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Why Liquidators Must be Independent – and Seen to be Independent
Tuesday, April 21st, 2015

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By Craig Hollett, Director at Bowen Buchbinder Vilensky Lawyers

(with assistance from Henry Burke)

21 April 2014

Liquidators and administrators should be aware that they are required to be independent, and may be disqualified from that role even if they only appear not to be independent. In ASIC V Franklin [2014] FCFCA 85, which was a recent appeal by ASIC to the Full Court of the Federal Court, ASIC successfully applied to have three experienced insolvency professionals disqualified as liquidators for precisely this reason.

Facts

In early 2013, Walton Group engaged Mawson Group (“Mawson”), a business advisory and corporate restructuring firm, to assess its restructuring options.

In late September 2013, Walton Group sold off a significant part of its business to entities created in July and August 2013 and owned and/or directed by persons closely connected with Mawson. This business included construction contracts, intellectual property, business records, plant equipment and stock.

Shortly after these transactions had taken place, Mawson referred Walton Group to accounting firm Lawler Draper Dillon (“LDD”) to undertake a voluntary administration of the Walton Group. Mawson had commenced referring other insolvency work to LDD since about February 2012, and the revenue from this referral relationship comprised about $750,000 in the 2012/2013 financial years.

The Corporations Act requires the administrators of a company to give a ‘declaration of relevant relationships and indemnities’ (“DIRRI”) to creditors, which enables them to resolve at a first creditors’ meeting whether they wish to retain or replace the administrators over concerns of independence.

The LDD DIRRI document stated that “… [Walton Group was] referred by .. Mawson Group, who refers us insolvency type matters from time to time. Referrals from solicitors, business advisors and accountants are common place and do not impact on our independence in carrying out our function as administrators. Other than this, there are no other known relevant relationships …”.

LDD selected insolvency professionals Glenn Franklin, Stirling Horne and Jason Stone to undertake the voluntary administration of Walton Group. Mawson was influential in the selection process.

On 8 November 2013, the creditors resolved to undertake a voluntary liquidation of Walton Group. It was agreed by the administrators at least by 15 October 2013 that liquidation would require them as liquidators to investigate six of the pre-administration transactions and eight links between the parties to those transactions and Mawson. This was in order to ascertain whether they might have been voidable or uncommercial transactions.

On 16 December 2013, ASIC commenced to have Franklin, Horne and Stone removed as liquidators on the ground that there was a reasonable apprehension of bias of the liquidators.

Decision

The judge decided that a reasonable fair-minded observer might reasonably decide that because of the respondents’ interest in not jeopardising future income, they might not discharge their duties with independence and impartiality. The fact that Mawson influenced the selection of the administrators added to this concern.

On this basis, the judge held that the liquidators should be removed as liquidators of Walton Group.

Summary

 Insolvency practitioners should be careful when they consider the possible conflicts that might arise out of referral relationships. If there is even any appearance of bias in this relationship, they should consider seeking legal advice as to the possible impact that this relationship has on their ability to act independently during the insolvency process.

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