,
“a well-functioning financial system should provide directors of distressed companies with easy access to advice to assist them to make critical decisions about the future of their company” but that “advisers other than professionals, such as lawyers and registered liquidators, are increasingly undertaking work in the Small & Medium Enterprise (SME) space”.[23]
Or, in the words of an English academic, there is
“more danger” in allowing other than insolvency practitioners in the initial advising stage, than in “self-interested IPs” seeking to take the appointment “to add to their own fees”.[24]
Other jurisdictions
The issues raised in the decision of Justice Brereton are common to the UK and other comparable jurisdictions, although variations are evident. The UK’s Joint Insolvency Committee has examined changing its Code rules about referral relationships, noting that “activities leading to insolvency appointments … bear little recognition to the landscape when the Code was introduced”.
And New Zealand’s proposed law reform would address its limitation on investigating accountants, which “excludes the very practitioners who are the most suitable for appointment (i.e. because they already have a good understanding of the business of the company and are well placed to carry out the insolvency procedure efficiently and effectively)”.[25]
ARITA, APESB
ARITA says it is presently revising its 2104 Code, and the decision in ASIC v Wily & Hurst, and others over the last years, may need to be factored into the revision as a matter of legal principle. [26]
It has not been in the most recent issue of APES 330, issued by accountants.[27]
The reason for the lack of reference to the ARITA Code[28] by Justice Brereton in this case, and by judges in earlier cases, may be that the Code has not kept up with, or anticipated changes in, insolvency practice; related to that, that it may not be seen to be in accord with the current “fair-minded observer”; and that it remains a voluntary code.
The ILRA 2016 brought changes to insolvency regulation, with both ASIC and AFSA now having more immediate and strong powers to act as needed. While the government saw neither ARITA nor any insolvency professional body resourced or structured to undertake a true co-regulatory role, with an enforceable code, it did give ARITA and other industry bodies[29] some authority and responsibility to report IP misconduct to the regulators. Code compliance monitoring and enforcement would be an exercise of that responsibility.[30]
Voluntary codes can therefore still be very useful regulatory mechanisms, as “soft law”, but retention of their relevance amongst the “hard law” and other influences requires constant attention.[31]
Bankruptcy
This decision of Justice Brereton is also relevant in bankruptcy, although AFSA has not applied under its equivalent power – former s 179 Bankruptcy Act 1966 – for some time. Actions that it has taken under the new law have been to discipline committees.
Time taken
Disciplinary proceedings and the investigations leading up to them, and the time taken for a final outcome are stressful for any individual; and while pending they impact upon an individual’s reputation and practice.
ARITA for example can suspend a person’s membership while proceedings are pending. See for example ARITA’s response in 2014 concerning Mr Peter Macks.
Without commenting on the individuals involved in the case before Brereton J, it should be recorded that ASIC began its investigations in 2012, commenced proceedings just before Christmas in 2016 with the proceedings heard in September 2017, and with judgment delivered in May 2019. That appears to be partly due to the time spent by ASIC in its investigations – involving 52 notices to produce, and 26 interviews or examinations, with Wily examined over 3 days and Hurst over two, all in accord with ASIC’s “general practice”. Justice Brereton then took over 18 months to deliver his judgment.[32] Presumably ASIC’s lawyers exercised its right to inquire of the Court, to no avail.[33] It is no answer to say that the judgment absolved the liquidators; by then, the impact would have had its effect.
If there is one of few benefits from the 2017 reforms it is that there are now more immediate remedies available to the regulators, and ARITA and the industry bodies, such that delays of this nature should not be countenanced.
Conclusion
The decision of Justice Brereton has raised a number of important issues that serve to address some of the on-going changes and challenges in the insolvency practice environment. The views given here may assist. Comments are welcome.
Michael Murray
e michael@murrayslegal.com.au
m 0402 248 353.
This article is not legal advice and should not be relied upon as such. © Michael Murray.
30 June 2019
…
[1] ASIC v Wily & Hurst [2019] NSWSC
[2] See now IPSC Div 45, Div 90.
[3] Legal Services Directions 2017.
[4] My emphasis
[5] Under the current law, to a discipline committee, under IPSC s 40-45.
[6] Though raised in the context of the Treasury Discussion Paper, September 2017 – Combatting Illegal Phoenix Activity.
[7] Iziphus Pty Ltd v Pluton Resources Ltd (R&M appointed (in liq) [2017] WASCA 193.
[8] Davies J in ASIC v Franklin, in the matter of Walton Construction Pty Ltd (in liq) [2014] FCA 68. Decision overruled on other bases: ASIC v Franklin [2014] FCAFC 85.
[9] ASIC’s RG 16 – External administrators: Reporting and lodging – What if an external administration has insufficient assets?
[10] Re Biposo (1995) 120 FLR 399
[11] See Keay’s Insolvency, 2018, at [10.295].
[12] Heesh & CALDB & ASIC [2001] AATA 87
[13] Parbery v QNI Metals Pty Ltd [2017] QSC 231
[14] Unless it be that this case pre-dates the levy.
[15] For example, ASIC v Dunner [2013] FCA 872; ASIC v McDermott [2016] FCA 1186; Joubert & Members of CALDB [2018] AATA 944.
[16] “The movement to a disciplinary committee approach … may continue to see ASIC taking the most complex matters directly to Court. … this may see the committee dealing with a more refined set of simpler cases allowing it to develop the expertise to be a more streamlined process … 9.147 This will better enable timely and appropriate disciplinary action to be taken when misconduct occurs.”: Ex Memo to ILRB 2015.
[17] [2017] FCA 486: “No creditor has expressed any apprehension of a lack of impartiality on the part of the liquidators, or raised any complaint ..”: [43].
[18] [2016] FCA 16
[19] [2015] FCA 1387
[20] [2014] FCA 1076
[21] Icicek Holdings Pty Limited [2015] FCA 1387
[22] Prior & Basedow [2018] SASC 148
[23] Combatting Illegal Phoenix Activity, Treasury Discussion Paper, September 2017
[24] The not-so-great reformation? R3 journal Recovery: Autumn 2016, p 30, Dr John Tribe
[25] Addressed in the Insolvency Practitioners Bill (NZ) cl 280
[26] ARITA’s website refers to ASIC’s ‘request’ (see its December 2018 Insolvency Update) for referrer details to be included in the DIRRI.
[27] APESB proposes revisions to the Insolvency Standard, 28 November 2018
[28] APES 330 has never been referred to by the courts.
[29] Including ARITA but not AIIP.
[30] ARITA, CAANZ, CPA and others have only limited co-regulatory powers: see Bodies everywhere, Corporations Law Bulletin, November 2018, Murray.
[31] Regulation in Australia, Freiberg, 2018, p 216ff.
[32] See [21] of the judgment.
[33] Delays in reserved judgments, NSW Supreme Court, 25 July 2007
