Increased disclosure obligations for liquidators under the ARITA Code


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.

Tagged in: , , , , , , , , , , , , , , , , , , , , , , , , ,

You may also be interested in:

6 Things You Can Expect When Declaring Bankruptcy

Declaring bankruptcy should be your last resort when you are faced with financial difficulties, whether as an individual or as a business owner. It is not exactly a “Get Out of Jail Free” card, as it comes with many adverse consequences, which may significantly impact your financial standing over a considerable period. So what consequences continue reading

How do you determine if a company is insolvent?

The answer to the question “How do you determine if a company is insolvent?” is important because there are serious consequences for a director if debts are incurred after the company has become insolvent, including civil penalties, compensation proceedings and criminal charges. However, it is often difficult to know when a company has crossed the continue reading

What to do if you receive an ATO Director Penalty Notice

Did you know that company directors may potentially become personally liable for unremitted Pay As You Go (PAYG) deductions and Superannuation Guarantee Charges (SGCs)? The Australian Taxation Office (ATO) has significant powers to recover a company’s unpaid liabilities personally through its directors and may issue a Director Penalty Notice (DPN). This article focuses on the continue reading

Liability Limited by a scheme approved under professional standards legislation | Website by VA