Australian Securities and Investments Commission v Wily & Hurst

1. [1]

   The first defendant Mr Wily was registered as a liquidator (under (CTH) Corporations Act 2001, s 1282) on 24 April 1991, and as an official liquidator (under s 1283) on 28 April 1995. [1] His registration was suspended for a period of four months from 25 November 2003 pursuant to an order of the Companies Auditors and Liquidators Disciplinary Board (CALDB). From about 2004, including at all times relevant to these proceedings, he practised as an equity partner in the insolvency firm Armstrong Wily. The second defendant Mr Hurst became registered as a liquidator on 9 October 1997, and as an official liquidator on 15 December 2005. He became a salaried partner in Armstrong Wily in 2005.

2. [2]

   In October 2007, Mr Wily was appointed liquidator, in creditors voluntary windings-up, of seven companies (“the 2007 companies”), each of which had provided services to Crystal Carwash Pty Ltd. Mr Hurst was not an appointee in those administrations, though he had some limited involvement in them as Mr Wily’s employee. Subsequently, between 11 March 2009 and 31 August 2009, Mr Wily and Mr Hurst (together, “the liquidators”) were jointly appointed liquidators, in creditors voluntary windings-up, of twelve companies (“the 2009 Companies”), ten of which had been incorporated on 12 September 2007, and all of which provided services to Crystal Carwash, apparently largely in substitution for those which had formerly been provided by the 2007 companies. The liquidations of each of the 2009 Companies left significant unpaid taxation and other debts.

3. [3]

   Between 2012 and 2016, the plaintiff ASIC investigated the liquidations of the 2009 Companies. On 15 December 2016, ASIC filed an originating process seeking, first, an order for an inquiry, pursuant to Corporations Act, s 536, into the conduct of the liquidations of each of the 2009 Companies, and by way of final relief orders to the effect that each defendant:

   1. (1)

      lodge within 7 days a request pursuant to Corporations Act, s 1290(1) that his registration as a liquidator be cancelled;

   2. (2)

      be prohibited from holding the office of a liquidator, provisional liquidator, voluntary administrator, administrator of a deed of company arrangement or as a receiver or other controller of property of a corporation or doing any act that requires the person to be registered as a liquidator, for such period as the Court thinks fit; and

   3. (3)

      further or alternatively, be restrained from making an application under Corporations Act, s 1279 or otherwise, for registration as a liquidator or as a liquidator of a specified body corporate for such period as the Court thinks fit.

4. [4]

   In April 2017, Mr Wily retired as liquidator and administrator from all appointments which he then held. He has not renewed his registration, and has indicated that he does not intend to resume practice. Mr Hurst left Armstrong Wily in 2012 to found the firm Hurst Insolvency Pty Ltd – subsequently, HoskingHurst Pty Ltd – where he has since practised and continues to practice as a director, apparently without attracting any further adverse notice.

Background

1. [5]

   Crystal Carwash Pty Ltd operated car wash sites at various locations in the Sydney metropolitan area. At all relevant times, the director of Crystal Carwash (as recorded in the ASIC database) was Mr Anthony Sahade.

2. [6]

   Each of the 2007 Companies (classified by ASIC as the “Group A” companies) had provided labour hire services to Crystal Carwash. Typically, each 2007 Company was associated with a particular Crystal Carwash site. All but one had their registered office at the same address in Coogee, which (according to the ASIC database) was the home address of Anthony Sahade’s father Victor Sahade, who was the director of one of the 2007 Companies.

3. [7]

   The 2007 Companies went into liquidation, by way of creditors voluntary windings-up, in October 2007, with Mr Wily appointed as liquidator of each of them. They were all deregistered in August 2008.

4. [8]

   All but two of the 2009 Companies (the exceptions being Stone Cliff and one other), were incorporated on 12 September 2007, and each of them (other than Stone Cliff) had as its registered office the premises of Oliveri Legal Pty Ltd in Darlinghurst. Eleven of the 2009 Companies were in the business of providing labour hire to Crystal Carwash, at one or more of its carwash sites (including the same carwash sites as had previously been serviced by the 2007 Companies), and had a carwash site as its principal place of business. Stone Cliff provided administrative services to Crystal Carwash, and had its registered office and principal place of business at the Coogee address.

5. [9]

   Five of the 2009 Companies had the same named directors as five of the 2007 Companies had had at the time of their liquidation; a sixth common director, Michael Srour, had also been a director of a 2007 Company (Bondi Carwash Pty Ltd) and later a 2009 Company (Msrour), but resigned within months before their respective liquidations.

6. [10]

   Stone Cliff (the Group B company) went into liquidation, pursuant to a creditors’ voluntary winding-up, on 11 March 2009. Sjain (the Group C company) did so on 6 July 2009; five other companies (the Group D companies) on 20 August 2009; and the remaining five (the Group E companies) on 31 August 2009. The primary unsecured creditors of each of the 2009 Companies were the Australian Taxation Office (for a total, across all the companies, of about $1.15 million), and Employers Mutual (for unpaid workers compensation premiums totalling $163,000).

7. [11]

   The 2009 Companies have been deregistered, the last of them in May 2011.

8. [12]

   On 1 July 2009, ASIC’s enforcement directorate (ASIC Enforcement) commenced an investigation into Mr Wily as deed administrator of Paddington Bowling Club Limited (“the Paddington Bowling Club investigation”), which was entirely unrelated to the liquidations of the 2009 Companies. On 16 November 2010, ASIC commenced a second investigation into conduct of Mr Wily, which included suspected activities in relation to a litigation funder in Vanuatu (“the Vanuatu investigation”), which again was entirely unrelated to the liquidations of the 2009 Companies. The Vanuatu investigation was amalgamated with the Paddington Bowling Club investigation.

9. [13]

   Meanwhile, in about September 2010, ASIC learned, through reports in the media, that the Fair Work Ombudsman was investigating Crystal Carwash and its principals. Up to 27 June 2012, ASIC’s insolvency practitioners section (ASIC IP) made enquiries and searches of a preliminary nature into several liquidated entities connected with Crystal Carwash.

10. [14]

    The Paddington Bowling Club investigation was finalised in February 2013, with no action taken against Mr Wily. On 6 November 2013, ASIC IP referred its enquiries into entities associated with Crystal Carwash to ASIC Enforcement, and on 6 December 2013 ASIC Enforcement opened an investigation, under the auspices of (CTH) Australian Securities and Investments Commission Act 2001 (“ASIC Act”), s 13(3), into the liquidations of the 2009 Companies. Ms Plowman, a senior lawyer in ASIC Enforcement with the care and conduct of this matter, says that ASIC awaited the outcome of the Paddington Bowling Club/Vanuatu investigation before deciding to refer the conduct of the liquidations of the 2009 Companies to ASIC Enforcement for investigation.

11. [15]

    Over the course of its investigation into the liquidations of the 2009 Companies, some 52 notices under ASIC Act, s 33, for production of documents, were issued, and 26 interviews or examinations were conducted. Significantly, Mr Wily was examined, under ASIC Act, s 19, over three days, on 17, 19 and 28 July 2015; and Mr Hurst was examined over two days on 20 August 2014 and 30 July 2015; several other employees of Armstrong Wily were also examined. The last examination was Mr Hurst’s second, on 30 July 2015. ASIC explained, reasonably enough, that it was its general practice to conduct examinations after relevant documentary evidence had been obtained, including pursuant to s 33 notices.

12. [16]

    These proceedings were instituted on 15 December 2016.

13. [17]

    In April 2017, Mr Wily resigned from all appointments as a liquidator or administrator, and retired from practice as an insolvency practitioner. He did not apply for renewal of his registration under the Insolvency Practice Schedule (Corporations) [2] (IPS) before 24 April 2017 (being the expiry day of his registration under the previous regime). Having resigned from all his appointments, Mr Wily is no longer an external administrator of any company. Accordingly, by Corporations Act, s 1560(4), ASIC is therefore taken to have cancelled his registration as a liquidator.

14. [18]

    On 3 July 2017, Mr Wily made an open offer to undertake to the court, without admissions, to retire permanently from the insolvency profession and not to apply for registration as a liquidator in the future, upon condition that the proceedings be dismissed, with no order as to costs. That offer, which was rejected, was renewed at the hearing, subject to the same conditions.

15. [19]

    The proceedings were before the Court for directions on 9 February 2017 (when directions were made for ASIC to serve a notice of the documentary material it proposed to tender, and a list of the issues for inquiry), on 27 March 2017 (for directions in respect of ASIC’s interlocutory process to set aside a notice to produce issued on behalf of Mr Wily), on 8 May 2017 (when one paragraph of the notice to produce was set aside), and on 15 May 2017 (when directions were made for service of evidence by the defendants and any evidence in reply, and for service of submissions, and the interlocutory application for an order that an inquiry be held was fixed for hearing on 5 and 6 September 2017).

16. [20]

    The hearing of the application for an inquiry duly commenced on 5 September 2017 and concluded the following day. Although the hearing was economically confined to less than two days, the documentary material was extensive, comprising 17 heavily-laden lever arch folders, although only a selection of it was formally tendered.

17. [21]

    The responsibility for the time which has elapsed since the hearing, which – although it represents only about 15% of the ten years that has passed since the relevant events in 2009 – is too long, is mine; it has been attributable to the competing demands of other matters which, given the absence of any present risk to the public interest in the circumstances which I have related, have warranted higher priority. The time I have taken is approximately equal to the time which elapsed between ASIC opening its investigation in December 2013 and examining Mr Wily in July 2015; or the time which elapsed between the conclusion of its examinations in July 2015 and its institution of these proceedings in December 2016.

Principles and Issues

1. [22]

   Section 536 provided [3] for the Court or ASIC to inquire into a complaint with respect to the conduct of a liquidator in connection with the performance of his or her duties:

2. [23]

   Provision was made in respect of the institution of such proceedings by the (NSW) Supreme Court (Corporations) Rules 1999, as follows:

3. [24]

   It is to be noted that s 536(1) provides for an inquiry by the Court or by ASIC, although in either case orders can be made only by the Court. Where ASIC conducts an inquiry, the procedure for obtaining operative orders from the Court is initiated by a report under s 536(2) of “any matter that in [ASIC’s] opinion is a misfeasance, neglect or omission on the part of the liquidator”, which enlivens the jurisdiction of the Court to order the liquidator to make good any loss that the estate of the company has sustained, and to make such other order or orders as it thinks fit. ASIC has chosen not to invoke this procedure, but instead to make a complaint to the Court, to found an inquiry by the Court.

4. [25]

   Section 536 has been repealed, by the (CTH) Insolvency Law Reform Act 2016 (ILRA), Schedule 2, with effect from not later than 1 September 2017, [4] and is replaced by provisions of the Insolvency Practice Schedule (Corporations), in particular cl 45-1 (Court may make orders in relation to registered liquidators), and the Court’s supervisory powers in Div 90, including cls 90‑5 (Court may inquire on own initiative), 90‑10 (Court may inquire on application of creditors etc), 90‑15 (Court may make orders in relation to external administration), and 90‑20 (Application for Court order). [5] However, the transitional provision in Corporations Act, s 1617, relevantly provides that if proceedings are commenced under provisions of the Act in force before the commencement of ILRA, Sch 2, then the Act as in force before the commencement of ILRA continues to apply in relation to those proceedings, despite the amendments and repeals made by ILRA, Sch 2:

5. [26]

   As the present proceedings were commenced on 15 December 2016, before the “commencement day” (regardless of whether for relevant purposes it was March 2017 or 1 September 2017), s 536 remains applicable for the purposes of these proceedings.

6. [27]

   The Court of Appeal has described the jurisdiction under s 536 as: [6]

7. [28]

   The jurisdiction is of a supervisory and disciplinary character; it is concerned with matters which may warrant sanctions or control of a liquidator for disciplinary reasons. [7] While its origins lie in the Court’s inherent supervisory jurisdiction over its officers, including liquidators of companies, its inclusion in Part 5.6 (Winding up generally) makes clear that, whether or not the inherent jurisdiction did so, the statutory jurisdiction applied to a voluntary as well as to a compulsory winding-up; s 513 provides:

8. [29]

   The power conferred by s 536 is one in respect of a particular liquidation or liquidations, [8] as distinct from a general supervisory and disciplinary jurisdiction in respect of the liquidators’ profession. [9] While the regulatory and disciplinary nature of the Court's jurisdiction has been emphasized, [10] and the Court can “take such action as it thinks fit”, there is no express reference in it to deregistering a liquidator (whereas CALDB had that power under former s 1292(3); ASIC now has that power, on the recommendation of a committee, under IPS cls 40-55 and 40-65, and the Court now also has it under IPS cl 45-1). Although it is clear enough that the Court could under s 536 remove a liquidator from the liquidation subject to inquiry, it may be doubted that it could order his deregistration: specific provision for cancellation of a liquidator’s registration was separately made in s 1292; and it was apparently for this reason that the final relief sought by ASIC included, somewhat curiously, an order that Mr Wily and Mr Hurst apply for their own deregistration. [11]

9. [30]

   Express reference is made in s 536, however, to compensatory orders, which tends to indicate that originally the main purpose of the provision was to provide a jurisdiction by which liquidators could be summarily required to compensate the estate where their defaults caused loss to the administration, without the limitations and constraints of a common law negligence trial. However, cases such as Hall v Poolman make clear that s 536 confers a broader regulatory and disciplinary function than a merely compensatory one.

10. [31]

    In circumstances where the administrations of the 2009 Companies have been concluded, the companies have been deregistered, and Mr Wily is no longer a liquidator of any company – nor a registered liquidator at all – a question arises as to whether the section could be invoked in respect of a person who is no longer a liquidator. The fact that the company has been deregistered is not a bar to the conduct of an inquiry, though it may bear on its utility. [12]

11. [32]

    In my view, the reference to a liquidator in s 536 is to a person who was a liquidator at the time of the conduct complained of, regardless of whether he or she remains a liquidator at the time of the complaint, or the proceedings. In connection with a deceased liquidator, in BL & GY International Co Ltd v Hypec Electronics Pty Ltd, Barrett J said (emphasis added): [13]

12. [33]

    Those observations do not appear to deny that jurisdiction remained, but were directed to the question whether as a matter of discretion it should be exercised.

13. [34]

    The Court’s jurisdiction under s 536(1)(b) is enlivened by a “complaint” to the Court with respect to the conduct of a liquidator in connection with the performance of his or her duties. Although the section provides that the Court may “inquire” into the matter, proceedings under the section are conducted as adversarial proceedings, [14] so that the inquiry is not at large, but is an inquiry into the complaint, which involves determining whether the complaint is established. There are three stages in proceedings under the section: the first involves determining whether to conduct an inquiry; the second, if the court determines to do so, involves conducting the inquiry, to determine whether the complaint is established; and the third, if the court decides that the liquidator’s conduct was deficient, involves determining what (if any) action to take and order to make – that is to say, what is needed by way of regulation, supervision, discipline and correction for the due administration of the winding up in the public interest. [15]

14. [35]

    The present application involves the first of those three stages, which involves two questions: first, whether the jurisdiction is invoked, in that there is a “complaint” to the Court with respect to the conduct of a liquidator in connection with the performance of his or her duties; and secondly, whether as a matter of discretion an inquiry should be conducted. In Leslie v Hennessy, [16] the Full Federal Court said:

15. [36]

    As to the first question, it has been said that it suffices that “there be criticism expressed to the court, in any context, with respect to the conduct of a liquidator connected to performance of the liquidator’s duties”. [17] It is not necessary, in order to attract jurisdiction to order an inquiry, that the applicant demonstrate a prima facie case, in the strict sense, of failure by the liquidator to perform his or her duties or observe the statutory requirements; it suffices that there be "a sufficient basis for making an order" or "something that requires inquiry", which is something less formal than a prima facie case. [18] . Nonetheless, an inquiry is not a roving commission of inquiry at large: it is an inquiry into the subject matter of a complaint, and there must be at least a “well-based suspicion indicating a need for further investigation”, in which context the notion of “suspicion” involves a “positive feeling of actual apprehension or mistrust, as distinct from mere wondering”. [19]

16. [37]

    As to the second, a complainant is not entitled to an order for an inquiry as of right, and whether the Court conducts an inquiry into a complaint is discretionary. [20] It is for the applicant for an inquiry to persuade the Court that its discretion should be exercised to order an inquiry. That discretion is exercised having regard to the purpose of such an inquiry; namely, the regulation, supervision, discipline and correction of liquidators in the interests of honest and efficient administration of the estates of companies subject to winding-up. The section serves a public interest and is not concerned, at least directly, with the vindication of private rights. [21] Relevant considerations include the nature and gravity of the alleged misconduct; the strength of the evidence of such misconduct; any explanation offered by the liquidator; the existence of other available remedies; the extent to which the liquidation has progressed; the amount of money likely to be involved; the availability of funds to pay for any inquiry; the likely benefit from the inquiry; the applicant’s legitimate interest in the outcome; and whether there has been delay in making the application. [22] That is not a complete or closed list of the factors that may be taken into account by the Court. [23]

17. [38]

    Thus, although to obtain an order for an inquiry a complainant does not necessarily have to establish a prima facie case in the strict sense, and the relevant considerations are broader, the “first stage” nonetheless serves functions somewhat similar to a preliminary hearing or a committal hearing, in deciding whether there is sufficient cause to conduct an inquiry into the complaint.

18. [39]

    Schedule D to the Originating Process is a document, entitled “Plaintiffs Contentions”, which comprises the “complaint”. [24] It is as follows:

19. [40]

    In those Contentions, paras [1], [2], [3] and [5] comprise allegations of what the liquidators are said to have known – or ought to have known – which provides the context for the allegations of misconduct contained in paras [4], [6] and [7]. As framed in the Contentions, the substantive allegations of misconduct are that, in the course of the winding up of the 2009 Companies, each of Mr Wily and Mr Hurst, in their capacities as Joint and Several liquidators of those Companies:

    1. (1)

       accepted and maintained the appointment as Joint and Several Liquidators of the 2009 Companies where there was, or there was likely to be perceived to be, a conflict of interest in circumstances where Mr Wily had conducted the liquidations of the 2007 Companies, each of Mr Wily and Mr Hurst were conducting the liquidations of each of the other 2009 Companies, and no potential conflict of interest was disclosed to creditors;

    2. (2)

       contrary to section 533, failed to lodge a report notifying ASIC:

    3. (3)

       failed to perform their duties and functions adequately, properly and faithfully, in that with respect to one or more of the 2009 Companies, each of Mr Wily and Mr Hurst failed to ensure that various other functions were performed, in particular to obtain books and records; to investigate, identify and take steps to recover potential recoveries; to report adequately to creditors; and to notify and conduct creditors meetings properly.

20. [41]

    It is convenient to address the issues that arise as follows:

    1. (1)

       whether there is a well-based suspicion – amounting to a positive feeling of actual apprehension or mistrust, as distinct from mere wondering – indicating a need for further investigation, [25] that, in connection with the liquidations of the 2009 Companies, Mr Wily and Mr Hurst did not act to the standard expected of reasonably competent liquidators with respect to:

    2. (2)

       whether as a matter of discretion there should be an inquiry into those matters.

Conflict and Disclosure – s 506A

1. [42]

   ASIC alleges that, by reason of what they should have appreciated to be the potential for “conflicts”, the liquidators should not have accepted, or maintained, their appointments to the 2009 Companies, at the least without disclosing the potential for conflicts in their Declarations of Independence, Relevant Relationships, Indemnities and Remuneration Methods (DIRRIs). ASIC’s concerns in respect of “conflicts and disclosure” involve four propositions, namely that:

   1. (1)

      each of Mr Wily and Mr Hurst knew, or ought to have known, the nature of the business conducted by each of the 2009 Companies (that is, providing labour hire or, in the case of Stone Cliff, administrative or other services, to Crystal Carwash), the identity of their directors as recorded in the official records, and their place of operations (that is, at one or more of the Crystal Carwash sites, or in the case of Stone Cliff at the Coogee address);

   2. (2)

      those matters – which appear from their company extracts, and in Veda Reports showing that directors of certain of the 2009 Companies had also been directors of certain of the 2007 Companies, which were on the Liquidation Files – would or should have alerted each of Mr Wily and Mr Hurst to “commonalities” shared across each of the 2009 Companies, and between the 2009 Companies and the 2007 Companies (in respect of the nature of their businesses, their directors, their association with Crystal Carwash, and their association with the Coogee address);

   3. (3)

      the commonalities across the 2009 Companies, and between the 2009 and 2007 Companies, indicated the potential for conflicts which ought to have been, but were not, disclosed to creditors of the 2009 Companies; and

   4. (4)

      the propriety of accepting and maintaining the appointments in 2009 is further brought into doubt by the evidence of Mr Hurst, in these proceedings, that it was Mr Wily who introduced the 2009 Companies to Armstrong Wily; that, at the time of the liquidations, Mr Hurst was not aware of the identity of the referrer; and that he subsequently, after the liquidations, became aware of the identity of the referrer, [26] who was common to all the 2009 Companies (although Mr Hurst does not reveal his or her identity). ASIC says that during its investigation it was unaware of these matters.

2. [43]

   ASIC’s first two propositions are at least sufficiently arguable and for present purposes may be accepted. However, the nub of the allegation is in the third: ASIC is concerned that the “commonalities” indicated a “potential for conflicts”, which ought to have been disclosed. Importantly, ASIC does not allege that there was any actual conflict, and does not elaborate what was the “potential for conflicts”. The fact that a group of companies that go into liquidation more or less simultaneously have common features – such as an association with a common address – is not only unremarkable, but does not point to any conflict between the liquidator’s duty as liquidator and his or her personal interest, or duty to anyone else. Nor does the fact that a group of companies that goes into liquidation have commonalities of the kind to which ASIC refers with another group which has earlier gone into liquidation bespeak any such conflict. ASIC does not point to how the liquidators’ interest might have been at odds with their duty. Nor does it point to any duty they might have owed to anyone else, inconsistent with their duty as liquidators. It is not apparent how being the liquidator of one of the 2009 Companies involved a conflict with being the liquidator of others of those companies. Nor is it apparent how being liquidator of a 2009 Company involved any conflict with having previously been liquidator of the 2007 Companies. Essentially, the allegation involves an amorphous reference to the potential for conflicts, with no specificity of how there might have been one.

3. [44]

   This is not altered by the fourth proposition. Again, it is unremarkable that there would be a common referrer of a group of companies that go into liquidation more or less simultaneously. If the suggestion is that the liquidator is somehow beholden to the referrer, the fact of a common referrer no more bespeaks a conflict than that of multiple referrers. In any event, ASIC has not alleged that there was an actual conflict between the liquidators’ duty as such, and any duty they might have owed to the referrer. Insofar as ASIC relies on Mr Hurst not having identified who the common referrer was, it did not seek to cross-examine him on his affidavit (and presumably had not asked him relevant questions at its s 19 examinations). Given the extensive investigation which ASIC has conducted, including examinations of both Mr Wily and Mr Hurst, it is extraordinary that ASIC is unable to allege who was the common referrer of the 2009 Companies to Armstrong Wily. When asked what might be found out on an inquiry that was not already known to ASIC, Mr Lo Surdo SC responded:

4. [45]

   When I expressed some incredulity that ASIC was not able to allege who the common referrer was, counsel responded (emphasis added):

5. [46]

   In deciding whether there is enough to warrant an inquiry, it may often be allowed that further evidence may emerge. Nonetheless, ASIC’s current inability to make that allegation – in the light of its investigation and the powers at its disposal – is telling. In those circumstances, at the highest, the Court is left “merely wondering”, as distinct from entertaining a “positive feeling of actual apprehension”.

6. [47]

   Even if there was a potential for conflict between the liquidators’ duty as such and their interest, or their duty to someone else, that would not preclude the liquidators from accepting appointment and acting. The circumstances in which a liquidator must not accept an appointment are specified in Corporations Act, s 532, which at the time relevantly provided:

7. [48]

   There does not appear to be any relevant basis on which Mr Wily, let alone Mr Hurst, was disqualified under s 532, in respect of any of the 2009 Companies; ASIC was invited to state any such basis, and did not.

8. [49]

   ASIC rightly submits that liquidators must be and appear to be independent and impartial. However, ASIC has not alleged that the liquidators were other than independent and impartial; only that they should have recognised a potential for conflicts, and on that account declined to act. But a mere potential for conflicts to arise – even if there was one – did not require them to decline to act.

9. [50]

   Accordingly, I do not accept that the “commonalities” across the 2009 Companies, and between the 2009 and 2007 Companies, of which ASIC contends that the liquidators should have been aware, indicated the potential for relevant conflicts between the liquidators’ duty as such, and their interest or their duty to others. In any event, a potential for conflicts, as distinct from actual conflicts, did not preclude the liquidators from acting, and no actual conflict has been identified. Neither Mr Wily nor Mr Hurst was disqualified from acting as liquidator of the 2009 Companies.

10. [51]

    As the argument developed, ASIC’s principal contention was, or became, that there was no disclosure in the relevant DIRRIs made by the liquidators in respect of the liquidations of the 2009 Companies, of a prior association or potential conflict. In the context of a creditors’ voluntary winding up, the requirement for a DIRRI is imposed by s 506A, which relevantly provides as follows:

11. [52]

    ASIC’s contentions do not in terms allege, let alone particularise, any contravention of s 506A. However, ASIC submits that, at the very least, Mr Wily and Mr Hurst ought to have, but did not, identify and disclose, in their DIRRIs, any potential conflict of interest or prior association with the five directors who were common to both the 2007 and 2009 Companies, nor explain why such previous associations would not have affected their independence (assuming they had determined that it would not); and that they ought to have made further inquiries and considered the propriety of the appointments in circumstances where the apparent conflicts were obvious.

12. [53]

    For reasons already explained, I do not accept that, from the circumstances relied on by ASIC, even potential conflicts were “obvious”. Moreover, the content of a DIRRI is prescribed by Corporations Act, s 60, which in 2009 relevantly provided as follows:

13. [54]

    The only possibly relevant category of relationship is one between the liquidators or their firm and “(v) an associate of the company”. The keystone of ASIC’s argument was that being a liquidator of a 2007 Company involved a relevant relationship with a named director of that company. ASIC advanced as an instance the case of the 2009 Company Vbrkic, of which Mr Victor Brkic was the named director, which went into liquidation on 20 August 2009. Mr Brkic had also been a director of Mosman Car Wash Pty Ltd, one of the 2007 Companies, when it went into liquidation on 18 October 2007 – a couple of months within the 24-month period referred to in s 60(2). ASIC contends that by reason of being liquidator of Mosman Car Wash, Mr Wily had a “relationship” within the meaning of s 60(2) with Mr Brkic; and that he and Mr Hurst should upon or shortly after being appointed to Vbrkic have known that to be so, and disclosed it.

14. [55]

    ASIC’s fundamental contention relies merely on Mr Brkic’s status as a named director of Mosman Car Wash; ASIC does not assert that Mr Brkic was a client of Armstrong Wily, or the referrer to that firm of the liquidation of Mosman Car Wash. The absence of any such contention is telling: although ASIC, with its ample investigatory powers, has conducted an extensive investigation, including compulsory examinations, it is unable to point to any more substantial relationship than that Mr Brkic had been a director of Mosman Car Wash when Mr Wily was appointed its liquidator.

15. [56]

    I do not accept that the mere fact that a person is a director of a company which goes into liquidation means that the liquidator has a relevant relationship with that person. In the context of s 60 and s 506A, “relationship” is not defined, but given the purpose of the provision, it refers to a relationship which creditors might think could potentially affect the impartiality of the liquidator. In my view, creditors of a company going into liquidation would not think that the liquidator’s impartiality might potentially be affected merely by his or her having previously been the liquidator of another company whose director was also the director of the current company.

16. [57]

    Vbrkic was advanced as the paradigm case; the same applies in respect of the other 2009 Companies which had a common director with a 2007 Company. Accordingly, in my view, the liquidators were not required to disclose in their DIRRIs, in relation to those 2009 Companies which had a director who had also been a director of a 2007 Company, that Mr Wily had previously been liquidator of a company of which that director had been a director. Again, it is important to observe that, despite the various references contained in ASIC’s evidence and submissions to the roles of Mr Anthony Sahade and Mr Victor Sahade, ASIC does not at this stage allege that there was a relationship with either of them that would have engaged s 60(2).

17. [58]

    I am therefore not satisfied that there is a “well-based suspicion indicating a need for further investigation”, in the relevant sense, that, in connection with the liquidations of the 2009 Companies, Mr Wily and Mr Hurst did not act to the standard expected of reasonably competent liquidators with respect to conflicts and disclosure, by accepting and/or maintaining their appointments to the 2009 Companies, or by not disclosing in their DIRRIs that they had been appointed to the other 2009 Companies or that Mr Wily had previously been appointed to the 2007 Companies. Moreover if, contrary to the view I have expressed, the relationship of liquidator and director is a relevant relationship, nonetheless the nature of that relationship, the arguability of the proposition that it was not a relevant relationship, and the circumstance that it was at the margin of the 24-month period, are factors which would bear on whether as a matter of discretion an inquiry is warranted.

Failure to report – s 533

1. [59]

   ASIC alleges that, contrary to s 533, the liquidators failed to lodge a report notifying ASIC that:

   1. (1)

      each of Victor Sahade and Anthony Sahade was a person who had taken part in the formation, promotion, administration, management or winding up of each of the 2009 Companies and as such may be shadow directors of the 2009 Companies; and

   2. (2)

      Victor Sahade or Anthony Sahade or the persons recorded as directors may have engaged in the illegal phoenixing of the 2009 Companies and, thereby, may have been guilty of negligence, default or breach of duty in relation to one or more of the 2009 Companies.

2. [60]

   The relevant reporting obligations under Corporations Act, s 533, are as follows:

3. [61]

   The defendants lodged s 533 reports in respect of each of the 2009 Companies, in the case of the Group D and Group E companies on 14 December 2010. Each report was in substantially similar terms, signed by Mr Hurst, and included:

4. [62]

   Notwithstanding the reports of possible misconduct – in respect of failing to keep adequate financial records, and insolvent trading – ASIC replied on 16 December 2010 that it had “decided not to commence an investigation at this time”, but that the report may be used should it be decided to take action under s 206F. However, ASIC now expresses “concerns” that none of the s 533 Reports issued by the defendants in relation to the 2009 Companies adverted to any suspected shadow directors, or potential breaches of duty related to unlawful phoenixing.

5. [63]

   ASIC sought to emphasise the importance of s 533 reporting by reference to its interaction with s 206F (ASIC’s power of disqualification), which relevantly provides:

6. [64]

   However, s 206F is triggered simply by the making of a report under s 533, regardless of its content, [27] and as has been mentioned, such reports were made by the liquidators in the case of each of the 2009 Companies.

7. [65]

   ASIC contends that, although each of the 2009 Companies are recorded in its database as having had different directors, there are matters which suggest that Anthony and Victor Sahade operated the 2009 Companies, and Crystal Carwash, as a group, and exerted a degree of control over their operations, and of the decision that they be placed into liquidation. Essentially, the matters relied on for those contentions are the circumstances that the Coogee address, which was Victor Sahade’s home (and which had been the registered office of the 2007 Companies), featured in some of the corporate documentation, and was the address to which all notices to employees were sent; and that Victor Sahade was a co-signatory with the named director on the bank account of four of the 2009 Companies.

8. [66]

   ASIC’s concerns in respect of “shadow directorships” involve the propositions that:

   1. (1)

      Crystal Carwash and the 2009 Companies were being conducted as a single group. Basic inquiries ought to have revealed the role that Victor Sahade, in particular, played regarding the accounts and finances of each of the companies, including being a joint signatory (with the nominal director [28] ) on several bank accounts: at least one letter from St George Bank, contained in the liquidation files, shows that Victor Sahade was a joint signatory on two companies' bank accounts.

   2. (2)

      Even assuming that the liquidators were unaware of those matters, they ought to have been aware of the “commonalities” between the 2009 Companies (in respect of their dates of incorporation; the style in which each was named, using the nominal director's first initial and last name; their businesses, in that each provided labour hire services to Crystal Carwash; and the coincidence of the timing of their referral for liquidation).

   3. (3)

      Those “commonalities” suggest a greater level of co-ordination in the companies' affairs than can reasonably be explained by their separate directors making independent decisions in the best interests of each company.

   4. (4)

      The liquidations of ten of the 2009 Companies (being the Group D and E Companies) were conducted as if they comprised a group; in particular, Armstrong Wily conducted preliminary company searches, signed the consents to act and conducted the first meetings of creditors in respect of each company in batches and on the same days as the other companies, and the s 533 reports for all ten Group D and E Companies were lodged on the same day and in substantially similar terms.

   5. (5)

      In addition, there are documents on the liquidation files recording links between all of the 2009 Companies and the Coogee address, including copies of correspondence addressed to the relevant company at that address, and print outs from MYOB showing that address as the company’s address – from which it may be inferred that those documents had, at some stage, been at the Coogee address and that electronic and other files were maintained at those premises. Yet it is not apparent from the files how those documents came to be in the liquidators’ possession, who provided them to the liquidators, or what further inquiries were made to obtain documents from the Coogee address.

   6. (6)

      The significance of the Coogee address must have been apparent to Armstrong Wily in circumstances where over 320 employee notices for ten of the 2009 Companies were sent to that address, although it does not appear on the relevant company search, nor in any correspondence from employees asking that their initial notices be sent to that address. It may be inferred that someone at the Coogee address had offered to co-ordinate the responses for the employees, which indicates that someone at Armstrong Wily was aware that there was a person at the Coogee address who had the relevant company records and could co-ordinate the responses across the relevant companies.

   7. (7)

      These matters ought to have sufficed to put each of Mr Wily and Mr Hurst on notice of the possibility that the companies were operating as a group, and being managed by a common guiding mind or will; but this potential was never reported to ASIC.

9. [67]

   Again, the proposition that the liquidators were, or should have been, aware that there were connections between the 2009 Companies can, at least for present purposes, be accepted. However, it is a large step to conclude, from the knowledge or belief that there were connections between them, that they were “being managed by a common guiding mind or will”. Indeed, ASIC alleges only that they should have placed each of Mr Wily and Mr Hurst “on notice” of the possibility that the companies were operating as a group and were being managed by a common guiding mind or will.

10. [68]

    The reporting obligations of liquidators prescribed by s 533 have been set out above. The section does not require a liquidator to report that a company is operating as a group (and/or is being managed by “a common guiding mind or will” as another company), let alone a mere possibility that that is so. They were not matters which the liquidators were required by s 533 to report.

11. [69]

    Nor does the section impose any obligation to report that there may have been shadow directors. It is true that the online form of s 533 report, of which use was made by the liquidators, includes the question “In your opinion are there shadow directors?”, to which the liquidators responded: “No”. That question is not one which s 533 obliged the liquidators to answer. Moreover, the question does not ask whether the liquidator considers that there may be shadow directors, but whether (in the liquidator’s opinion) there are shadow directors.

12. [70]

    The reference to “shadow directors” – which is not a defined term – is presumably to the expanded definition of “officer” in Corporations Act, s 9, which refers to:

13. [71]

    Assuming that the liquidators were, or should have been, aware that there were connections between the 2009 Companies, it is again a large step to conclude from that that persons other than their nominal directors made, or participated in making, decisions that affect the whole, or a substantial part, of their businesses, or had the capacity to affect significantly their financial standing, or that the nominal directors were accustomed to act in accordance with the instructions or wishes of Mr Victor Sahade or Mr Anthony Sahade. The allegation that a person is a shadow director is not easily established, and is not to be inferred merely from the existence of a relationship between companies, or co-ordinated activity between them.

14. [72]

    If it were alleged that the liquidators, having formed the opinion that there were shadow directors, had answered the question falsely, there might well be something for inquiry. However, where there is no statutory obligation to report whether there may be shadow directors, and no assertion that the liquidators had formed the opinion that there were, I am not satisfied that there is a “well-based suspicion indicating a need for further investigation”, in the relevant sense, that, in connection with the liquidations of the 2009 Companies, Mr Wily and Mr Hurst did not act to the standard expected of reasonably competent liquidators in not reporting the possibility that Anthony and Victor Sahade may have been shadow directors. If I am wrong in that, nonetheless the circumstance that it is not a reportable matter under s 533, and the absence of an allegation that the liquidators had or should have formed the opinion that they were shadow directors, would be relevant to whether as a matter of discretion an inquiry should be ordered.

15. [73]

    ASIC contends that after the liquidation of the 2009 Companies, their businesses appear to have been carried on by other companies which were incorporated in 2009 and 2010, and that this may have involved “illegal phoenixing” whereby Mr Victor Sahade or Mr Anthony Sahade (or the nominal directors) may have been guilty of negligence, default or breach of duty in relation to one or more of the 2009 Companies.

16. [74]

    ASIC’s concerns in respect of potential breaches of involves propositions that:

    1. (1)

       Each of Mr Wily and Mr Hurst knew or ought to have known of matters which ought to have alerted them to the potential that the relevant directors were breaching their duties to each of the 2009 Companies by engaging in unlawful phoenixing.

    2. (2)

       In particular, basic inquiries ought to have been made as to whether the business of each of the 2009 Companies was continuing through a different corporate vehicle (which, apart from Stone Cliff, would have been answered in the affirmative). The existence of significant outstanding statutory creditors in the 2009 Companies ought to have suggested this phoenixing was in breach of the directors' duties to the company.

    3. (3)

       The precedent of the 2007 Companies (namely, their liquidation and continuity of the businesses through the 2009 Companies) provides important context for why such inquiries ought to have been made, assuming the defendants were otherwise ignorant of that conduct. In particular, where there were common directorships between a 2007 Company and a 2009 Company, and in circumstances where the company was conducting the same business, the potential for repeated phoenixing ought to have been apparent and reported.

17. [75]

    Although ASIC contends that the businesses of the 2009 Companies (other than Stone Cliff) were, after their liquidation, carried on by other companies incorporated in 2009 and 2010, ASIC does not suggest that the defendants were aware of or had any involvement in those later companies' operations or their subsequent liquidations. Absent any suggestion that the defendants were aware of this, it is not readily apparent how it could inform an assessment of their conduct, let alone how they can be culpable for a failure to report it. Nonetheless, ASIC suggests that, particularly in the context of the history of the 2007 Companies, the defendants ought to have discovered and reported it, by making inquiries as to whether the business of each of the 2009 Companies was being continued through a different corporate vehicle.

18. [76]

    Although ASIC’s contentions and submissions referred repeatedly to “illegal phoenixing”, ASIC does not contend that the liquidators failed to report that a past or present officer or employee, or a member or contributory, of the company may have been guilty of an offence under a law of the Commonwealth or a State or Territory in relation to the company, for the purposes of s 533(1)(a). The allegation was of failure to report that persons who had taken part in the formation, promotion, administration, management or winding up of the company may have been guilty of any negligence, default, or breach of duty in relation to the company, for the purposes of s 533(1)(b)(ii).

19. [77]

    Moreover, attention was not directed to what is intended to be encompassed by the term “illegal phoenixing”. 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”. There is no allegation or indication that assets, tangible or intangible, of the 2007 Companies had somehow been transferred to the 2009 Companies, or those of the 2009 Companies to their supposed successors. These were labour hire companies, which provided a service to a specific customer at a specific site. They did not have marketable goodwill or fixed assets; their only asset was a claim against the person to whom they provided the service. Inherently, they had no assets capable of transfer to a new company by way of “phoenixing”. In those circumstances, one would not be predisposed to be alert for the possibility of “phoenixing”.

20. [78]

    Mr Lo Surdo SC submitted that the Companies should have had assets, in order to meet their taxation and insurance liabilities. That does not bespeak “phoenixing”, although if those liabilities were incurred when the Companies did not have the means or resources to meet them, that might well amount to insolvent trading – which the liquidators reported in their s 533 reports.

21. [79]

    Ultimately, Mr Lo Surdo SC submitted that the reportable breach of directors’ duty was “placing the companies into liquidation for a purpose, to avoid the payment of creditors”. However, liquidation is not a means of avoiding the payment of creditors; rather, it is a means of paying creditors, to the extent that the assets permit. If, as appears to be the case, the 2009 Companies were insolvent, then it could hardly be a breach of duty to cause them to be placed in liquidation. If there was a breach of directors’ duty, it was in allowing the companies to incur liabilities – including taxation liabilities – when they would not have the ability to pay them when they fell due; or – potentially – in denuding them of assets leaving them unable to pay their liabilities. The liquidators reported the possibility of insolvent trading, and ASIC did not at the time consider that any further action was warranted.

22. [80]

    In circumstances where it is not suggested that the liquidators knew that new companies incorporated in 2009 and 2010 provided the services which had formerly been provided by the 2009 Companies before their liquidation; where the nature of the business of the 2009 Companies was such as did not lend itself to the transfer of their assets to a “phoenix” company; and where the real vice was in allowing the 2009 Companies to incur liabilities, including taxation liabilities, without the ability to pay them, and the liquidators reported in their s 533 reports that there was potentially insolvent trading in respect of each of the 2009 Companies; I am not satisfied that there is a “well-based suspicion indicating a need for further investigation”, in the relevant sense, that, in connection with the liquidations of the 2009 Companies, Mr Wily and Mr Hurst did not act to the standard expected of reasonably competent liquidators in failing to report, contrary to s 533, that persons involved in the formation, promotion, administration, management or winding up of the 2009 Companies may have engaged in illegal phoenixing and, thereby, may have been guilty of negligence, default or breach of duty in relation to one or more of the 2009 Companies. Once again, if I am wrong in that conclusion, nonetheless the circumstances to which I have referred would be relevant to whether as a matter of discretion an inquiry should be ordered.

Other matters

1. [81]

   ASIC also raised concerns that each of Mr Wily and Mr Hurst failed to ensure:

   1. (1)

      that they collected books and records of each of the companies;

   2. (2)

      that they carried out an adequate and proper investigation into the affairs of each of the companies;

   3. (3)

      that potential claims were identified, investigated and reported to creditors, in particular:

   4. (4)

      that adequate and proper reporting was made to creditors; and

   5. (5)

      that adequate and proper procedures were followed for the notification and conduct of creditor meetings, in particular:

2. [82]

   Insofar as these matters involve contentions that the liquidators should have undertaken more extensive inquiries, it is relevant that Corporations Act, s 545, provides:

3. [83]

   While there may be room for debate as to whether this provision applies only to out-of-pocket expenses and not to the liquidator’s own time, authority favours the view that what a liquidator is expected to do must be affected where there are no available assets. In Clasquin SA v AAR International Pty Ltd, [29] Cohen J said, of a materially identical predecessor provision: [30]

4. [84]

   In Re Biposo Pty Ltd, [31] Young J (as he then was) said:

5. [85]

   In Jenkins v Jonkay Pty Ltd, [32] Finkelstein J said:

6. [86]

   And in Warner, Re GTL Tradeup Pty Ltd (in liq), [33] Farrell J said (emphasis added):

7. [87]

   While Black J in In the matter of ACN 151 726 224 Pty Ltd (in liq) [34] expressed some doubt as to whether in s 545 “expenses” included remuneration, his Honour nonetheless acknowledged that there was force in the submission that, even if s 545 of the Corporations Act does not apply to a liquidator’s time costs, as distinct from expenses payable to third parties, the principle it reflects should inform an understanding of the liquidator’s role.

8. [88]

   There were no available assets in any of the administrations of the 2009 Companies. Further, although ASIC emphasised that there did not appear to have been any attempt to obtain documents from where they likely resided, at the Coogee address, it is evident (from the Stone Cliff liquidation file, as Mr Pike’s submissions demonstrated) that work was done and steps – including inquiries of Stone Cliff’s bookkeeper – were taken to obtain financial information. In addition, letters requiring delivery up of books and records were sent to the registered office of each of the 2009 Companies at Oliveri Legal; letters were sent to each of the named directors of each of the 2009 Companies asking for the financial records; and at least some MYOB printouts were on the liquidation files, which seem likely to have been obtained from a disc, which appears no longer to be available.

9. [89]

   The erroneous preliminary admission of two proofs, for the purposes only of voting at a creditors meeting, could hardly warrant an inquiry. By reason of the absence of any, let alone sufficient, property in the liquidations, and the work that was in fact done, I am not satisfied that there is a “well-based suspicion indicating a need for further investigation”, in the relevant sense, that, in connection with the liquidations of the 2009 Companies, Mr Wily and Mr Hurst did not act to the standard expected of reasonably competent liquidators in failing these respects.

10. [90]

    Moreover, as ASIC acknowledges, the nature of these other allegations is not such as of themselves to warrant an inquiry. As Mr Lo Surdo SC put it:

Discretionary factors

1. [91]

   Some of the discretionary factors are of general application, while others, which will be considered subsequently, relate specifically to one or other of Mr Wily or Mr Hurst.

2. [92]

   The discretionary factors are to be considered in the light of what would be involved in an inquiry. ASIC proposes to call at least 13 witnesses in the inquiry, which – it appears uncontroversial – would require not less than a week of court time.

3. [93]

   I have concluded, above, that, I am not satisfied that there is a well-based suspicion indicating a need for further investigation, in the relevant sense, that, in connection with the liquidations of the 2009 Companies, Mr Wily and Mr Hurst did not act to the standard expected of reasonably competent liquidators with respect to conflicts and disclosure; in not reporting pursuant to s 533 the possibility that there might be shadow directors; in not reporting pursuant to s 533 the possibility that persons involved in the promotion, formation or management of the 2009 Companies might have engaged in “unlawful phoenixing”; and in respect of the “other matters” alleged by ASIC.

4. [94]

   Moreover, as has been foreshadowed above, if I am incorrect in concluding there is not sufficient suspicion that Mr Wily and Mr Hurst did not act to the standard expected of reasonably competent liquidators, the following considerations are relevant to whether, as a matter of discretion, an inquiry should be ordered:

   1. (1)

      Even if, contrary to the view I have expressed, the relationship of liquidator and director is a relevant relationship which ought to have been disclosed, the nature of that relationship, the arguability of the proposition that it was not a relevant relationship, and the circumstance that it was at the margin of the 24-month period, are factors which mitigate the gravity of any such omission.

   2. (2)

      Even if the possibility that there were shadow directors ought to have been reported, the circumstance that it is not a reportable matter under s 533, and the absence of an allegation that the liquidators had or should have affirmatively formed the opinion that there were shadow directors, mitigate the gravity of any such failure.

   3. (3)

      Even if the possibility of illegal phoenixing ought to have been reported, the circumstances that it is not suggested that the liquidators knew that the new companies incorporated in 2009 and 2010 provided the services which had formerly been provided by the 2009 Companies before their liquidation; that the nature of the business of the 2009 Companies was such as did not lend itself to the transfer of their assets to a “phoenix” company; and that the real vice was in allowing the 2009 Companies to incur liabilities, including taxation liabilities, without the ability to pay them, and the liquidators reported in their s 533 reports that there was possibly insolvent trading in respect of each of the 2009 Companies, mitigate the gravity of any such failure.

   4. (4)

      As set out above, ASIC acknowledges that the other allegations it raises would not of themselves warrant an inquiry.

5. [95]

   It is important to recognise that, while what is now known may suggest that over several iterations, labour hire companies connected to Crystal Carwash failed to meet their taxation obligations and were put into liquidation, ASIC has not advanced any case that the liquidators were party to some scheme of this kind to evade taxation liabilities. ASIC did not contend that the referrer, whoever it was, having wound up the 2007 Companies, returned to Mr Wily in 2009 and gave instructions that he wanted to do the same thing again, so that the ATO would get nothing. Rather, ASIC’s allegations are essentially of omissions – to make disclosures, to make reports, or to make inquiries – in the context of asset-less administrations, in which there were not available resources to fund substantial inquiries, and those which are propounded as the more serious ones (relating to conflicts and disclosure, and failures to report) are framed in terms of “potential” for conflicts, and the “possibility” of shadow directors and unlawful phoenixing. Although there may be a sotto voce theme in ASIC’s submissions that there may be more to these liquidations than meets the eye, which may emerge on an inquiry, that rises no higher than mere wondering or speculation. Given ASIC’s ample investigatory powers, the protracted and apparently extensive investigation that it has conducted, including compulsory examinations of Mr Wily, Mr Hurst and others, the limited nature of the allegations is striking, and there is no reason to have any degree of satisfaction that more is likely to emerge.

6. [96]

   Accordingly, in my view, the allegations are not of a strength or nature as would justify an inquiry.

7. [97]

   The 2009 Companies went into liquidation between March and August 2009, and had been deregistered by May 2011. Although ASIC was alerted to concerns about the liquidations in 2010, it did not commence inquiries until mid-2012, and an investigation was opened only in December 2013. It was mid-December 2016 before these proceedings were instituted.

8. [98]

   The chronology of ASIC’s investigation has been set out above. [35] Notably:

   1. (1)

      it was almost two years from when ASIC became aware through media reporting, in about September 2010, that the Fair Work Ombudsman was investigating Crystal Carwash and its principals, until it first made any enquiries about the 2009 Companies in June 2012;

   2. (2)

      it was a further 18 months before ASIC opened an investigation into the liquidations of the 2009 Companies;

   3. (3)

      it was still a further 18 months before ASIC conducted examinations of the defendants; and

   4. (4)

      it was yet a further 18 months until the proceedings were commenced on 15 December 2016.

9. [99]

   There is some evidence that this passage of time is associated with the degradation of relevant records, and of the memory of the defendants in relation to relevant events. Mr Wily’s solicitor, Ms Banton, asserts that his recollection of events has faded, and his written records degraded; while Mr Hurst observes that it appears that a number of documents – relevantly, staff work papers and file notes regarding investigations, which could potentially have substantiated his satisfaction with the investigations carried out by staff at the time that he signed the s 533 reports – are missing from the liquidation files, that his independent recollection of events is limited, and that insofar as his involvement in the liquidations of the 2007 Companies is relied on as providing relevant context, his ability to defend the allegations is affected because the files in relation to the 2007 Companies have been destroyed.

10. [100]

    ASIC submitted that the liquidators ought not be allowed to rely on their own defaults to resist an inquiry into their conduct. It was submitted that they were the architects of the delay they now say compromises their defences, in that “[i]t goes without saying that prompt and comprehensive reporting of potential contraventions to ASIC would have engaged ASIC's attention just as the converse is true”. This may be doubted: first, prompt reporting of insolvent trading produced only a response to the effect that no action would be taken by ASIC; and secondly, even if it produced a response, it would not have been an investigation into the conduct of the liquidations, but into the matters reported. There is greater force in ASIC’s argument that the liquidators should not be able to complain of the loss or degradation of their records, in circumstances where they were obliged to maintain them, yet Mr Wily appears to have destroyed the 2007 files prematurely.

11. [101]

    Notwithstanding that there is some evidence of prejudice by way of loss of records and deterioration of memory arising from the delay, I do not regard this as of much significance. However, this is not an application by a defendant to stay or dismiss proceedings on the grounds of prejudice occasioned by delay. In this case, ASIC bears the onus of persuading the Court to exercise its discretion to order an inquiry, notwithstanding its delay.

12. [102]

    ASIC sought to explain the time taken by reference to two matters. One was the requirement to procure production of documents from third parties, in circumstances where the liquidation files were incomplete. While this may provide an explanation for a little of the delay, it is an insufficient explanation for most of it. The principal explanation advanced was that priority had been given to a pre-existing and advanced investigation into the conduct of Mr Wily, and it was said that, in the context of marshalling finite resources, this was a reasonable approach for the regulator to adopt.

13. [103]

    I do not agree that it was reasonable for ASIC to defer commencing the subject investigation until its other investigations concerning Mr Wily had terminated, with no adverse action. Ordinarily, one would expect an investigation into a liquidator to deal with all concerns that might impinge on his or her fitness. That is what ASIC did with the Vanuatu investigation, which it combined with the otherwise unrelated Paddington Bowling Club investigation. While Ms Plowman expressed the view that it was in the best interest in the investigation of all relevant matters to defer the Crystal Carwash investigation, it is just not logically apparent why or how that would or could be so. It would increase the prospects of revealing any troubling systemic issues, and strengthen any case against the liquidator, to investigate all suspicions concurrently. Indeed, there is a significant element of vexation in deferring one investigation – in effect, holding it in reserve – until the others had come to nothing.

14. [104]

    Moreover, Mr Wily continued to practice until his retirement in 2017, and Mr Hurst still does, apparently without further complaint. [36] In those circumstances, the prospects of establishing present unfitness by conduct which occurred in 2009 are much diminished. As McHugh JA (as he then was) observed in Herron v McGregor: [37]

15. [105]

    In my view that consideration, coupled with the element of vexation in pursuing Mr Wily in respect of this matter only once the other investigations had come to nothing, weigh against ordering an inquiry, notwithstanding that I give little significance to prejudice by way of loss of records and deterioration of memory arising from the delay.

16. [106]

    Under the rubric of this heading I consider overlapping factors which include those that have been described in the authorities as including the stage that the liquidation has reached, the utility of an inquiry, and the legitimate interest of the applicant, all of which go to informing whether an inquiry will beneficially advance the purpose for which the power to inquire is conferred. Those factors are to be seen in the context of the nature and strength of the complaints, the delay to which I have referred, the circumstance that Mr Wily has retired, and the circumstances of Mr Hurst’s practice since 2012.

17. [107]

    As the regulator of the liquidators’ profession – and in that capacity, the representative of the public interest – ASIC has a legitimate interest in upholding the standards of the profession, and scrutinising misconduct. So much can be accepted.

18. [108]

    ASIC submitted that there was a particular interest in examining the matters the subject of inquiry; that unlawful phoenixing was costly to other businesses and the Australian economy generally, and destructive of confidence in the efficient operation of the market economy; that the public ought to be protected from those people who, through controlling corporate vehicles, cause loss or repeated losses to others; that ASIC's disqualification powers are only effective if those people are identified either as directors or potential directors and their potential breaches reported; and thus that there was a public interest in ensuring that liquidators fulfil their reporting obligations in respect of potential misconduct. This submission is somewhat redolent of ASIC’s suspicion that there may be more to these administrations than meets the eye – and more than it is currently prepared to allege despite its extensive and protracted investigation. As currently framed, ASIC’s concerns do not include that the liquidators were implicated in unlawful phoenixing, but only that they ought to have discovered and reported the possibility of it. As already explained, while raising the spectre of “unlawful phoenixing”, ASIC has not explained how it arises in the context of this type of company.

19. [109]

    As has been mentioned, the last of the 2009 Companies was deregistered in May 2011. As has been noted, the fact of deregistration does not preclude an inquiry. [38] However, it is relevant that the inquiry and its outcome can secure no benefit for the administration, or for the creditors of the 2009 Companies. Nor is the relief sought (which does not include compensatory orders) of a character that would do so.

20. [110]

    Nonetheless, the regulatory and disciplinary function under s 536 is not rendered inutile by the absence of potential for benefit to the administration, or even that the liquidator has submitted to deregistration. Formal proceedings and findings fulfil an important role, in upholding the reputation of the profession, and in informing consideration of any later application for reinstatement. In New South Wales Bar Association v Cummins, [39] Spigelman CJ said, in respect of the latter:

21. [111]

    And in respect of the former, his Honour pointed out:

22. [112]

    The application of these considerations, which is not confined to lawyers, illustrates that proceedings are not necessarily deprived of utility by the circumstance that the liquidator has resigned. In particular, liquidators should not be able to escape censure by resigning. However, that does not mean that their current status and circumstances are irrelevant, a matter to which it will be necessary to return, in respect of each of them.

23. [113]

    It may be relevant, where there are multiple remedies available, that an applicant for relief has elected not to avail itself of an available remedy. [40] In this case, ASIC had a number of courses open to it if it wished to take disciplinary action against Mr Wily and Mr Hurst.

24. [114]

    ASIC could have applied to CALDB for the cancellation of the liquidators’ registration, under (former) Corporations Act, s 1292(3). [41] Such a course is the ordinary one for disciplinary proceedings by the regulator against a liquidator, particularly where the issues are not limited to a particular administration, and no remedial relief for the benefit of the administration is sought. [42] However, just as the Court retains and sometimes exercises inherent supervisory and disciplinary jurisdiction over lawyers, notwithstanding that the more usual procedure is to involve the jurisdiction of the professional tribunals (now NCAT, formerly the Legal Services Tribunal and the Legal Profession Disciplinary Tribunal, and originally the Solicitors Statutory Committee), so it retained, under s 536, a supervisory jurisdiction over liquidators.

25. [115]

    More significantly, however, ASIC did not need the Court to conduct an inquiry under s 536; it could have done so itself and, having done so, reported its findings to the Court, which could then have ordered the liquidator to make good any loss that the estate of the company had sustained and made such other order or orders as it thought fit. Such proceedings would no doubt involve affording the liquidator an opportunity to contradict the report with evidence and submissions. But they commence from the position that ASIC has formed the opinion and reported that there has been a misfeasance, neglect or omission on the part of the liquidator.

26. [116]

    Although it has conducted an investigation, ASIC has not conducted an inquiry under s 536; it has chosen not to do so itself, but instead to ask the Court to do so. When asked why, counsel for ASIC distinguished an inquiry from an investigation, and continued:

27. [117]

    While the distinction between an investigation and an inquiry is correctly drawn, and ASIC has conducted an investigation and not an inquiry, I am unconvinced by the argument that the respondents’ rights are better served by asking the Court to conduct the inquiry, rather than ASIC proceeding to do so itself. If ASIC were to conduct the inquiry, that would itself involve affording procedural safeguards to the respondents in the course of the inquiry, before ASIC made its report to the Court. Then, if proceedings were instituted in the Court upon ASIC’s report, the respondents would be entitled to adduce evidence and make submissions in opposition to it, and the Court would determine any disputed issues of fact, law or remedy. The real practical consequence of ASIC not itself conducting an inquiry is that the respondents have only one and not two opportunities to be heard.

28. [118]

    In my view it is relevant, though far from decisive, in that notwithstanding its investigation, ASIC has chosen not itself to conduct the inquiry it could have conducted under s 536, and has not formed the opinion which it could have reported to the Court, that there has been a misfeasance, neglect or omission on the part of the liquidator.

Mr Wily

1. [119]

   As has been noted, Mr Wily has resigned all appointments, and retired from practice. As a result of the deemed cancellation of his registration, he is no longer a registered liquidator. For reasons that have already been explained, that does not of itself mean that an inquiry could serve no proper purpose, because there is a public interest in exposing and censuring impropriety, even if the liquidator is no longer registered. However, this interest is mitigated, in this case, by my conclusions about the nature and strength of the allegations, and by the delay, especially in the context of the vexatious aspect to which I have referred.

2. [120]

   Moreover, any application by Mr Wily for re-registration would be governed by Div 20 of the Insolvency Practice Schedule (Corporations), under which an individual may apply to ASIC to be registered as a liquidator. Such an application must be referred to a committee – consisting of ASIC, a registered liquidator chosen by a prescribed body, and a person appointed by the Minister – to assess the application against criteria which include the applicant’s conduct and fitness. The committee must report its decision to ASIC, and only if the committee decides that the applicant should be registered, must ASIC register the applicant as a liquidator.

3. [121]

   Thus, should Mr Wily ever again apply to become registered as a liquidator, ASIC will be in a position to ensure that its concerns about Mr Wily are considered. The significance of this is that, even if there is a possibility that Mr Wily would as a liquidator pose some risk to the public, he could only resume practice after ASIC had ample opportunity to address the matter. This mitigates the importance at this stage of formal proceedings and findings to inform consideration of any later application for reinstatement.

Mr Hurst

1. [122]

   Mr Hurst raises a number of considerations specific to his circumstances – in particular, that his involvement in the liquidations of the 2009 Companies was as a "secondary appointee"; that the arrangements under which he has practised since 2012 include measures which mitigate the risk of recurrence; and that he has insufficient resources to defend himself.

2. [123]

   There are particular features of Mr Hurst’s role in the liquidations of the 2009 Companies which provide context for the significance of his practice since then. First, Mr Hurst was not an appointee in relation to the 2007 Companies, although he had some limited involvement in those administrations. Secondly, Mr Hurst was not involved in introducing the liquidations of the 2009 Companies to the firm, and was not at the time of his appointment to them aware of the source of the referral. In determining that there was no conflict, he relied principally upon Mr Wily, who was the partner who had introduced the matters to the firm, to identify, via Armstrong Wily’s standard conflict check review form, which was completed for each company, whether there were any conflict issues.

3. [124]

   Thirdly, he was the junior appointee. He explains that he was not the “lead appointee”, in circumstances where he was an employee of Armstrong Wily and thus subject to the direction of Mr Wily. He was made an appointee jointly with Mr Wily, chiefly so that there would be someone to act if Mr Wily were absent. Mr Hurst was not primarily responsible for supervising the work performed by Armstrong Wily in relation to the 2009 Companies; it was Mr Wily who selected and supervised the team. When he did sign documents or chair meetings, which was typically because Mr Wily was absent from the office, Mr Hurst checked them, reviewed supporting documentation (conformably with the firm’s policies and procedures) if some discretion was involved, and obtained information from staff members working on the matter. He also received and scanned copies of relevant email correspondence, and reviewed reports, generated by “Chieftain”, a scheduling engine that manages various aspects of insolvency appointments.

4. [125]

   With the benefit of hindsight and knowing what he now knows, Mr Hurst accepts that he should have been more actively involved in the liquidations of the 2009 Companies than he in fact was. He says that had he known of the matters giving rise to ASIC’s concerns, he would have reported the issues to Mr Wily and asked that Mr Wily investigate them, or investigated them himself; reported any suspected phoenixing activity or shadow directorships to ASIC (as is consistent with his practice now at HoskingHurst); made any necessary disclosures to the directors, shareholders and creditors of the 2009 Companies; and sought to resign from his appointments if he believed that he could not continue to act.

5. [126]

   There can be no doubt that a liquidator appointed joint and severally must have an adequate and proper involvement in the liquidation in order to execute the function of the office of liquidator, and that this is so notwithstanding that there may be an agreement or practice for one liquidator to have the day-to-day running of the liquidation. [43] Nonetheless, in judging whether an inquiry will be of utility, the context in which the conduct complained about occurred, and Mr Hurst’s acceptance of deficiencies in the practices which may have enabled it, are relevant, particularly in the context of his subsequent practice.

6. [127]

   As has been recorded, Mr Hurst left Armstrong Wily in July 2012 and established his own insolvency practice, specialising in corporate insolvency matters. In late August 2012, Mr Phillip Hosking joined him in that practice, which is now known as HoskingHurst.

7. [128]

   As has been noted, Mr Hurst has given evidence that he accepts now that he should have been “more across” the liquidations of the 2009 Companies. He also explains why there is little risk of the matters about which ASIC is concerned arising in his current practice. Mr Hurst deposed, without challenge or contradiction, to procedures, policies and practices established at HoskingHurst which minimise any risk of recurrence at HoskingHurst of such problems as ASIC contends existed in relation to the 2009 Companies. These include formal weekly staff meetings, attended by all professional and senior administrative staff; a schedule of workflow/current matters which is updated on a weekly basis and made available to all staff; the preparation of a comprehensive conflict review form, which is supplemented by an email to all staff requesting identification of any relationships with the company or director(s); regular training sessions for all staff; and monthly director meetings. Importantly, given the context of the concerns expressed about the liquidations of the 2009 Companies and the nature of Mr Hurst’s role in them, joint appointments are exceptional at HoskingHurst, and prior to accepting a joint appointment, Mr Hurst and Mr Hosking discuss the proposed appointment and whether it should be taken on, and if it is taken on, the arrangements for its conduct. The firm’s procedures, policies and practices described above contribute to ensuring that both appointees are appropriately across the details of any matter in which there is a joint appointment.

8. [129]

   No suggestion has been raised of any lapse in Mr Hurst’s professional conduct since 2012. ASIC’s reply submissions acknowledge that, to Mr Hurst's credit, his evidence suggests that his current practice embraces systems designed to avoid some of the issues that arose in the liquidations of the 2009 Companies. However, ASIC submits that this is not a basis upon which to decline to order an inquiry, by reason that the systems that had been in place at Armstrong Wily did not prevent that firm’s partners accepting, without disclosure, appointments to 12 voluntary liquidations from a common referrer, some with the same named directors as prior liquidations conducted by one of the proposed appointees; and that concerns regarding Mr Hurst's fitness focus upon his judgment and discretion. In this respect, ASIC points to his signing and lodging, on 14 December 2010, the ten s 533 reports for the Group D and E Companies in almost identical terms (including that each of the companies failed due to poor financial control and lack of records; all the directors failed in their obligations to keep financial records; and that there were no shadow directors), in circumstances where (1) company records obtained by the liquidators included a MYOB payroll activity print out dated within days of the date of liquidation, with the Coogee address as the company address, but the liquidators do not appear to have sought or obtained the MYOB electronic files; and (2) the en globo lodgment of the section 533 reports in the same terms suggest the companies were being treated as a single group by the liquidators, despite having different directorships and shareholdings, and thus some awareness of an overarching co-ordination between them, and yet it appears Mr Hurst was unable to consider and report on the possibility that there was a shadow director.

9. [130]

   For reasons already explained, I do not consider that those matters raise a serious concern as to Mr Hurst’s discretion and judgment. The common source of referrals of the 2009 Companies, and the “commonalities” between them and with the 2007 Companies, did not manifest such conflicts as would alarm a liquidator in accepting an appointment. It appears likely that the liquidators did have a disc with the MYOB records; they sought information from the directors; and, in the context of asset-less administrations, it is not remarkable that they did not do more. Recognition that the companies were connected does not bespeak that there were shadow directors.

10. [131]

    The conclusion that these matters do not raise a serious concern about Mr Hurst’s judgment is fortified by his subordinate role in the 2009 liquidations, his recognition of the shortcomings in those arrangements, and his practice since 2012. In my view, it is doubtful in the extreme that present unfitness could be established from a want of discretion and judgment of that kind nearly a decade ago.

11. [132]

    Mr Hurst says that he does not have sufficient financial resources to defend himself if an inquiry is ordered, so that as a matter of reality ASIC would succeed by default without him having a fair and proper hearing. ASIC submitted that Mr Hurst's financial circumstances provide no basis for not ordering an inquiry, and I agree.

12. [133]

    For Mr Hurst, reliance was placed on Hall v Poolman [44] as indicating that the availability of funds to pay for an inquiry is a relevant discretionary factor. In Hall v Poolman, the reference to this being a factor was in the passage cited from Leslie v Hennessy, set out above. In neither Hennessy nor Poolman was the reference elaborated, but in my view, it was directed to the availability of funds in the liquidation, or to the applicant, rather than to the circumstances of the respondent liquidator. As Mr Pike SC, for Mr Hurst, acknowledged, it could not be that a respondent’s impecuniosity would be a reason for declining to conduct an otherwise warranted inquiry.

Conclusion

1. [134]

   I am not satisfied that there is a “well-based suspicion indicating a need for further investigation” – in which context the notion of “suspicion” involves a “positive feeling of actual apprehension or mistrust, as distinct from mere wondering” – that, in connection with the liquidations of the 2009 Companies, Mr Wily and Mr Hurst did not act to the standard expected of reasonably competent liquidators in:

   1. (1)

      accepting and/or maintaining the appointments to those companies, and/or in failing to disclose supposed potential conflicts of interest arising from Mr Wily’s appointments to the 2007 Companies, and their appointments to each of the other 2009 Companies;

   2. (2)

      complying with their reporting obligations under s 533, in respect of possibilities that Victor Sahade and Anthony Sahade were shadow directors, and that they or others may have engaged in unlawful phoenixing – not least because they did report the possibility of insolvent trading, which was the real vice; and

   3. (3)

      otherwise adequately perform their duties and functions in collecting books and records, reporting to creditors, conducting investigations, identifying potential claims and conducting creditor meetings.

2. [135]

   Even if I am incorrect in those conclusions, in my view, the allegations are not of a strength or nature as would justify an inquiry.

3. [136]

   Moreover, ASIC bears the onus of persuading the Court to exercise its discretion to order an inquiry, notwithstanding the time which has passed, for which it is essentially responsible. Although I give little significance to prejudice by way of loss of records and deterioration of memory arising from the delay, the passage of time since 1999 weighs against ordering an inquiry in circumstances where Mr Wily continued to practice until his retirement in 2017, and Mr Hurst still does, apparently without further complaint, so that the prospects of establishing present unfitness by conduct which occurred in 2009 are much diminished, and there is a significant element of vexation in pursuing Mr Wily in respect of this matter only after other investigations into his conduct had come to nothing. It is also relevant, though far from decisive, that notwithstanding its investigation, ASIC has chosen not itself to conduct the inquiry it could have under s 536, and has not formed the opinion which it could have reported to the Court, that there has been a misfeasance, neglect or omission on the part of the liquidator.

4. [137]

   As to Mr Wily, there is no need for action for the protection of the public, as he cannot resume practice without ASIC having ample opportunity to express and have considered any concerns it might entertain. While I do not overlook that the maintenance of professional standards and public confidence is served by disciplinary proceedings even where the liquidator has already resigned, the nature and strength of the allegations in this case, coupled with the time that has passed since the relevant conduct, and that the investigation was opened only after two other investigations had concluded with no action against him, are not such as to warrant an inquiry.

5. [138]

   As to Mr Hurst, whose role in the liquidations of the 2009 Companies was a subordinate one, the complaints raised by ASIC concern the liquidations of one group of companies, nearly a decade ago, and there is no suggestion of a systemic or continuing pattern of misconduct on his part. Given the time which has passed since the relevant conduct in 2009 and 2010, during which he has continued to practice apparently without coming under further adverse notice, under arrangements designed to minimise the risk of matters which may have contributed to any problems that arose in respect of the liquidations of the 2009 Companies, the prospects of establishing present unfitness by reference to the conduct complained about, are remote in the extreme.

6. [139]

   The Court therefore orders that the originating process be dismissed, with costs.