SPOTLIGHT ON LAW: CASE COMMENTARY - SAFE HARBOUR TO LIQUIDATOR

A recent Administrative Review Tribunal of Australia case considered the implications of a Safe Harbour Advisor taking an Appointment as Liquidator and whether he should be “publicly admonished or reprimanded” for his conduct. Wexted reviews the case and findings.

In our recent article SPOTLIGHT ON LAW: CASE COMMENTARY ACCEPTING AN APPOINTMENT AS ADMINISTRATOR | News & Insights we considered the issue of accepting an appointment as an Administrator, and ensuring the background is properly understood, and the appointment is made for a proper purpose.

A further case, this time an Administrative Review Tribunal (ART) Case, has considered where an Insolvency Practitioner who provided Safe Harbour advice as an Appropriately Qualified Entity, ultimately accepted an appointment as a Creditors Voluntary Liquidator.

FACT SUMMARY

The parties in the Case have not been named. 

A registered liquidator (the Applicant), with over 40 years’ experience (in the Case called “Insolvency & Co’) was retained by a Company (in the Case called ABC Pty Ltd”). The Applicant provided advice to the Directors of ABC that would “assist .. obtain the benefit of ‘safe harbour’ protection from insolvent trading pursuant to Section 588GA(1) of the Corporations Act”

The Case Decision is linked here:  FQGW and A committee convened under section 40-45 of the Insolvency Practice Schedule (Corporations) [2025] ARTA 218 (17 March 2025)

• From late 2021, the Applicant provided Safe Harbour Protection but apparently after ‘cursory analysis’ considered ABC had been insolvent since 2021;
• In early February 2022 ABC Pty Ltd entered into a creditor’s voluntary liquidation and the Applicant was appointed liquidator;
• The Applicant’s DIRRI concluded the Safe Harbour engagement role was not a conflict of interest because, inter alia:
  •  ­ It was .. apparent .. the company had become insolvent at an earlier date in 2021;
  • ­ Insolvency & Co did not provide ongoing services to the company;
  • ­ The work undertaken during the engagement has assisted ..  in developing an understanding of the company and its activities;
  •  The nature of the advice provided to the company is such that would not be subject to review and challenge during the course of the liquidation. …  in an objective and impartial manner.

ASIC INVOLVEMENT

• ASIC’s view was (given section 1.68 of the ARITA Practice Statement: Insolvency 1 – Independence (Linked here: 5. PSI 1 Independence.pdf ) expressly was that “ if a Member has provided advice to a company or the directors of a company which they intend to, or do rely upon, to avail themselves of the safe harbour provisions of the Act, the member cannot take a subsequent Appointment”;
• ASIC’s sought further information whether Applicant had a conflict of interest “due to your pre-appointment advice to the directors of ABC Pty Ltd that they had safe harbour protection”;
• The Applicant responded, inter alia “ that the appointment with ABC Pty Ltd had only been for “finite short-term period” and they “had given consideration to the “APES 330 Insolvency Services and to the ARITA Code of Professional Practice, section 3 and PS1” when formulating his views”
• Central to ASIC’s concern was that in discharging his duties as liquidator the Applicant would need to form views as to whether the directors had exposed themselves to any liability under Section 588G of the Act,;

• There was a ‘review’ undertaken by Insolvency and Co, and by ASIC, and the involvement of ARITA.  ASIC ultimately issued the Applicant with h a ‘Notice to Explain why Liquidator Registration Should Continue’ pursuant to section 40-40(1) of the IPS explaining that they may refer him to a committee convened under section 40-45 of the IPS if a satisfactory response was not received. ASIC noted the Applicant:

  “failed to carry out adequately and properly any other duties or functions that a registered liquidator is required to carry out under a law of the Commonwealth or of a State or Territory, or the general law [section 40-40(1)(l)(ii) of Schedule 2 of the Act] by accepting an appointment as the liquidator of [ABC Pty Ltd] when you had an actual or apprehended bias or an actual or apprehended conflict of interest due to your pre-appointment advice to the directors of [ABC Pty Ltd] that they had safe harbour protection.”

APPLICANT CONCESSIONS AND PROPOSED UNDERTAKINGS

The Applicant accepted that:

• He had failed to carry out “adequately and properly” his duties because he had an actual or apprehended conflict of interest arising from his pre-liquidation appointment as a safe harbour adviser; 
• He had not “adequately assessed his independence nor properly had regard to section 3.6(c) of the ARITA COPP: Insolvency Services and section 1.6.8 of the ARITA Practice Statement: Insolvency 1 – Independence”;
• ASIC acknowledged the admissions of the Applicant and would consider resolving the matter if the Applicant were agreeable to providing Court Enforceable Undertakings (CEU) under ASIC’s Regulatory Guide 100 - Court enforceable undertakings. As is ASIC’s practice, those undertakings would “be publicly disclosed by way of a media release (on execution and completion) and available via ASIC’s CEU register”;
• The Applicant expressed his concern that any such publication would be “a black mark against my name for the rest of my life”. and the “prejudice to the individual compared to the benefit to the public”, that this was not a case that warranted publication of the Applicant’s name and the consequent damage to his reputation that would follow.

ASIC DISCIPLINARY COMMITTEE DECISION

The Committee made its decision in late 2023 in the following terms:

• That the Applicant should continue to be registered under IPS s40-55(1)(a).
• That the Applicant should be publicly admonished or reprimanded under s40-55(1)(e); and
• That ASIC should publish the fact of the decision, and this report, pursuant to s40-55(1)(h).

The Committee had said that:

“Making this report public ensures that the reasons for this decision are not the subject of inaccurate speculation and will serve the dual purposes of educating the profession in general on the topic, as well acting as a personal deterrent to ensure that to the extent [the Applicant] may not understand his obligations under the relevant professional standards, he will educate himself further and will ensure that such a mistake is not repeated ever again”

ADMINISTRATIVE APPEALS TRIBUNAL APPEAL 

The matter was referred to the Administrative Appeals Tribunal for review. The ART said that:

•  In almost all conceivable circumstances where an insolvency practitioner has provided advice in the context of Safe Harbour engagement, they would necessarily find themselves in a conflict of interest should they go on to act as liquidator;
• It was hard to imagine how someone of the Applicant’s experience could fail to identify an obvious conflict of interest;
• Since the Committee’s decision was handed down the Applicant liquidator had undertaken and completed a range of professional development courses focusing on issues of conflicts of interest and independence;
• The Applicant would have undoubtably expended significant time, energy and funds in addressing the concerns of ASIC … illustrative of the seriousness with which he took his previous failings.
  As such the Applicant has been able to avoid the disclosure, publicly admonishment and reprimand.

COMMENTARY:  THE VIEW OF THE REVIEW PANEL IN 2021:

The independence of Safe Harbour Advisors is a critical element of the credibility of the Safe Harbour Process.  The Safe Harbour Review (covered in our article SAFE HARBOUR – IS IT FIT FOR PURPOSE? | News & Insights).

In the Review Report the Panel noted in in Section 9.2 of the Report, the points in relation to Safe Harbour Advisors (AQE’s) included:

• Should any existing relationships between a proposed AQE and a company preclude an AQE appointment? We are of the view that there are some roles where conflicts will be difficult to overcome;
• We fall shy of recommending an AQE be independent and free of conflict as we think that is too prescriptive and limiting and difficult to regulate, particularly in longer-term safe harbour appointments;
• However, we are of the view that it is a factor directors should consider when appointing an AQE. In some circumstances the ‘appropriate’ requirement will also mean they should be independent;
• When an AQE later seeks a role in a formal restructuring (either as an administrator or liquidator). Several stakeholders (including Deloitte, Wexted and ARITA) were clear in their submissions that if a registered liquidator took on a role as an advisor in safe harbour, then he or she should not later act as either voluntary administrator or as liquidator of the company. This is to avoid registered liquidators being placed in positions of actual conflicts, as well as perceived conflicts;
• Others, such as the Law Council and McGrathNichol, thought the position uncertain as to whether a registered liquidator who provided safe harbour advice is capable under the law of accepting a formal appointment. The Law Council noted that there may be some merit in not excluding such parties outright;
• There are obvious efficiencies and synergies in a company (and, in a derivative sense, its creditors) not duplicating the costs of an AQE and the costs of an administrator/liquidator. Of course, ‘efficiencies’ is a vexed question, because there are also problems associated with an administrator or liquidator of a company being asked to opine on whether solvency advice they previously provided, or their better outcome analysis was right;
• When an AQE assists with pre-planning administration advice, the Panel can envisage occasions where their involvement should not automatically conflict with them acting in a formal capacity in any later appointment;
• We caution against any amendments to the safe harbour provisions which would seek to exclude absolutely any AQE from a later formal role;
• We also note that the safe harbour provisions are not the right place to address any such concerns, and that matters of independence for the appointment of administrators and liquidators are best dealt with by Courts (in considering the independence of such registered liquidator by reference to the independence.

CONCLUSION

While matters have moved on since the Safe Harbour Review (including the development of Small Business Restructuring, and the various amendments to Section 588GA), Wexted Advisors maintain the view we disclosed in the 2021 Enquiry, which is that a Safe Harbour Advisor should not accept a subsequent appointment as VA or Creditors Voluntary Liquidator.

There are of course questions about whether the regulatory objectives of ASIC have been satisfied by the seemingly lesser publishing the committee’s decision in full which would identify the Applicant.  The matters that the ART sought to focus on are set out in the Case, including the need for even the most honest and experienced of liquidators to carefully assess their independence prior to taking on appointments, and the potentially serious regulatory consequences that may flow should a liquidator fail to appropriately identify such a conflict.