Court criticises ASIC for lack of evidence to support inquiry into liquidators

The recent Supreme Court of NSW decision of ASIC v Wily & Hurst, provides useful guidance regarding the Court’s criteria to inquire into a liquidator’s conduct under former section 536 of the Corporations Act 2001(Cth). The decision is relevant as to how a Court may determine such an application made under the Insolvency Practice Schedule (Corporations). The decision is also useful to insolvency practitioners as it clarifies the scope of their duty to disclose information in statutory reports (such as the section 533 Report).

In ASIC v Wily & Hurst,[1] the Supreme Court of New South Wales considered the criteria to inquire into a liquidator’s conduct under former section 536 of the Corporations Act 2001 (Cth) (the Act), (currently under the Insolvency Practice Schedule (Corporations)).[2]

The Court also helpfully clarified the scope of an insolvency practitioner’s duty to disclose information in statutory reports such as the section 533 Report.

Facts

Numerous companies provided labour hire and/or administrative services to Crystal Carwash Pty Ltd which operated various car wash sites.

In October 2007, Andrew Wily was appointed as a liquidator, following creditors’ voluntary windings-up, of seven of these companies (2007 Companies).

In 2009, Mr Wily and David Hurst were appointed liquidators, following creditors’ voluntary windings-up, of twelve of these companies (2009 Companies).

Five of the 2007 Companies and five of the 2009 Companies shared common directors.

ASIC applied to the Supreme Court of NSW for orders that an inquiry be carried out into the liquidators’ conduct and ultimately, that they be struck off or prohibited from being liquidators.

Issues

In considering ASIC’s application under the now repealed section 536 of the Act (replaced by provisions of the Insolvency Practice Schedule (Corporations) at Schedule 2 of the Act),[3] the Court had to consider whether ASIC had put forward enough evidence to establish a “well based suspicion” justifying further investigation into the liquidators and whether the Court should exercise its discretion to conduct such an inquiry.

In particular, ASIC argued that the liquidators failed to:

1. disclose a potential conflict in Declarations of Independence under section 506A of the Act;
2. discharge reporting obligations under section 533 of the Act relating to alleged shadow director activities carried out by A Sahade (who owned the Crystal Carwash businesses) and his father, V Sahade (one of the directors of one of the 2009 Companies), in addition to alleged phoenix activities; and
3. adequately perform their general duties and functions as liquidators such as properly investigating the companies’ affairs and collecting books and records.

Decision

The Court considered that to sufficiently establish a “suspicion”, ASIC needed to persuade it that there was a “positive feeling of actual apprehension or mistrust, as distinct from mere wondering“.[4]

ASIC fell short of producing sufficient evidence and the Court dismissed the application with costs against ASIC.

In reaching this conclusion the Court held:

1. Whilst there was a potential for conflict, ASIC had not established an actual conflict that had not been disclosed by the liquidators. The Court observed it was not uncommon for the simultaneous liquidation of a group of companies and that it was unremarkable that there may have been a common referrer (unidentified and unquestioned in this case by ASIC) who allegedly had prior dealings with the liquidators which affected the liquidators’ impartiality.
2. Whilst the template section 533 Report may provide for reporting on shadow directors and phoenix activities, section 533 places no positive obligation on the liquidators to report on this. The Court observed that there was no marketable goodwill or fixed assets in this case to establish “phoenix activities” that the liquidators should have been aware of and further, that there was insufficient evidence to establish shadow director activities. The outcome would have been different if the liquidators knew of such activity and falsely completed the section 533 Report.
3. ASIC had a list of alleged failures by the liquidators in carrying out the administration of the liquidations. These included not making enquiries in relation to a particular address of interest to collect books and records and issuing creditor/employee notices to the wrong address. In light of section 545 of the Act and the common law position,[5]the Court found that the liquidators had sufficiently and adequately performed their duties having regard to the fact that there were no available assets to benefit creditors in the administration of the liquidations.

Key takeaway

Given the criticism of the Court, ASIC may be more reluctant to bring matters before the Court without first undertaking a thorough investigation. ASIC may also choose to avail itself more often of its own investigative powers that are provided for in the Insolvency Practice Schedule (Corporations).

[1] [2019] NSWSC 521.

[2] See now Corporations Act 2001 (Cth) at Schedulkle 2:  Insolvency Practice Schedule (Corporations).

[3] In particular cl 45-1, 90-5, 90-10, 90-15 and 90-20.

[4] ASIC v Wily & Hurst [2019] NSWSC 521 [134].

[5] Clasquin SA v AAR International Pty Ltd (1989) 15 ACLR 9, 11−12; Re Bisopo Pty Ltd (1995) 17 ACSR 730, 734; Jenkins v Jonkay Pty Ltd [2007 FCA 858 [10]; Re GTL
Tadeup Pty Ltd (in liq) (2015) 104 ACSR 633, [2015] FCA 223 [70]; ACN 151 726 224 Pty Ltd (in liq) [2016] NSWSC 1801 [57].

Authored by:

Barbara-Ann Sim, Partner

Petar Damnjanovic, Solicitor