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The NSW Supreme Court has reaffirmed the criteria for a Court to inquire into a liquidator’s conduct. It is necessary to show that there is at least a ‘well-based suspicion’ indicating a need for further investigation. ‘Mere wondering’ is not enough.
In exercising its discretion, a Court will also consider the nature and gravity of the allegations against the liquidator, delays in seeking an inquiry, the utility of an inquiry and the existence of alternative remedies.
This latest guidance came out of ASIC’s unsuccessful attempt to obtain an order for an inquiry into the conduct of Andrew Wily and David Hurst during their liquidation of a number of labour hire companies, some in 2007 and others in 2009.
Joseph Scarcella of JWS represented Mr Hurst in the proceedings, in respect of whom the Court found the prospect of establishing the need for an inquiry was ‘remote in the extreme’.
ASIC alleged that the companies being liquidated gave rise to questions of possible conflicts of interest, phoenixing and potential shadow directors. ASIC therefore sought an inquiry under the now repealed s536 of the Corporations Act 2001 (Cth) into whether Mr Wily and Mr Hurst had acted to the standard expected of reasonably competent liquidators with respect to:
These inquiry powers are now conferred by the Insolvency Practice Schedule (Corporations).
The Court dismissed ASIC’s application with costs, labelling ASIC’s prospects of establishing unfitness of the liquidators as ‘doubtful in the extreme’.
The Court found that there was no well-based suspicion of a conflict of interest where a liquidator of certain companies had previously been the liquidator of other companies sharing commonalities, such as carrying on similar businesses, sharing similar directors, being treated as a group and being referred to the liquidators by a common referrer. Additionally, even if there was a potential conflict, it would not require a liquidator to decline an appointment, or disclose common directors as relevant relationships. Readers will note that one of the main concerns often expressed by regulators is the fact that multiple external administrations are referred to liquidators from a single source. That, it appears, is not sufficient to ground a reasonable apprehension of a potential conflict of interest.
The Court also said that s533 did not require liquidators to report that a company may have shadow directors. Further, the mere fact that when a company goes into liquidation, another with the same ownership and directors commences to provide the same services to the same customers does not amount to ‘illegal phoenixing’. In any event the Court found that Mr Hurst had lodged many s533 reports.
Finally, the Court reaffirmed that the level of inquiry required of a liquidator is more limited when the company in liquidation has no available assets.
It followed that the Court identified no well-based suspicions regarding Mr Wily and Mr Hurst’s conduct. In any event, the Court would have declined to order an inquiry in light of discretionary factors, including the fact that Mr Wily was no longer a registered liquidator and Mr Hurst had conducted practice for almost a decade since the alleged conduct without incident or being the subject of any other complaint or disciplinary procedures.
Liquidators have been subject to significant regulatory and judicial criticism of late. This decision breathes an air of commercial reality into how the Courts view a liquidator’s business and function. It establishes that the Courts are not eager to take action without a well-grounded suspicion of potential wrongdoing.
 Australian Securities and Investments Commission v Wily & Hurst  NSWSC 521
Click here to read the full decision.