Not Measuring Up – the Federal Court of Australia Finds that the Conduct of a Liquidator Falls Short of the Standard of Reasonable Care and Diligence

The decision of the Federal Court of Australia in Commissioner of Taxation v Iannuzzi (No 2) [2019] FCA 1818 (‘Iannuzzi’) considered the scope and content of a liquidator’s standard of reasonable care and diligence.  The liquidator in question was found to have been “systemically negligent in his responsibilities as liquidator over an extended period of time”, to have been “in substantial dereliction of his duties” and to have fallen “very short of the conduct that was to be expected of him”.  It was also possible that the defendant’s conduct had caused substantial loss to the creditors of the companies in question. The defendant was found not to be a fit and proper person to remain registered as a liquidator and was banned for a period of 10 years.

Iannuzzi concerned an application brought by the Commissioner of Taxation in August 2017 under section 536 of the Corporations Act 2001 (Cth) (‘Supervision of Liquidators’)[1] (the Act) seeking orders to remove the defendant liquidator from the register of liquidators and restraining the defendant for a period of 10 years from applying to be a registered liquidator or any other insolvency practitioner.  Despite a history of dogged opposition and resistance to the proceedings, shortly before the hearing on the inquiry was scheduled to commence in July 2019 the defendant made a series of admissions in relation to the conduct alleged by the Commissioner in which he broadly conceded that he had failed to exercise reasonable care and diligence in the exercise of his powers and the discharge of his duties.  The parties then sought orders in the above terms by consent.  Notwithstanding, Justice Stewart found that he could not proceed merely on the basis of the parties’ consent and he needed first to be satisfied that there was a proper basis for the consent orders.

The defendant had been a registered liquidator since October 2012 and an official liquidator since February 2013.  The misconduct in question occurred between mid-2014 and September 2017 in relation to the defendant’s appointment as a liquidator of seven groups of companies (comprising 23 separate companies).  The thrust of the Commissioner’s allegations (which were largely admitted by the defendant) was that the defendant had repeatedly fallen short of the standards that would ordinarily be expected of him by:

• failing to take steps to obtain the books and records of the companies and documents from relevant third parties, including bank statements;
• failing to undertake proper searches for real estate owned or formally owned by the companies;
• failing to identify and investigate monetary payments which were possibly unfair preferences and voidable transactions, and to consider taking action to recover such payments;
• failing to identify and investigate whether real and personal property transfers for non-commercial prices were voidable transactions, and to consider taking action in respect of such transfers;
• failing to identify and investigate possible ‘phoenixing’ activity i.e. the deliberate liquidation of certain companies and transfer of assets to new entities;
• failing to identify and investigate the possible ‘sham’ appointment of certain directors to the companies designed to avoid adverse consequences to the real directors of those companies;
• failing to make adequate disclosure to creditors of the companies, including as to the defendants’ personal conflicts of interest;
• making various administrative errors in the context of creditors’ meetings and failing to make proper reports to creditors (including by failing to explain substantial inconsistencies between reports);
• breaching his duty of diligence and candour in correspondence with the Commissioner of Taxation (who was a major creditor of a number of the companies) and in communications with other creditors;
• admitting proofs of debt without proper investigation as to their veracity; and
• inadequately supervising his staff on whom he relied to do much of the work.

Justice Stewart commenced his analysis of the relevant legal principles by outlining the nature and purpose of section 536 of the Act.  He found that the provision was the statutory embodiment of the court’s power to supervise its officers (which extended to all liquidators whether appointed by the court or otherwise) and it served an important public interest relating to upholding the honest and efficient administration of estates of companies subject to winding up.  Moreover, the power to inquire under section 536 extended to ‘banning orders’, the purpose of which was directly to protect the public from the work of that person.

His Honour then considered the standard of conduct expected of a liquidator, and endorsed the following legal principles:

• All liquidators, however appointed, perform an important public function. The position of liquidator is “a repository of public trust; the public is entitled to trust a liquidator to perform their functions to a high standard and with scrupulous attention to obligations of candour, honesty and integrity” (at [203]).  Importantly, “[w]hen a liquidator falls short of the standards expected of them, the public’s trust in the office of liquidator is eroded.  That in turn has a corrosive effect on the administration of the body of insolvency law, and consequently on the administration of justice” (at [204]).
• Court-appointed liquidators fall for special consideration. A court-appointed liquidator is an officer of the court, through whom the court itself notionally conducts compulsory liquidations.  This has particular implications for the standard of conduct expected of a liquidator – in particular, “[t]he liquidator is entrusted with the reputation of the court for impartial and proper dispatch of their duties” (at [202]).
• A liquidator’s duties include both general law and statutory duties to act with reasonable care and diligence, proper use of their position, proper use of any information obtained and not to act recklessly or dishonestly. Liquidators also have a fiduciary duty to act with complete impartiality between creditors and not to allow the liquidator’s personal interests to conflict with the liquidator’s duties (at [205]).
• A liquidator’s duty to investigate includes making himself or herself thoroughly acquainted with the affairs of the company and investigating not only breaches of the relevant companies legislation, but also conduct falling short of the requisite standards of commercial morality (at [206]-[207]).
• Whilst a high standard of care and diligence is to be expected of a liquidator as a professional person who is being paid for his or her services, the 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 the wisdom born of hindsight (at [208]-[209]).

Applying the standard of care to the admissions of the defendant and additional conclusions which he had reached on the evidence, Stewart J found that the defendant had been “systemically negligent in his responsibilities as liquidator over an extended period of time … and across a large number of companies” (at [218]).  In particular, the defendant had “made little or no effort other than to go through a set of standard procedures and without paying attention to whether his enquiries were bearing fruit or whether further or different enquiries were warranted, had “failed to make even the most basic inquiries about a company’s assets such as previous bank accounts or real property, or who its real directors were,” had “been reckless and [could] even be said to have closed his eyes to inconvenient features of the liquidations that he was administering”, and had possibly caused actual loss to creditors (at [219]-[222]).  Whilst not going so far as to find that the defendant had been dishonest in the execution of his duties as liquidator, his Honour concluded that (at [223]):

“Nevertheless, [the defendant’s] systemic conduct was certainly reckless; it fell very far short of the conduct that was to be expected of him; it demonstrates that he failed to observe the obligations of candour on him with regard to disclosing relevant circumstances to creditors; it reflects poorly on his character; and it demonstrates that he is not a fit and proper person to remain registered as a liquidator.”

Justice Stewart concluded that the agreed orders – which would have the effect of removing the defendant liquidator from the register of liquidators and restraining the defendant for a period of 10 years from applying to be a registered liquidator or any other insolvency practitioner – were appropriate as being within a proper range of orders in light of the proved and admitted conduct of the defendant. Orders were made accordingly.

Stewart J’s decision in Iannuzzi is careful and considered, and helpfully provides a clear and concise articulation of the standard of care and diligence to be expected of a reasonable liquidator.  The decision strikes an appropriate balance between the need to hold liquidators to a high standard of care and diligence, whilst at the same being careful not to condemn quickly a person in the difficult position of a liquidator nor to judge his or her conduct with the benefit of hindsight.

[1] In March 2017, section 536 was repealed by Schedule 2 to the Insolvency Law Reform Act 2016 (Cth) and replaced with the provisions now found at s 90-10 of Division 90, Subdivision B ‘Court powers to inquire and make orders’ of the Corporations Act 2001 (Cth).