Amanda Carruthers has recently had the following article published in the Australian Banking and Finance Law Bulletin.

Summary of Outcome

Australian Securities and Investments Commission (ASIC) v Franklin (liquidator), Re Walton Constructions Pty Ltd (the appeal) is a sobering judgment to read for all insolvency practitioners and referrers — be they banks with secured or unsecured debts, lawyers, accountants, advisers or pre-insolvency consultants. The appeal is of particular note for referrers working with a panel, such as banks, even with a reasonably broad range of appointees.

While it is a well-understood and uncontroversial concept that insolvency practitioners must be — and be seen to be — independent, this case has considered more deeply on appeal whether certain factors in referral relationships may cause an insolvency practitioner to be unable to take or maintain an appointment.

Administrators and liquidators are on notice of the broad range of factors which may require attention when considering any potential independence issues relating to the referrer, in order to determine whether a fair-minded lay observer might (not necessarily would) reasonably apprehend that the insolvency practitioner might not discharge their responsibilities with independence and impartiality.

At first instance, in Australian Securities and Investments Commission (ASIC) v Franklin2 (the primary judgment), the Australian Securities and Investments Commission (ASIC) sought orders under s 503 of the Corporations Act 2001 (Cth) (the Act) to remove the appointed liquidators due to a perceived lack of independence and impartiality. ASIC also sought declarations that the liquidators were in contravention of s 436DA of the Act, due to alleged deficiencies in their declaration of independence, relevant relationships and indemnities (DIRRI) (an offence under s 1311(1) of the Act). Both elements of ASIC’s application failed.

The key questions in the appeal were the following:
• Did the primary judge err in finding “no apprehended or perceived lack of independence or impartiality on the part of the liquidators of Walton Construction Pty Ltd (in liq) and Walton Construction (Qld) Pty Ltd (in liq)” (the Companies)?
• Did the primary judge err in finding that there was no contravention of s 436DA of the Act, and that the liquidators’ DIRRI was in compliance with the Act?

In the appeal, the Full Court of the Federal Court unanimously held that the primary judge had erred in relation to the first question, but not the second. Accordingly, it was ordered that the liquidators of Walton Construction Pty Ltd (in liq) (WCPL) and Walton Construction (Qld) Pty Ltd (in liq) (WCQPL) be replaced, but the court held that the DIRRI had been compliant in that it met the disclosure obligations under the Act.

The appeal judges found that there was a “more than theoretical” conflict between the liquidators “not jeopardising the prospect of further remunerative referrals … and the proper discharge of their duties as liquidators”, and that a “reasonable fair-minded observer would perceive this conflict” and “might reasonably apprehend that …[the liquidators] might not discharge their duties with independence and impartiality”.

Notwithstanding the expectation that the removal of the liquidators would cause considerable inconvenience, expense and loss of knowledge (given that the liquidators had been administrators and liquidators of the Companies for over nine months), the court held that there was no practical alternative apparent to removing the liquidators. The court noted that it was “unfortunate that the [liquidators] did not recognise the conflict at the time that issues about their relationship with the Mawson Group were first raised”.

To read the rest of the article, see Eyes on independence and referrals – in the matter of Walton Construction.