ASIC's new powers to regulate insolvency practitioners have had their first test in courts. In a 274-page judgment finding against the regulator, Justice Markovic set a high evidentiary bar, and emphasised the critical social function and challenging role of insolvency practitioners, who must oversee complex, financially troubled companies, while maintaining their independence and high standards with limited resources (Australian Securities and Investments Commission v Bettles [2023] FCA 975).
Making orders against registered liquidators: the powers in section 45-1 of the IPS
Section 45-1 of the Insolvency Practice Schedule (IPS) empowers the court to make orders in relation to registered liquidators. It broadly replaces the former section 536 of the Corporations Act, under which ASIC had previously brought unsuccessful claims against two liquidators in ASIC v Wily & Hurst. The court can exercise this power either on its own initiative during proceedings, or upon application by the registered liquidator or ASIC.
When making orders under section 45-1 of the IPS, the court may consider various factors outlined in subsection (4), including:
- whether the liquidator has faithfully performed his or her duties;
- whether the liquidator is in compliance with the Act and the Insolvency Practice Rules or an order of the court;
- whether any person has suffered, or is likely to suffer, loss or damage because of the liquidator's actions or failure to act; and
- the consequences of the liquidator's actions or failure to act, including the impact on public confidence in registered liquidators.
ASIC takes action on suspected phoenixing
Mr Bettles was appointed as administrator and/or liquidator to 18 companies in the Members Alliance Group (MA Group), a group of more than 50 companies, which were placed into liquidation in July 2016 with a $26 million debt owing to the ATO. ASIC suspected illegal phoenixing had occurred, and most of its claims arose from this (others came from his conduct as liquidator of an unrelated company, Bradford Marine Pty Ltd (in liquidation)).
ASIC focused on Mr Bettles' knowledge of, involvement in, and actual breaches of the Act, including his duties as an officer of the companies to which he was appointed; specific liquidator duties; and the Australian Restructuring Insolvency & Turnaround Association Code of Professional Practice (ARITA Code). Its claims fell into two broad categories: those related to his conduct arising out of the implementation of the strategy, and more general claims relating to his conduct as a liquidator. These included that Mr Bettles:
- was involved in illegal phoenix activity by participating in meetings where strategies were devised to transfer the assets of certain MA Group companies and divert income streams to newly formed entities, as well as by taking no steps to prevent the implementation of the strategy, effectively shielding these assets from creditors, including the ATO. Notably, four company officers and one lawyer associated with the MA Group faced criminal charges in relation to the alleged phoenix activity in 2021;
- failed to investigate whether one of the four company officers charged with criminal offences, Colin MacVicar, was entitled to a $250,000 settlement sum in return for his resignation;
- made false declarations regarding the MA Group's business records, because he answered "Yes" to the question "[h]ave you obtained or inspected the company's books and records" without having obtained or inspected 761 boxes of records and 16 terabytes of computer records;
- failed to obtain a valuation of a client book and allowed or failed to prevent its sale;
- failed to provide adequate disclosure in his declarations of independence of relevant relationships and indemnities (DIRRI). In particular, he failed to adequately disclose that in 2015, he had advised Mr MacVicar and his wife on their personal liabilities should the MA Group cease to trade because of an inability to pay outstanding debts to the ATO; and
- failed to faithfully perform duties and act independently when accepting an offer for the purchase of a chose in action without obtaining advice as to its value and opposed a subsequent application for his removal as liquidator of Bradford Marine.
ASIC argued, inter alia, that the seriousness of the consequences of Mr Bettles' actions or failures to act, was likely to diminish public confidence in registered liquidators as a group.
Mr Bettles denied the allegations and argued that he acted in good faith and in accordance with his professional obligations as a liquidator.
Justice Markovic determined that ASIC had failed to prove its case on all but one of its "many claims". She considered his breaches of the ARITA Code to be minor and should not be taken into account for the purposes of section 45-1 of the IPS.
Directors' and Officers' duties: "involvement" in a breach requires actual knowledge and intentional participation
The duties specified in sections 180 (care and diligence), 181 (good faith), and 182 (use of position) of the Act apply to liquidators as officers of the company to which they have been appointed. In terms of liability, sections 181 and 182 also extend to persons who are "involved in" a contravention of those duties.
With respect to Mr Bettles' alleged "involvement in" contraventions of the Act, the Court emphasised that "[a]ctual knowledge of the essential elements constituting the contravention is required. Imputed or constructive knowledge is insufficient". For a liquidator to be "involved in" such a breach, they must have been an "intentional participant" in the contravention. On this point, Justice Markovic cited a passage by Chief Justice Gibbs in Giorgianni v The Queen (1985) 156 CLR 473:
"The determination that a person has actual knowledge in this manner is not always easy. Amongst other things, it requires consideration of the defendant's knowledge of matters giving rise to suspicion, the circumstances in which the defendant did not make the obvious enquiry, and the defendant's reasons, to the extent that they are known, for not making the enquiry. It is necessary to keep in mind that it may not be every deliberate failure to make enquiry which will support the inference of actual knowledge…"
The first (but not last) test of section 45-1 of the IPS, and ASIC's possible response
Justice Markovic acknowledged that it is a liquidator's role to investigate the affairs of a company – but this is limited by the resources available, particularly funds. In commentary that indicates the court's reluctance to condemn liquidators, Justice Markovic cited authorities to the effect that a "court should not be quick to condemn a person in the difficult position of a liquidator, and, in particular, should not judge his or her conduct with wisdom born of hindsight" [emphasis added]. Further, "it is not every error of judgment that will be accounted negligence".
While Justice Markovic observed that there was "a level of naivety on Mr Bettles' part and a complete lack of scepticism" – noting his lack of significant experience in large group insolvencies – he did not strike her "as someone who would act in disregard of his duties or statutory obligations". Rather, Mr Bettles came across "as someone who is earnest and attempted to 'do the right thing' when it came to understanding his role as liquidator".
Given ASIC's failure to establish Mr Bettles' liability, there was no need for the Court to consider questions of remedies and sanctions. ASIC has not appealed the decision.
ASIC clearly faces a high evidentiary burden when establishing a liquidator has failed to carry out his or her duties or functions, and courts which are prepared to scrutinise its allegations carefully. The case also highlights the challenges and complexities faced by liquidators in dealing with large and complicated corporate groups, especially when there are allegations of fraud or misconduct by directors or other parties.
Given that, it seems this is a golden opportunity for ASIC to set out its expectations for insolvency practitioners in greater detail. Doing so would have three benefits:
- insolvency practitioners in the thick of complex insolvencies, administrations or restructuring would have better support, and be less likely to lose sight of concerning or illegal activity;
- ASIC would be able to point to what insolvency practitioners were on notice of, and be better placed to clear the high evidentiary bar; and
- ASIC would have a better benchmark for distinguishing well-intentioned practitioners such as Mr Bettles from those knowingly breaching their duties.
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