Conflict of interest (in the context of company liquidation)

A liquidator in a company liquidation has a fiduciary obligation to the creditors of a company, and a liquidator has a duty to act honestly in the exercise of their duties. A liquidator must act, and be seen to act, with complete independence. If a liquidator is unable to act without complete impartiality, then a conflict of interest occurs.

Section 503 of the Corporations Act 2001 (Cth) provides that a Court may “on cause shown” remove a liquidator appointed in a voluntary winding up and appoint another liquidator. In Wood v Targett (1997) 23 ACSR 291 Lehane J observed that the discretion that the Court has under section 503 will commonly be exercised in favour of removal of a liquidator when it appears that the liquidator, through relationships and connections with the company, its management or particular persons concerned it its affairs, is in a position of actual or apparent conflict of interest.

In ASIC v Franklin (liquidator), in the matter of Walton Constructions Pty Ltd [2014] FCAFC, White J held that the test for the reasonable apprehension of bias (i.e. the test of independence) in respect of a liquidator is what is known as the “double might” test. This test was first elucidated in Ebner v Official Trustee in Bankruptcy (2000) 205 CLR 337 whereby the test was stated as being whether “a fair-minded lay observer might reasonably apprehend that the judge might not bring an impartial mind to the resolution of the question the judge is required to decide”. In this matter White J imputed the same test of impartiality that applied to judges in Ebner to that of a liquidator.

The position of White J is reflected in clause 6 of the ARITA Code of Professional Practice states the position of ARITA when it comes to determining the independence of insolvency practitioners. The Code states that:

Independence has two parts. A Practitioner must:

  • Be independent in fact; and
  • Be seen or perceived to be independent.

A Practitioner must be independent in fact, that is, they should act and conduct the Administration in an independent manner.

A Practitioner must be seen to be independent, that is, they must not accept an appointment, or continue to act under an existing appointment, if:

  • A reasonable and informed third party;
  • On the information available ( or which should have been available) at the time;
  • Might reasonably form the opinion that the Practitioner might not bring an independent mind to the administration and thus may not be impartial or may in fact act with bias;
  • Because of a lack of independence, or a perception of a lack of independence.