The recent Federal Court decision of ASIC & Franklin & Ors  FCA 68 represents, respectfully, a noteworthy exercise by the Court in applying the law in a commercial common sense manner.
Justice Davies was asked to consider ASIC’s application for disqualification of the Liquidators of Walton Construction Pty Ltd (in liq) and Walton Construction (Qld) Pty Ltd (in liq) (the Companies). The Liquidators were appointed the Administrators of the company having been referred to the directors of the Companies by Mawson Group.
Mawson Group had provided business advisory and restructuring services to the Companies prior to the appointment. It became apparent that transactions involving the Companies and Mawson Group personnel required investigation by the Liquidators. The Liquidators’ firm had an ongoing commercial relationship with Mawson Group which generated significant fees. As Davies J summarised:
ASIC argued that the circumstances give 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 associated with the Mawson Group at the expense of the interests of creditors, whether consciously or not, because of their interest or concern not to damage the referral relationship – as ASIC colloquially put it, “not to bite the hand that feeds them”. 
Section 503 of the Corporations Act is designed to deal with situations where it appears that the Liquidator is in a position of apparent conflict because of some relationship. In considering the circumstances of this case the Court said:
The fair minded observer, appropriately informed, would know that the Liquidators’ firm is commonly referred voluntary administrations and other insolvency work by solicitors, business advisors and accountants and would know that this is the nature of the firm’s business relationship with the Mawson Group. A fair minded observer would also know that the Mawson Group is a business advisory firm providing corporate restructuring advice to troubled companies, and that its relationship with the companies was a professional one... [and] would also know that there is nothing about the conduct of the other insolvencies referred by the 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. 
Davies J went onto say that the Liquidators had adequately disclosed their firm’s business association with Mawson Group, noting that Mawson Group refers insolvencies from time to time, and explained why the referral relationship did not compromise their independence.
The existence of the relationship was not sufficient for a finding of lack of independence. ASIC failed to establish that the relationship was of such a nature that the independent and impartial exercise of the duties of the Liquidators would be impeded or interfered with.
The case is a true example of the Court applying the law in a context of the modern commercial world. That is not to understate the importance of independence and the function of the declaration of relevant relationships and the role it has to play in creating a confident creditor body. Indeed, true independence and impartiality are central to the roles of administrators and liquidators.
Author: Chris Brodrick
Chris Brodrick, Partner
T: +61 3 9321 9888
Greg Wrobel, Partner
T: +61 2 8083 0411
Toby Boys, Partner
T: +61 7 3135 0649
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