In this week's TGIF, we consider ASIC v Bettles [2023] FCA 975 and ASIC v Jones [2023] WASCA 130, two cases which bring into focus the conduct of insolvency practitioners and alleged abrogation of their duties and independence.
Key takeaways
- ASIC has sought court guidance as to the high standard of care
and diligence owed by liquidators. The courts have indicated they
will not be quick to condemn liquidators and that not every error
of judgment by a liquidator will constitute a breach of their
duties or compromise their independence.
- Accepting an appointment which requires scrutiny of
pre-administration remuneration may give rise to a real and
sensible possibility of a conflict of interest. However, the courts
retain discretion as to whether to review an insolvency
practitioner's remuneration and can consider mitigating
factors, in particular, whether there is a suggestion that an
insolvency practitioner would be deflected from the due performance
of any aspects of their duties.
- An allegation that a liquidator is 'involved in' a contravention of the Corporations Act 2001 (Cth) requires precise identification of the particular conduct and how that conduct aided or abetted a contravention of the Corporations Act by others. Proving involvement is difficult where inferences are drawn on conduct based on presence at meetings and events that followed.
ASIC v Jones
On 31 October 2018, Messrs Jones and Smith, of Ferrier Hodgson, were appointed voluntary administrators of GD Pork Pty Ltd (GD Pork) and GD Pork Holdings Pty Ltd.
Prior to his appointment, Mr Jones had undertaken advisory work for GD Pork, including in relation to negotiations with secured and unsecured creditors. GD Pork paid $100,124.37 for Mr Jones' services.
ASIC expressed concern that Mr Jones and Smith's appointment created an actual or perceived conflict of interest and duty, and that their renumeration ought to be reviewed and reduced.
The Supreme Court of Western Australia found that no conflict of interest arose. ASIC appealed, alleging that Mr Jones and Mr Smith were subject to a reasonable apprehension of bias and had conflicts of interest, including in investigating whether the $100,124.37 payment made to Mr Jones was a voidable transaction.
Decision
ASIC was successful in establishing that Mr Jones' pre-administration work gave rise to conflicts of interest on the part of the administrators in carrying out some of their core functions. The Court of Appeal found that at the time of their appointment, there was a real and sensible possibility that Messrs Jones' and Smith's interest in avoiding any disgorgement of the $100,124.37 paid to Ferrier Hodgson might influence them in discharging their duties of investigating and reporting on potential recoveries of voidable transactions.
However, the Court determined that:
- it should not exercise its discretion to review and reduce
Messrs Jones and Smith's remuneration;
- the $100,124.37 payment represented only a small proportion of
the fees charged for the administration of GD Pork;
- the conflict of interest was inadvertent;
- there was no suggestion that Messrs Jones and Smith were
deflected from due performance of their duties;
- there was no basis to doubt the correctness of Messrs Jones and
Smith's recommendation;
- there were considerable benefits and cost savings to retaining
Ferrier Hodgson;
- the companies' creditors resolved to approve the
remuneration after Messrs Jones and Smith disclosed the relevant
facts; and
- the remuneration review would involve further expense and delay
proceedings which had already consumed a substantial period of
time.
ASIC v Bettles
ASIC commenced proceedings in the Federal Court of Australia
against Mr Bettles arising out of its work in the Serious Financial
Crime Taskforce. ASIC alleged that Mr Bettles, the external
administrator and liquidator to companies in the Members Alliance
Group (MA Group), aided and abetted the
controllers of the MA Group to engage in illegal phoenix activity
by diverting assets and revenues streams.
ASIC alleged Mr Bettles:
- was present at three meetings in July in which the alleged
activity was designed;
- assisted in the activity's implementation;
- created management deeds and settlement deeds which were not in
the interests of the company;
- failed to investigate whether the director was entitled to a
settlement sum;
- failed to prevent the sale of a client book;
- made false declarations regarding the MA Group's business
records;
- and failed to provide adequate disclosure in his Declaration of Independence (DIRRI).
ASIC sought the cancellation of Mr Bettles' registration as liquidator and prohibition against re-registration.
Decision
The Court determined that ASIC did not make out its claims that Mr Bettles breached his duties as liquidator.
The Court did find that Mr Bettles had not provided adequate disclosure in his DIRRI. The Court considered the inadequate disclosure to be minor and was not satisfied that the Court ought to make orders in relation Mr Bettles' registration as a liquidator.
Justice Markovic stated that a court should not be quick to
condemn liquidators, particularly with the benefit of hindsight,
and not every action taken by liquidators performing a difficult
role will be considered negligent.
Comment
ASIC has sought clarity from the courts as to the independent
role, diligence and care required of liquidators. These decisions
may assist ASIC in formulating revised regulatory guidelines. Some
key takeaways for insolvency practitioners are:
- A conflict of interest will not automatically disqualify a
liquidator's appointment particularly where the conflict of
interest is inadvertent and does not cause concerns for creditors.
Practitioners should be careful to record pre-appointment services
and ensure accurate completion of the DIRRI, disclosing all
potential conflicts.
- In assessing independence, a court will have regard to the
steps taken by the practitioner; the public interest; the
pre-appointment work completed by the practitioner and their
knowledge of the business' financial position. Practitioners
should recognise these issues and seek judicial advice where
required.
- For a liquidator to be involved in a contravention of the Corporations Act and a breach of their duties, they must have been an intentional participant in the contravention, with actual knowledge of the essential matters. Actual knowledge will commonly be inferred from circumstances and, sometimes, from a combination of knowledge of suspicious matters and a deliberate failure to make necessary enquiries to remove those suspicions.
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.
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