24 May, 2019
"Mere wondering" is not enough for ASIC to use court based inquiry powers.
What you need to know
- The New South Wales Supreme Court has dismissed ASIC’s request for the actions of two liquidators to be referred to the Court for an inquiry under section 536 of the Corporations Act.
- Justice Brereton was not satisfied that there was a “well-based suspicion indicating a need for further investigation” in relation to the liquidators’ conduct.
- Although these proceedings were commenced before ASIC's "why not litigate?" approach, it suggests that ASIC will need to pick its battles carefully to avoid any suggestion that it is making allegations that are not of a strength or nature that would justify the exercise of the court's discretion.
Background
Australian Securities and Investments Commission v Wily & Hurst [2019] NSWSC 521
Mr Wily and Mr Hurst acted as liquidators, in creditors’ voluntary windings-up, of 19 companies which had supplied labour hire and other services to Crystal Carwash.
In October 2007, Mr Wily was appointed as liquidator for seven of those companies (2007 Companies). In March 2009, both Mr Wily and Mr Hurst were appointed as liquidator of the other 12 (2009 Companies).
ASIC raised a number of concerns about the liquidators' conduct including that the liquidators had a potential conflict of interest in failing to disclose "commonalities" between the 2007 Companies and the 2009 Companies to creditors (including the nature of the businesses and their directors), failure to report suspected shadow directors and illegal phoenix activity, and failure to adequately perform their duties and functions.
Threshold questions
The now repealed section 536 provided for the Court or ASIC to inquire into a complaint with respect to the conduct of a liquidator in connection with the performance of his or her duties. Section 536 has been replaced by provisions of the Insolvency Practice Schedule (Corporations).
This power was in addition to ASIC's general investigative and examination powers under sections 13 and 19 of the ASIC Act, respectively.
Justice Brereton stated that there were two questions to answer in considering whether the Court should conduct an inquiry under section 536:
- Whether the Court’s jurisdiction is enlivened: is there a “well-based suspicion indicating a need for further investigation”?
- Whether the Court should exercise its discretion to conduct an inquiry: relevant factors include the nature of misconduct, evidence in support, and delay.
“Mere wondering” not enough
His Honour was not satisfied that that there was “a well-based suspicion” as distinct from “mere wondering”, that warranted further investigation into the conduct of the liquidators. Specifically:
- The fact that the 2007 Companies went into liquidation simultaneously and shared similarities to the 2009 Companies, was “unremarkable”. ASIC’s allegations did not show that the liquidators’ duties and their personal interests conflicted.
- ASIC failed to show there were shadow directors or demonstrate that there was illegal phoenixing. The fact that one company goes into liquidation and another is incorporated with the same ownership and directors is not determinative. The real issue is whether assets have been transferred between the companies.
- The liquidators adequately performed their duties, including to collect records and properly investigate the liquidations.
Discretionary factors
- ASIC unduly delayed bringing an investigation into the liquidators conduct.
- There was limited utility in pursuing action against the liquidators as it would not result in a financial benefit to the creditors of the 2009 Companies.
- Notwithstanding its investigation, ASIC chose not to conduct the inquiry itself under section 536, but chose instead to refer the matter to the Court.
Where to from here?
While this was not a successful outing for ASIC, it is unlikely to deter the regulator from continuing to advance its "why not litigate" approach, as well as increasing surveillance of external administrators. The Court's comments about ASIC's own powers may also encourage it to use various statutory powers to build a stronger case before proceedings are commenced.
For further information, please contact:
Ian Bolster, Partner, Ashurst
ian.bolster@ashurst.com
