Why ASIC needs to rise from ashes of failed phoenix case

The Federal Court has dismissed ASIC’s potentially “career-ending” case against Jason Bettles, a seasoned liquidator and partner at Worrells Solvency and Accounting. The nub of ASIC’s case was that Mr Bettles was involved in the improper transfer of Members Alliance Group’s (MAG) assets as part of a scheme of illegal phoenix activity.

Despite defeat, ASIC deputy chair Sarah Court reaffirmed ASIC’s intention to clamp down on illegal phoenix activity. “Taking action against suspected phoenixing remains a key priority of the [Serious Financial Crime] Taskforce” she said, and the regulator will carefully review the judgment, foreshadowing a possible appeal.

However, the court’s cautious approach to condemning liquidators suggests potential implications for regulatory guidelines, prompting a need for reconsideration and reframing of certain duties.

Background

Mr Bettles served as the liquidator for MAG from July 2016 until his resignation in July 2017. MAG operated over 50 property investment vehicles on the Gold Coast and provided financial advice to retail investors. In July 2016, 18 companies within the group were placed into liquidation with an aggregate debt of around $26 million to the ATO.

In November 2019, ASIC initiated an inquiry into Mr Bettles’s conduct as part of the ATO-led Serious Financial Crime Taskforce (SFCT). The inquiry was prompted by concerns that Mr Bettles failed to fulfil his duties as a liquidator, acting without independence and failing to exercise the required degree of care and diligence. This alleged negligence led to the improper transfer of assets belonging to MAG and designed to defeat creditors. ASIC brought the proceedings pursuant to section 45-1 of the Insolvency Practice Schedule (Corporations).

ASIC’s allegations included Mr Bettles’s attendance at meetings where complex strategies were devised to transfer the companies’ assets and divert income streams to new entities to the detriment of creditors. It was further alleged that he breached his duties as a company officer and fell egregiously short of the expected standards of propriety, independence, and the care and diligence mandated for a registered liquidator.

These actions, according to ASIC, were conducted with the intention of removing these assets and income streams from the reach of creditors, including the ATO, and amounted to illegal phoenix activity.

Decision

Following an eight-day trial, the court determined that ASIC did not make out its claims that Mr Bettles had breached his duties as liquidator.

A significant portion of ASIC’s argument revolved around the assertion that Mr Bettles either “knew or ought to have known” certain matters. The claim suggested his active “involvement” under section 79 of the Corporations Act 2001 was in breach of his duties as a director (under sections 181 and 182). ASIC further contended that Mr Bettles’s involvement stemmed from his awareness of each relevant action taken by the directors and that he “aided” or was “knowingly concerned” in a payment.

The detailed discussion of section 79 of the act (assessorial liability) emphasised the necessity of actual knowledge of essential matters. However, it was highlighted that such knowledge can be inferred from a person’s knowledge of circumstances giving rise to suspicion. This inference, coupled with a deliberate failure to conduct inquiries, could have substantiated those suspicions.

ASIC’s one minor win in the trial was that the court did find that Mr Bettles had not provided adequate disclosure in his Declaration of Independence, Relevant Relationships and Indemnities. While acknowledging this inadequate disclosure, the court determined that it was a minor failure and it was not satisfied that it warranted issuing orders regarding Mr Bettles’ registration as a liquidator.

Ultimately, the judge was not satisfied that Bettles had breached his duties as liquidator for the purposes of s45-1 of the IPS. Consequently, there was no need for the case to proceed to a hearing for remedies and sanctions and ASIC was ordered to pay Mr Bettles’s costs of the proceeding.

Justice Markovic stated that Mr Bettles had been “too trusting” and did not appear to be “someone who would act in disregard of his duties or statutory obligations”. It was emphasised that a court should not be quick to condemn a person in the difficult position of a liquidator, particularly with the benefit of hindsight, and not every action or error of judgement taken by liquidators should be regarded as negligent.

Key takeaways

It appears that there may be some broader implications for ASIC’s failure in this case:

• The courts have indicated their reluctance to hastily condemn liquidators, emphasising that not every lapse in judgement by a liquidator will amount to a breach of their duties or a compromise of their independence.
• The judgement highlights the significant procedural and evidentiary challenges that ASIC encounters in its pursuit of addressing phoenixing, particularly concerning the alleged involvement of insolvency practitioners in such activities. ASIC has sought clarity and court guidance on the independent role, diligence and high standard of care owed by liquidators.
• Proving “involvement” is consistently challenging and intricate. In phoenixing cases, where direct evidence is limited and reliance is placed on drawing inferences from attendance at meetings and subsequent activities, it is even more difficult to prove.
  
  For a liquidator to be involved in a contravention of the act and a breach of their duties, they must have intentionally participated in the contravention, possessing actual knowledge of the essential matters. Actual knowledge can be deduced or inferred from a person’s knowledge of circumstances giving rise to suspicion and a deliberate failure to conduct inquiries to negate that suspicion.
• The ruling could assist ASIC in formulating revised regulatory guidelines. Although ASIC did not successfully demonstrate the breaches of the duties of liquidators, some of these duties appear to be rather conventional and textbook in nature. To enhance practical applicability, ASIC may need to reconsider and reframe certain duties if it intends to continue relying on them. Indeed, there are certain matters in the judgement that could be considered by ASIC in the potential revisions to Regulatory Guide 16 External Administrators – Reporting and Lodging (RG 16).

Finally, notwithstanding Mr Bettles’ success, liquidators and other accountants should be very careful not to be inadvertently concerned in illegal phoenix activities and certainly should avoid the rare but occasional deliberate participation.

Trevor Withane is a litigation and insolvency lawyer at Ironbridge Legal.