by Paul Gidley30.06.19

Liquidators and their clients have been offered some common-sense around professional relationships and liquidator independence, lowering a previously ‘too-high’ bar. Orders handed down in the NSW Supreme Court on May 9 by Justice Brereton in Australian Securities and Investment Commission v Wily & Hurst ([2019] NSWSC 521) dismissed the case with costs.

In December 2016, ASIC sought an inquiry by the Court into the conduct of liquidators Wily and Hurst in their winding up of two groups of companies, one group in 2007 and another in 2009. The crux of their argument being that Wily and Hurst:

  • should not have acted in the 2009 winding up because of the potential for conflicts of interests resulting from their relationships with directors common to the 2007 winding up
  • failed to declare their relationship in the DIRRI with the five directors common to both the 2007 and 2009 liquidations
  • should have known or become aware of, and reported, relationships between the companies that could raise suspicion of shadow directors
  • failed to report the possibility of illegal phoenixing in companies established after the 2009 liquidations.

Timeline of the windings up:

October 2007
Wily was appointed as liquidator for the creditors voluntary winding up of 7 companies (the 2007 Companies) that provided labour hire services to 7 sites of Crystal Carwash. Hurst was involved as an employee of Mr Wily but was not an appointed liquidator.

All but one of these companies had the same registered address in Coogee, NSW, which was the residence of Victor Sahade, director of Boulder Shore and father of Anthony Sahade, director of Crystal Carwash.

These companies were deregistered in August 2008.

March – August 2009
Wily and Hurst were jointly appointed as liquidators for the creditors voluntary winding up of 12 companies (the 2009 Companies), 10 of which were incorporated in September 2007. It appeared that these 10 companies were substitutes for the 2007 Companies.

Five of these companies had the same named directors as the 2007 Companies.

ASIC alleged that the business of the 2009 Companies continued to be carried on in the same locations by other companies incorporated in 2009 and 2010.

The liquidation of the 2009 Companies left unpaid debts of $1.5 million in taxes and $163,000 in unpaid workers compensation premiums to Employers Mutual.

September 2010
ASIC became aware that Crystal Carwash was being investigated by the Fair Work Ombudsman
2012 – 2016
ASIC opened an investigation into the 2009 liquidations
15 December 2016
ASIC commences proceedings for an inquiry by the Court.

With the benefit of hindsight, it would be easy to interpret this pattern of liquidations as suspect. However, a pattern in events can only be established in retrospect. The issue of this case is what the liquidators could reasonably establish and report during the real-time daily grind of the winding up process.

The Court ordered that the originating process by ASIC be dismissed with costs for the following reasons:

  • A group of companies sharing common features going into liquidation together is not evidence per se of any conflict of interest on behalf of a liquidator. ASIC failed to describe what the potential conflict of interest was, nor did they allege an actual conflict of interest. Furthermore, under the relevant legislation, the liquidators were not obliged to decline to act because of potential conflict of interest.
  • Wily and Hurst could not have easily established that Victor or Anthony Sahade were shadow directors, and they were required to provide an accurate answer to the s 533 report question “…are there shadow directors?”, not ‘may there be shadow directors?’
  • Each of the companies provided services to one other entity (a particular site of Crystal Carwash). The nature of the businesses did not lend itself to the transfer of assets to phoenix companies. Furthermore, Wily and Hurst only had evidence of insolvent trading by the 2009 Companies which was reported.

Of interest is Justice Brereton’s view that the nature of the relationship between a liquidator and a director involved in a previous liquidation needs to be taken into consideration before that relationship necessitates inclusion in the DIRRI and/or prevents a liquidator acting in a current winding up.

Changes to regulation around liquidator/director relationships over recent years have failed to consider the business needs of insolvency professionals to promote their practices and gain referrals. This is particularly relevant in regional communities that offer a smaller pool of insolvencies and increases the likelihood of liquidators and directors having relationships as a result of routine business networking or repeat referrals. The outcome of this case points to a more pragmatic approach to regulating insolvency professionals.

Whatever this case heralds for the regulation of insolvency practice, you can rely on the experienced specialists at Shaw Gidley to act professionally, ethically and with integrity. 

Shaw Gidley are experts in restructuring, turnaround and insolvency and provide free initial advice on these matters. Please contact our offices on (02) 4908 4444 or (02) 6580 0400.