Increased disclosure obligations for liquidators under the ARITA Code

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Changes to the Privacy Act and the decision in the Federal Court of Australia case of Australian Securities and Investments Commission v Franklin (liquidator), in the matter of Walton Constructions Pty Ltd [2014] FCAFC 85 (‘Walton appeal decision’) prompted the addition of section 6.6.1 to the Australian Restructuring Insolvency and Turnaround Association (ARITA) Code of Professional Practice for Insolvency Practitioners (Code).

Walton appeal decision

On 8 November 2013, liquidators were appointed to Walton Construction Pty Ltd (‘Walton Construction’). Prior to this appointment Walton Construction sought advice from the Mawson Group. Upon Walton Construction’s liquidation, the Mawson Group referred liquidators to Walton Construction. However, these particular liquidators enjoyed an ongoing commercial relationship with the Mawson Group. The issue for the Court was whether or not there was an “apprehension of bias”.

In the first instance, the Federal Court held that there was no apprehension of bias, as the liquidators were compelled by law to comply with all relevant statutory obligations, and would do so accordingly and the relationship between the Mawson Group and the liquidators was a professional one. Subsequently, this decision was appealed to the Full Court of the Federal Court.

The Full Court of the Federal Court held that there was a reasonable apprehension of bias on behalf of the liquidators. This was because the liquidators were not seen as independent, which resulted in an apprehension of bias arising out of the association with the Mawson Group. As such, the Full Court was satisfied that a reasonable fair-minded observer would perceive there being a conflict between the Mawson Group and the liquidators due to the ongoing commercial relationship.

Ultimately, the liquidators were removed pursuant to section 503 of the Corporations Act 2001 (Cth). On 29 July 2014, replacement liquidators were appointed. Costs were awarded against the liquidators.

Additions to the ARITA Code

Section 6.6.1 of the ARITA Code provides that:

  1. If a practitioner accepts an appointment following a Specific referral, the Practitioner must disclose in the DIRRI:
  • The Referring Entity (firm/organisation name); and
  • The Practitioner’s reasons for believing that the relationship with the Referring Entity does not result on the Practitioner having a conflict of interest or duty.

In practice

The following statements are an example of proposed wording a liquidator may use when fulfilling disclosure obligations pursuant to section 6.6.1 of the ARITA Code:
This appointment was referred to me by XY Lawyers, Lawyers of the Company. The reasons I believe that this relationship does not result in me having a conflict of interest or duty are:

  1. XY Lawyers has not previously referred any insolvency type matters to my firm; and
  2. Referrals from accountants, business advisors and solicitors are commonplace and do not impact on my independence in carrying out my duties as liquidator.

If you have any questions relating to the ARITA Code or liquidation, please don’t hesitate to contact me.