The Federal Court has made orders prohibiting Melbourne liquidator, Ross John McDermott from accepting any new appointments as a registered liquidator (including appointments as a controller or administrator) for three years.

The Court's orders followed an inquiry by the Court into Mr McDermott's conduct of 26 external administrations during the period 2009 to 2014.

In addition, the Court made orders that:

• Mr McDermott must satisfactorily complete an external review of ten current appointments to be conducted by an independent reviewer engaged by Mr McDermott and approved by ASIC;
• Mr McDermott must successfully complete the Australian Restructuring Insolvency & Turnaround Association (ARITA) Advanced Certification course before accepting new appointments as a registered liquidator, controller or administrator;
• Mr McDermott is removed as liquidator of Fontana Property Group Pty Ltd and Total Elevator Services Pty Ltd;
• a joint liquidator/administrator, John Stuart Potts  is appointed to 15 external administrations to which Mr McDermott has until now been the sole appointee; and
• Mr McDermott is to pay costs to ASIC.

In conducting the inquiry and making the orders against Mr McDermott, the Court has confirmed its power to inquire into the conduct of administrators under section 447E of the Corporations Act, in addition to its power to inquire into the conduct of registered liquidators under section 536 of the Corporations Act.

The concerns identified by the Court include:

• independence concerns arising out of Mr McDermott's relationship with his appointer or referrer;
• failures to consider and avoid actual or potential conflicts of interest in accepting appointments;
• failures to lodge with ASIC reports of suspected misconduct by officers or former officers of companies under administration; 
• failures to properly inform creditors of the basis for remuneration claimed, drawing down that remuneration without properly informed creditor approval or Court approval, and failure to repay remuneration he had drawn down while adequate approvals were obtained.

The Court considered that, while Mr McDermott’s conduct was not dishonest, he failed to carry out and perform adequately and properly his duties as liquidator, and also his duties and functions as administrator and deed administrator; and that each aspect of his conduct was serious and occurred across multiple appointments.

In ordering a three year suspension, the Court took into account:

• Mr McDermott's acceptance of three appointments when a clear conflict of interest existed;
• his acceptance of legal advice that he had no conflict when he should have known that the lawyer providing the legal advice was also conflicted;
• his failure to resign conflicted appointments despite objections from creditors;
• his failure to acknowledge the existence of the actual conflict in his appointments in affidavits filed in the proceeding;
• systemic and repeated deficiencies in Mr McDermott's remuneration reports;
• his drawing of remuneration on the basis of deficient reports, and failure to seek Court approval for (and failure to repay) the funds until almost two years after they were drawn; and
• Mr McDermott's failure to implement checklists and procedures recommended to him during various training courses and his failure to complete an ongoing practice review conducted by a peer reviewer.

The Court found that, at its lowest, the evidence indicated a systematic failure of systems and procedures, and, at its highest, it indicated a lack of understanding of, and in some instances a disregard for, the duties and responsibilities of a liquidator.

ASIC Commissioner John Price said that the Court's decision sent a clear reminder to insolvency practitioners of the importance of remaining strictly independent from referrers, and maintaining high standards of integrity and professionalism whether acting as liquidators, controllers or administrators. 

'The failure of registered liquidators to abide by the law and the ARITA Code, in particular in matters of conflict of interest and when drawing remuneration, has the potential to undermine public confidence in registered liquidators and as this case demonstrates, has significant consequences for a liquidator's ability to practise as a liquidator', Mr Price said.  

A copy of the Court's decision, which was handed down on 4 October 2016, may be accessed here. 

Background

The orders against Mr McDermott follow an application by ASIC in December 2015 to inquire into the conduct of Mr McDermott concerning the performance of his duties as a registered liquidator, voluntary administrator and deed administrator of twenty-six companies to which he had been appointed (refer: 15-394MR).

Under the Corporations Act, ASIC may apply to the Court to undertake an inquiry where it appears that an insolvency practitioner has not faithfully performed, or is not faithfully performing, his or her duties as a liquidator or receiver or adhering to relevant legal requirements.

After making an inquiry into the conduct of an insolvency practitioner, the Court may make such orders as it sees fit.

The companies to which John Stuart Potts has been appointed joint liquidator/administrator are:

• TSM Selection Pty Ltd (ACN 099 151 765),
• Bushy Park Concreting Pty Ltd (ACN 137 376 964),
• Lonnex Pty Ltd (ACN 097 786 751),
• Glenferrie Trading Pty Ltd (ACN 115 044 481),
• A.C.N. 149 376 812 Pty Ltd (formerly known as BVM Building Force Pty Ltd) (ACN 149 376 812),
• Gallen Earthmoving Pty Ltd (ACN 137 675 775),
• New Point Properties Pty Ltd (ACN 123 070 164),
• Oliver Property (Gisborne) Pty Ltd (ACN 147 422 133),
• A.C.N. 133 174 624 Pty Ltd (formerly Known as Surveys Australia Pty Ltd) (ACN 133 174 624),
• Eco Plus Pty Ltd (ACN 131 750 288),
• McConnon Interstate Transport Pty Ltd (ACN 130 986 917),
• Star Energy & Resources Pty Ltd (ACN 156 642 072)
• Damkel Industries Pty Ltd (ACN 604 509 695)
• Morgan Street Investments Pty Ltd (ACN 128 995 693)' and
• JEA Business Services Pty Ltd (formerly known as James East & Associates Pty Ltd) (ACN 071 660 074).