Safe harbour meets liquidator's independence

When Australia introduced the safe harbour regime in 2017, it was widely seen as a step toward rescuing more businesses by leveraging the expertise of experienced turnaround professionals before the business reached a financial tipping point. During pre-insolvency appointments, insolvency professionals gain a deep understanding of the business, and often become a trusted advisor, even if the safe harbour does not ultimately lead to a better outcome. In such a case, the business may look to appoint that insolvency professional as external administrator, given their unique history with and understanding of the business, and their personal relationships with the decision-makers in the business.

However, the principles of independence that underpin external administration mean that any practitioner involved in pre-insolvency advisory work is, in most cases, conflicted out of acting as an administrator or liquidator. After all, a liquidator may be required to investigate a safe harbour plan and the advice given by a pre-insolvency advisor. Given the commercial and personal imperatives facing an insolvency professional considering an appointment to a business for which they have provided pre-insolvency advice, testing the outer limits of what "most cases" means may be tempting. Such temptation should be resisted.

Case study: when pre-insolvency advice becomes a conflict

A recent decision underscores how these conflicts can arise and trap even experienced practitioners (FQGW and A committee convened under section 40-45 of the Insolvency Practice Schedule (Corporations) [2025] ARTA 218).

FQGW is a registered liquidator and ARITA member, with many years' experience as a liquidator. His firm was retained by a company in financial distress to assist in preparing and implementing a plan to obtain the benefit of the safe harbour protection from insolvent trading in section 588GA(1) of the Corporations Act.

The company then entered into a creditor’s voluntary liquidation and FQGW was appointed liquidator. FQGW subsequently lodged a DIRRI disclosing his pre-appointment advice to the directors of the company.

The disclosures in the DIRRI brought the matter to ASIC's attention, which sought further information from FQGW. ASIC pointed out that, except in rare circumstances, the ARITA Practice Statement on independence precluded a member from taking an appointment where they had provided safe harbour advice to a company or its directors. After being pressed by ASIC for many months, FQGW admitted that, in accepting the appointment, he failed to adequately appraise his independence in accordance with professional standards and did not identify that he had "an actual or apprehended bias or an actual or apprehended conflict of interest”, because of his pre-insolvency advice to the directors of the company.

A committee convened by ASIC determined that although FQGW ought to be entitled to remain registered as a liquidator, he should be “publicly admonished or reprimanded” (under section 40-55 Insolvency Practice Schedule (Corporations) (IPS)) for his conduct and that ASIC should publish the committee's decision and its reasons (together with the applicant's name). Such a measure would operate as a general deterrent to other liquidators, and ensure that liquidators were aware that in almost all circumstances where they provide safe harbour advice, a conflict of interest would arise should they take any subsequent appointment as liquidator.

Upon review in the Administrative Review Tribunal (ART), it was accepted that, while undoubtedly serious, FQGW's misconduct was unintentional, innocent in nature and unlikely to be repeated. Crucially for FQGW, the ART agreed with his argument that ASIC's regulatory objectives, in particular the need for general deterrence, could be achieved without the ignominy of publishing his name. FQGW also undertook not to engage in any further pre-insolvency work.

ASIC's regulatory role and possible future actions

The ART's decision raises the question whether, outside a disciplinary committee process, ASIC will bring similar matters before the Court to set a precedent on the conflicts that arise between an insolvency practitioner's role as a pre-appointment advisor and any subsequent role as an external administrator over that same company. As the committee and ART both found, such a conflict appears obvious. However, as the case of FQGW highlights, even experienced practitioners need reminders of their obligations of independence and must remain vigilant to avoid conflicts of interest.

One option available to ASIC is the seldom used power in section 45-1 of the IPS, which permits ASIC to apply to the Court to make various orders regarding a registered liquidator. In making orders, the Court may take into account:

• whether the registered liquidator has faithfully performed, or is faithfully performing, the registered liquidator’s duties;

• whether an action or failure to act by the registered liquidator is in compliance with the Corporations Act and the Insolvency Practice Rules;

• whether an action or failure to act by the registered liquidator is in compliance with an order of the Court;

• whether any person has suffered, or is likely to suffer, loss or damage because of an action or failure to act by the registered liquidator; and

• the seriousness of the consequences of any action or failure to act by the registered liquidator, including the effect of that action or failure to act on public confidence in registered liquidators as a group.

There have been limited cases in which ASIC has elected to pursue an application under section 45-1, with the most recent example being Australian Securities and Investments Commission v Bettles [2023] FCA 975, where ASIC unsuccessfully applied for a broad range of orders, including cancelling the liquidator's registration and a lifetime prohibition on reapplying for liquidator registration. While ASIC was ultimately unsuccessful in Bettles, the case highlights the powers of the regulator, and at times the motivation, to pursue insolvency practitioners. Even if such actions by ASIC do not result in the cancellation of a liquidator's registration, the reputational risks of being named in proceedings commenced by the regulator remain a potent reminder of a liquidator's obligations.

Keeping an eye on independence

It is clear that a fundamental principle of independence lies at the heart of the Australian insolvency regime, and that the circumstances in which a pre-appointment engagement will not prevent an insolvency practitioner from accepting a subsequent formal appointment are limited. The ARITA Practice Statement on independence gives an example of such a pre-appointment "engagement", where it amounts to no more than an initial meeting with the directors of the company, during which the insolvency practitioner forms the view that a restructure is highly unlikely to succeed and recommends that the company enter into administration. In such a case, the pre-appointment "engagement" will not preclude the insolvency practitioner from being appointed as administrator of the company. This example may be conservative, but for practical purposes, practitioners would be well-advised to treat any form of pre-insolvency appointment as excluding them totally from any subsequent formal appointments.

FQGW illustrates a number of important points. First, even well-intentioned and experienced practitioners can misstep and fall prey to the temptation of accepting pre- and post-insolvency appointments for the same business. Second, ASIC is motivated to make an example of malpractice by naming and shaming liquidators who do so.

It is an important reminder to remain vigilant of a liquidator's obligation of independence.