Australia: ASIC defeated and ordered to pay costs

Last Updated: 24 May 2014
Article by Cassie O'Bryan

The recent case of Australian Securities and Investment Commission v Glenn Franklin and Ors VID1359/2013 has raised some interesting issues in respect of disclosure and the acceptance of referrals. The proceeding was ultimately unsuccessful and ASIC were ordered to pay the Defendants' costs.


The case centred around the collapse of a large construction company which operated along the east coast. Walton Construction Pty Ltd headed operations in Victoria and New South Wales and Walton Construction (QLD) Pty Ltd headed operations in Queensland.

Glenn Jeffrey Franklin, Stirling Lindley Horne and Jason Glenn Stone of Lawler Draper Dillon ("the Liquidators") were appointed joint and several administrators of the companies on 3 October 2013 and subsequently appointed joint and several liquidators on 8 November 2013 pursuant to a resolution passed at the meeting of creditors.

The job was originally referred to the Liquidators by the restructuring firm Mawson Group.


Australian Securities and Investment Commission ("ASIC") issued proceedings on 16 December 2013 seeking relief in relation to an alleged lack of disclosure in the Declaration of Independence Relevant Relationships and Indemnities ("DIRRI") (pursuant to ss60 and 436DA of the Act) and the removal of the Liquidators on the basis that there was an apprehension of a lack of independence (pursuant to s503 of the Act).


From submissions made during the course of the proceeding, ASIC's contention was that the DIRRI did not sufficiently disclose the nature of the relationship between Mawson and the Liquidators.

ASIC conceded that there was no case law in respect of what constitutes sufficient disclosure in respect of the DIRRI. Their argument effectively centred around s60(1)(b) and the requirement for insolvency practitioners ("IP") to set out reasons for believing that the existence of a relevant relationships would not result in the IP having a conflict of interest or duty.

ASIC maintained that in circumstances where an IP received a referral from a referrer and in the course of the administration/liquidation, the conduct or dealings of the referrer with the insolvent would need to be investigated, then this need for investigation should be disclosed. Further, if the need to investigate was not apparent at the time that the DIRRI was first published, that a further DIRRI should be circulated disclosing the need to investigate.

ASIC advised the Court that it was its position that this additional disclosure would be required in any circumstance where there would be a need for an IP to investigate the referring party including for example, an ATO referral where the ATO would need to be investigated in terms of receipt of a preference.

ASIC also argued, though only in passing, that IPs should provide a more detailed explanation as to why they believed that a relevant relationship did not result in a conflict of interest or duty and that the standard response that "Referrals from such professionals are commonplace and do not impact on our independence" was not sufficient and that clear and detailed reasons were required.

s503 apprehended lack of independence

Counsel for ASIC was at pains to point out that ASIC was not of the opinion that the Liquidators had done anything wrong. Given this position, ASIC relied on the apprehension as opposed to any wrongdoing or actual bias as the basis for the removal of the Liquidators.

ASIC's position was that when an IP:

  • has an ongoing referral relationship with a party and that relationship may be categorised as a 'material relationship'; and
  • the referring party has been involved in pre-appointment transactions; and
  • there may be a need for the insolvency practitioner to investigate these transactions;

then there is an automatic apprehension of a lack of independence and the IP shouldn't accept the appointment.

ASIC did not clarify what it considered to be a material relationship, however it appears that they would argue that anything over 5% of total revenue for a 12 month period would be considered a material relationship by the regulator.

The difficulty with this position however, is that it requires several determinations to be made prior to a job being accepted by an IP. By analogy, if an appointment was accepted and three quarters of the way through the appointment it became obvious to the IP that the referrer had been involved in pre-appointment transactions that these transactions would need to be investigated, that he should step down from the role.

The inference that can be drawn from ASIC's argument is that IPs need to be especially careful when accepting appointments from restructuring firms. By initiating this proceeding, the regulator seems to be indicating that it required additional disclosure in such circumstances.

ASIC hinted that such additional disclosure would include specific details as to the meetings held with both the referrer and the party to whom the IP was to be appointed be recorded in the relevant Report to Creditors. This would include who was at the meeting, their role, along with what was discussed.

Presumably this would extend to any and all pre-appointment conversations or meetings or correspondence between the IP, the referrer and the insolvent party.



The Court found against ASIC on both points. Her Honour Justice Davies found that there was no basis for the argument that the disclosure in the DIRRI was in any way deficient and refused to read into s60 of the Act any additional disclosure requirements other than what is specifically required under the section.

As such, the Court has confirmed the position that the only disclosure needs to be the existence of the relationship and the standard response that "Referrals from such professionals are commonplace and do not impact on our independence" is sufficient.


Her Honour also found against ASIC in respect of the s503 point. Her Honour found that the reasonable lay observer is also armed with the knowledge that professional referral relationships are commonplace and the mere fact of the referral would not be sufficient to question an insolvency practitioner's independence.

Although the judgement confirms that the conduct engaged in by most IPs is appropriate in terms of developing a professional referral relationship, practitioners need to take care to ensure that disclosure of the relationship is made.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Madgwicks is a member of Meritas, one of the world's largest law firm alliances.

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