ASIC appeals the decision in ASIC v Franklin (liquidator), in the matter of Walton Construction PL (in liq) [2014] FCA 68

On 13 February 2014 the Federal Court refused an application by ASIC for the removal of liquidators because of an apprehension of a lack of independence and impartiality, brought under s 503 of the Corporations Act 20001 (Cth). ASIC had also claimed that the DIRRI (declaration of relevant relationships) made by the liquidators upon their appointment as administrators was deficient, and had sought a declaration that they had contravened s 436DA of the Act. The case is that of Australian Securities and Investment Commission v Franklin (liquidator), in the matter of Walton Construction Pty Ltd (in liq) [2014] FCA 68.

It is important to note that ASIC did not challenge the liquidators’ independence and impartiality in the performance of their duties either as adminstrators, and then as liquidators, of the companies (Walton Construction Pty Ltd and Walton Construction (Qld) Pty Ltd). Rather, it was a matter of the appearance to the hypothetical fair minded observer. ASIC contended that a reasonable apprehension of a lack of independence and impartiality existed because of the following matters –

  • they were appointed administrators on the referral of the Mawson Group, which provides business advisory and restructuring services to companies in financial difficulty;
  • the Mawson Group had worked with the companies prior to their collapse;
  • shortly prior to going into administration the companies had assigned debts and sold assets, which transactions the liquidators would need to investigate, where –
  • * the other parties to the transactions appeared to be connected with the Mawson Group, based on company searches, and
  • * the effect of the debt assignments and asset sales was the transfer of a significant part of the business of the companies,
  • there was a need to investigate whether those transactions could be challenged as uncommercial transactions or unreasonable director-related transactions, whether the directors had breached their duties, and whether Mawson Group personnel were involved in such breaches, where –
  • * the Mawson Group was involved in the appointment of the insolvency practitioners who would be investigating the transactions involving entities connected to the Mawson Group,
  • * the Mawson Group had referred six other voluntary administrations to the firm of the liquidators,
  • * these referrals had generated a material volume of work with significant fees for the firm, and
  • * in 3 of the other 6 administrations, there were also antecedent transfers of assets and debt assignments by the companies, to entities connected with the Mawson Group.

ASIC contended that the significance of these matters was that the liquidators must investigate Mawson Group’s involvement in those transactions, and those associated with Mawson Group, in circumstances where the liquidators’ firm had an ongoing commercial relationship with the Mawson Group which generated significant fees for the firm, and where the persons who would be the subject of those investigations included those who referred the appointments to them. ASIC submitted that these matters gave rise to a reasonable perception or apprehension that the liquidators would not bring an impartial and unprejudiced mind to the investigation of the pre-appointment transactions, and would favour interests assocated with the Mawson Group at the expense of the interests of creditors, whether consciously or not.

This perception or apprehension of a lack of independence would be heightened by the alleged lack of full disclosures in the DIRRI, so ASIC contended, in the mind of the hypothetical fair minded observer.

The Legal Principles

Her Honour Davies J had regard to the following legal principles –

  1. It is settled law that a liquidator may be disqualified from continuing to act in the winding up of a company where the hypothetical fair minded observer would perceive a lack of independence or impartiality on the part of the liquidator in the discharge of his or her functions, even where independence and impartiality have in fact been maintained (see [2] and the authorities there cited);
  2. The disqualification principle gives due recognition to the requirement that liquidators must not only be independent and impartial, they must be seen to be independent and impartial, which is fundamental to the integrity of the winding up process (see [2] and the authorities there cited);
  3. Thus the discretion under s 503 of the Act will commonly be exercised in favour of removing a liquidator where it appears that the liquidator is in a position of apparent conflict because of some relationship (direct or indirect) or connection (see [2] and the authoriites there cited; note that I would query the use of the word “commonly” here);
  4. The test for determining whether a hypothetical fair minded observer would apprehend a lack of independence and impartiality requires the articulation of a logical connection between the matters which, it is said, may impede or inhibit the liquidators from acting impartially in the interests of all creditors in the discharge of their duties, and the feared deviation from discharging their duties and responsibilities impartially (see [6] and the authorities there cited);
  5. The test is an objective test viewed through the legal fiction of the hypothetical fair minded observer, and the apprehension of lack of independence must be reasonably formed. For the apprehension to be reasonable, it is axiomatic that the apprehension must be informed and arise upon an understanding of the actual circumstances in which the claim of apprehended lack of independence is made (see [6]).

The Court’s Decision

The question of the “logical connection” referred to in 4 above proved to be the tripping point. ASIC pointed to the character and nature of the liquidators’ business association with the Mawson Group, where the Mawson Group was involved in the very transactions that would need to be investigated, and the lawfulness of the conduct of the Mawson Group would come into question.

However the Court held that the logical connection was not made out. Davies J took the view (at [8]-[9]) that the knowledge attributed to the fair minded observer, appropriately informed, would include –

  • an awareness about the functions and duties of liquidators;
  • an awareness that liquidators have statutory duties and responsibilities that they must discharge;
  • an awareness  that it is the liquidators’ duty to discover whether any transactions are voidable, whether any conduct of persons has been in breach of the Act or given rise to some other civil or criminal liability;
  • knowledge that the liquidators’ firm is commonly referred voluntary administrations and other insolvency work by solicitors, business advisors and accountants, and that this was the nature of the liquidators’ firm’s business relationship with Mawson Group;
  • knowledge that as Mawson Group was a business advisory firm providing corporate restructuring advice to troubled companies, and its relationship with the companies in this case was a professional one;
  • knowledge that there is nothing about the conduct of the other insolvencies referred by Mawson Group to the liquidators’ firm that brings the firm’s independence and impartiality into question, having regard to their professional relationship with the Mawson Group; and
  • knowledge that if there was any deficiency in the DIRRI, such deficiency was inadvertent and not intended.

With an appreciation of those matters, the Court concluded, the fair minded observer may reasonably conclude that the liquidators would similarly discharge their statutory duties and responsibilities impartially and as required by law, uninfluenced by their relationship with the Mawson Group (at [9]).

The Court was not persuaded that there was any substance in the claim of apprehended lack of independence, and refused the application to remove the liquidators (at [10]).

Section 436DA – Disclosure in the DIRRI

At the time of their appointment as administrators, the (now) liquidators declared in the DIRRI that:

“The [companies were] referred by Mr P McCurry of 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…”.

ASIC’s complaint was that this did not go far enough, and ought also have addressed why they did not believe that this referral relationship resulted in any actual or perceived conflict of interest or duty, in the context of the additional factor here – the potential need to investigate transactions involving the Mawson Group. ASIC contended that this omission meant the DIRRI was deficient by failing to meet the requirement of s 60(1)(b). ASIC contended that even if the liquidators were not aware of the involvement of Mawson Group in transactions they would need to investigate at the time of making the DIRRI, s 436DA(5) required that they update the DIRRI with the information when they did become aware of it. ASIC argued that the creditors needed to know that the Mawson Group may be investigated, to enable them to make an informed decision about whether to replace the administrators.

Davies J observed that the starting and end point is s 60 of the Act. Her Honour considered the policy objectives of s 60 and the passages in that regard in the relevant 2007 explanatory memorandum, commenting also upon the relevant 2004 Parliamentary Joint Committee Report and the 1998 CAMAC Report at [14]-[17].

However her Honour referred to the High Court’s judgment in Commissioner of Taxation v Consolidated Media Holdings Ltd [2012] HCA 55; (2012) 91 ACSR 359 at [39] and cautioned against looking at what the EM says over construing the text of s 60. Whilst accepting that the primary purpose of the DIRRI is to enable creditors to make informed decisions about whether to replace an administrator, the content of the DIRRI is a matter prescribed by statute, and it is necessary to examine what the section requires.

The Court noted that the liquidators had disclosed their firm’s business association with Mawson Group and explained why the referral relationship did not compromise their independence in carrying out their function as administrators. ASIC argued that the liquidators had not gone far enough in the DIRRI, but the Court disagreed and declined the declaration ASIC sought (at [22]-[23]).

Decision Appealed

The Federal Court of Australia portal shows that ASIC lodged a notice of appeal last week on 26 February 2014. Consent orders were made by Jessup J on 28 February 2014 that the hearing of the appeal be expedited and listed for hearing on an estimate of one day. The portal also shows that the appeal is listed for a callover before Marshall J on 29 April 2014.


Three points to make about this case.

First – the Court’s decision demonstrates clearly that, as with other cases such as Accord Pacific Holdings Pty Ltd v Gleeson as liquidator of Accord Pacific Land Pty Ltd (in liq) [2011] NSWSC 1021, the courts do not exercise their discretion in s 503 lightly, even where it is not an actual lack of impartiality or independence that is alleged, but the appearance of it.

Secondly, as was noted in the National Safety Council of Australia decision of the Full Court of the Victorian Supreme Court ([1990] VicRp2; [1990] VR 29), this judgment of the Federal Court was a discretionary judgment. Therefore the limitations upon a court of appeal’s interfering with such a judgment ought be borne in mind. The principles upon which an appellate court interferes in such a judgment were considered by the High Court in Lovell v Lovell [1950] HCA 52; (1950) 81 CLR 513. At 519 Latham CJ quotes from the judgment of Dixon, Evatt and McTiernan JJ in House v The King [1936] HCA 40; (1936) 55 CLR 499 at 504-5 where their Honours said this:

“The manner in which an appeal against an exercise of discretion should be determined is governed by established principles. It is not enough that the judges composing the appellate court consider that, if they had been in the position of the primary judge, they would have taken a different course. It must appear that some error has been made in exercising the discretion. If the judge acts upon a wrong principle, if he [or she] allows extraneous or irrelevant matters to guide or affect him, if he mistakes the facts, if he does not take into acount some material consideration, then his determination should be reviewed and the appellate court may exercise its own discretion in substitution for his if it has the materials for doing so. It may not appear how the primary judge has reached the result embodied in his order, but, if upon the facts it is unreasonable or plainly unjust, the appellate court may infer that in some way there has been a failure properly to exercise the discretion which the law reposes in the court of first instance. In such a case, although the nature of the error may not be discoverable, the exercise of the discretion is reviewed on the ground that a substantial wrong has in fact occurred.”

The onus upon ASIC here as a party seeking to have an appellate court interfere with a lower court’s exercise of discretion is a heavy one. As Kitto J observed in Lovell v Lovell at 533, it takes “a clear conclusion that the judge was plainly wrong” to justify the reversal of his or her decision.

Thirdly, it will be interesting to see on appeal whether, if this relates to one of the grounds of appeal, all of the matters listed above which Davies J in this case attributed as matters that would be within the knowledge or awareness of the hypothetical fair minded observer are upheld by the Full Court.

3 thoughts on “ASIC appeals the decision in ASIC v Franklin (liquidator), in the matter of Walton Construction PL (in liq) [2014] FCA 68

  1. Pingback: Heads up #2 – Two other insolvency law appeals before the Courts | Carrie Rome-Sievers, Barrister

  2. Pingback: Newsflash – ASIC’s appeal in ASIC v Franklin successful | Carrie Rome-Sievers, Barrister

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