The recent case of Australian Securities and Investments Commission v Wily & Hurst  NSWSC 521 has shed some light on the criteria to be met in order for the Court to exercise its powers under s. 536 of the Corporations Act 2001 (Cth) to undertake a Court Inquiry into the conduct of liquidators. Although the section no longer applies, since it was repealed by the Insolvency Law Reform Act 2016 and replaced by the Insolvency Practice Schedule (Corporations), it will likely still govern applications for conduct arising made prior to the repeal, which may be persuasive on the issue of what constitutes liquidator misconduct.
The matter centres on an application brought by ASIC in relation to the conduct of the liquidators of the companies operating as, and providing services to, the carwash giant 'Crystal Carwash'.
In 2007 seven of the 9 companies providing services to Crystal Carwash went into liquidation (Initial Companies). The liquidator of these companies was Mr Andrew Wily (the First Defendant). Mr David Hurst (the Second Defendant) had limited involvement in these liquidations.
Shortly after these companies went into liquidation ten new companies were incorporated and commenced providing services to Crystal Carwash. The services provided by these companies were largely identical to the services provided by the Initial Companies, and they demonstrated strikingly similar aspects to the Initial Companies, such as having the same officeholders and registered addresses.
In 2009 the remaining 12 companies also went into liquidation (Second Companies), and Mr Wily and Mr Hurst were appointed as the liquidators.
The basis for ASIC's application was:
- The appointments potentially gave rise to conflicts of interest which the Defendants failed to disclose to ASIC;
- Failure to report potential shadow directions, and phoenix activities; and
- Failure to perform their duties to the standard expected.
Some examples of the facts giving rise to the basis for the application included:
- The Defendants' involvement in both sets of liquidations, where the entities were clearly related by more than the Defendant's involvement in their liquidations;
- The similarities between the Initial Companies and the Second Companies, including having the same office holders and same registered addresses; and
- The Defendants not making thorough inquiries into the finances and accounts of the companies in the course of the liquidation.
THE COURT'S POSITION
ASIC's application was dismissed, with costs.
The Court held, amongst other matters, that:
- The delay in bringing the application was unjustified, though not prejudicial to the Defendants, as prior investigations into Mr Wily's conduct had been undertaken by ASIC and they had chosen not to include the circumstances of the case in those investigations;
- ASIC did not adequately allege and/or support the allegations against the Defendants to warrant the Court undertaking an inquiry into their conduct. 'Mere wondering' is not enough for such an application to be allowed;
- The fact that the Defendants were involved in the liquidation of both sets of companies did not necessarily mean that there was potential for conflict. It is common for liquidators to receive referrals for work stemming from prior, related, work they have undertaken. However, this does not necessarily indicate a conflict. It was up to ASIC to highlight the exact conflicts which may have arisen, on which basis the Court could assess whether there was a matter worth inquiry; and
The level of inquiry undertaken by liquidators in the course of exercising their duties is less onerous in circumstances where the company has little or no assets.
IMPACT OF DECISION
The approach taken by the Court is likely to impact the regulator's approach in bringing future applications such as this. It has indicated that it will not make rash decisions without clear and substantiated allegations which would give rise to a Court Inquiry, and that the commercial realities associated with a liquidator's exercise of their duty will be taken into account in determining whether there was potential misconduct.
More importantly, the decision has set a higher threshold for the determination of applications for a Court Inquiry into the conduct of liquidators. Given this decision is on federal legislation, and the notion of comity suggests a unified approach, this may cause potential issues in the future. If all jurisdictions apply the same approach in determining applications such as this, what may appear to be prima facie misconduct may no longer be considered sufficient. On the other hand, it may also make the processing and determination of these applications more efficient because the regulator will be forced to take more care in assessing the framing of its case, and in collating evidence which substantiates its position, before commencing proceedings.
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