Federal Court Removes Liquidators

by K&L Gates LLP

The Full Court of the Federal Court of Australia (Full Court) has upheld part of the appeal of the Australian Securities and Investments Commission (ASIC) by removing liquidators in the case of Australian Securities and Investments Commission v Franklin (liquidator), in the matter of Walton Constructions Pty Ltd [2014] FCAFC 85.


On 8 November 2013, liquidators were appointed to two companies, Walton Construction Pty Ltd and Walton Construction (Qld) Pty Ltd (Companies). This followed their appointment as administrators of the Companies. In the months leading up to their administration, the Companies had received restructuring advice from the Mawson Group. The Companies subsequently entered into transactions (including asset sale agreements) with entities created, owned and/or directed by persons connected with the Mawson Group.

In the 18 month period prior to the appointment as administrators of the Companies, the Mawson Group had referred work to the liquidators' firm, who had realised a "not insignificant amount of fee income".1

Federal Court – First Instance

In December 2013, ASIC commenced proceedings against the liquidators alleging that the liquidators:

  1. contravened section 436DA of the Corporations Act 2001 (Act), by failing to make proper disclosures in their declarations of independence and relevant relationships (DIRRI)
  2. should be removed from their positions on the ground that there was a reasonable apprehension that the liquidators lacked independence and impartiality.

Issue 1: DIRRI

At first instance, ASIC argued that the liquidators contravened s 436DA on the basis that they did not give full reasons in the DIRRIs why they believed the referral relationship between their firm and the Mawson Group did not result in a conflict. ASIC argued that "the DIRRI was deficient because creditors were not alerted to the fact that there may be a need for the liquidators to investigate the firm that referred them work".2 Justice Davies, in Her Honours reasons, explained that while the purpose of the DIRRI is to allow creditors to make informed decisions, the content of the DIRRI is a matter prescribed by statute3 and, in this case, the administrators complied with their obligations under s 60.

The liquidators had outlined their relationship with the Mawson Group in the DIRRI and gave the reason: "referrals from solicitors, business advisors and accountants are common place and do not impact on our independence in carrying out our functions as Administrators".4 Justice Davies stated that "if there be any conflict of interest or duty, it was founded in the referral relationship, the nature of which was disclosed".5 ASIC's application on this point failed.

Issue 2: Apprehension of Bias

Section 503 gives the court the power to remove a liquidator, on cause shown, in a voluntary winding up and appoint another liquidator. In considering 'cause shown', the court will look at evidence of conduct or lack of conduct, including lack of independence and apprehension of bias. ASIC argued that there was a reasonable apprehension of bias because the liquidators had a conflict of interest, arising from their relationship with the Mawson Group.

It was common ground that the test for apprehended bias was the same test that applies to the judiciary and is whether "a fair-minded lay observer might reasonably apprehend that the judge might not bring an impartial mind to the resolution of the question the judge is required to decide".6

Justice Davies dismissed ASIC's claim, stating that a fair-minded observer, appropriately informed, would be aware that:

a) the liquidators are under a statutory obligation to investigate voidable transactions, unlawful conduct  and potential criminal conduct
b) the firm is commonly referred work from solicitors, business advisors and accountants
c) the relationship between the Mawson Group and the firm was a professional one.

Therefore, the fair-minded observer may reasonably conclude that the liquidators would carry out their statutory duties uninfluenced despite their relationship with the Mawson Group.

Appeal to Full Court

ASIC appealed the decision to the Full Court. Referring back to the issues raised at 'Federal Court – First Instance':

Issue 1: DIRRI

The Full Court agreed with the primary judge on this issue. It was decided that requiring the administrators to give reasons as to why there was no perception of a lack of independence when they were investigating a person with whom they had a material referral relationship and who was involved in their appointment, expands the obligation on an administrator beyond the requirements of s 60(1)(b).7

Justice Robertson commented that the Insolvency Practitioners Association of Australia's (as it then was, now Australian Restructuring Insolvency and Turnaround Association (ARITA)) Code of Professional Practice for Insolvency Practitioners (Code) should not be taken into account in construing the Act.

Issue 2: Apprehension of Bias

The Full Court used the same test for whether there is an "apprehension of bias" as was used at first instance. However, the Full Court found that the judge at first instance erred in concluding that there was no real apprehension of bias.

Justice White noted in his reasoning that "the guiding principle is that a liquidator must be independent and be seen to be independent"8 and that an appearance of bias arising by association is a recognised category of disqualification.9 He concluded that there was in this case a conflict which was more than theoretical between the interest of the firm in not jeopardising the prospect of further remunerative referrals from the Mawson Group, and the proper discharge of their duties as liquidators of the Companies.

Justice White formed the view that a reasonable fair-minded observer would perceive this conflict.10 He also found that a reasonable fair-minded observer might reasonably apprehend that, because of the liquidators' interest in not jeopardising future income, they might not discharge their duties with independence and impartiality.11

As a result, the Full Court found it had no alternative but to remove the liquidators. The final order was published on 29 July 2014, stating that the liquidators were removed and replacement liquidators appointed. Costs were awarded against the liquidators and the Companies.

How Will this Affect You?

ARITA has responded to the decision of the Full Court by inserting a new s 6.6.1 into the Code, which requires insolvency practitioners to disclose in the DIRRI the referring entity and practitioner's reasons why the relationship with the referrer does not result in a conflict of interest or duty.

Practically, the Code requirement for declaring referral relationships in the DIRRI does not make it any clearer whether such a relationship gives rise to an 'apprehension of bias'. That will still be a matter of fact, which may be subject to consideration of the court where it is in contention. While the referral relationship may weaken the practitioner's appearance of independence, there will still be a test of whether a reasonable fair-minded observer would perceive there to be a conflict as a result.

This case and the subsequent changes to the Code by ARITA reinforce the fact that insolvency practitioners should not only be independent but be seen to be independent. If practitioners have any doubt, it is best not to take on the appointment or if challenged, consider resigning. While the Full Court did not go as far as ASIC wanted it to do, administrators and liquidators will have to examine their relationships to ensure that there will be no appearance or real apprehension of bias.  

[1] Australia Securities and Investment Commission v Franking (liquidator), in the matter of Walton Constructions Pty Ltd [2014] FCAFC 85 at 57. 
[2] Australia Securities and Investment Commission v Franking (liquidator), in the matter of Walton Constructions Pty Ltd (in liq) [2014] FCA 68 at 17. 
[3] Australia Securities and Investment Commission v Franking (liquidator), in the matter of Walton Constructions Pty Ltd (in liq) [2014] FCA 68 at 18. 
[4] Australia Securities and Investment Commission v Franking (liquidator), in the matter of Walton Constructions Pty Ltd (in liq) [2014] FCA 68 at 11. 
[5] Australia Securities and Investment Commission v Franking (liquidator), in the matter of Walton Constructions Pty Ltd (in liq) [2014] FCA 68 at 21. 
[6] Ebner v Official Trustee in Bankruptcy [2000] HCA 63 at 6. 
[7] Australia Securities and Investment Commission v Franking (liquidator), in the matter of Walton Constructions Pty Ltd [2014] FCAFC 85 at 34.
[8] Re Queensland Stations Pty Ltd (In Liq) [1991] FCA 469. 
[9] Australia Securities and Investment Commission v Franking (liquidator), in the matter of Walton Constructions Pty Ltd [2014] FCAFC 85 at 57. 
[10] Australia Securities and Investment Commission v Franking (liquidator), in the matter of Walton Constructions Pty Ltd [2014] FCAFC 85 at 124.
[11] Australia Securities and Investment Commission v Franking (liquidator), in the matter of Walton Constructions Pty Ltd [2014] FCAFC 85 at 125.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© K&L Gates LLP | Attorney Advertising

Written by:

K&L Gates LLP

K&L Gates LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.