Insolvency practitioners are increasingly encountering whistleblower disclosures during formal appointments, particularly in trade-on scenarios. These disclosures can raise complex legal challenges that need to be navigated with caution.
The Corporations Act 2001 (Cth) (Corporations Act) contains onerous obligations on the handling of whistleblower disclosures, particularly relating to confidentiality and protection from detrimental conduct.
These obligations continue to apply fully after a formal insolvency appointment, with no exceptions. In fact, these obligations have the potential to sit in tension with an Insolvency Practitioner (IP)’s core duties to investigate misconduct, report to creditors, and continue to trade the business of the distressed company generally.
With growing regulatory scrutiny and risk for personal exposure, IPs must exercise caution and seek legal advice when managing whistleblower issues. Failure to do so can lead to regulatory action, reputational harm or personal liability.
The Australian whistleblowing framework
Over the past five years, Australian employers have experienced an increase in whistleblower complaints. Whistleblower complaints present a number of challenges for businesses that need to navigate complaints carefully, ensuring compliance with the strict legislative framework.
Australia’s whistleblower framework, primarily governed by the Corporations Act, establishes the legal protections and procedural requirements for managing whistleblower disclosures. In particular, the Corporations Act imposes strict obligations of confidentiality over the protection of a whistleblower’s identity, which creates an inherent tension with the need to investigate the subject matter of the whistleblower disclosure.
This balancing act becomes even more precarious in the insolvency context, where competing interests, heightened scrutiny, and limited resources can significantly complicate compliance and investigative processes.
What is a whistleblower complaint?
A whistleblower complaint, otherwise known as a disclosure, is a report made by an eligible whistleblower about misconduct, legal breaches, or unethical behaviour within a company. These reports can be made internally to an eligible recipient or to regulators such as the Australian Securities and Investments Commission (ASIC).
An individual will qualify as an eligible whistleblower if they are:
- An employee, officer, or contractor of the company.
- A supplier (including their employees).
- An associate of the company.
- A relative or dependent of a past or present employee.
- A person with an existing or past financial relationship with the company.1
We have seen whistleblower disclosures made by present or former directors, creditors and suppliers at critical points in an insolvency event, which can cause significant disruption to the insolvency process.
A whistleblower disclosure must relate to a disclosable matter or an improper state of affairs, such as:
- Fraudulent activity;
- Breaches of financial regulations;
- Insider trading; and
- Corporate misconduct, including breaches of fiduciary duties by directors.
Clearly these matters arise with a high degree of frequency during the course of an insolvency process, as an IP seeks to understand and report on the cause of failure.
It is important to note that complaints concerning personal workplace grievances such as disputes over salary or job performance do not fall under the whistleblower protection framework, unless they relate to retaliation for making a protected disclosure.
How should Insolvency Practitioners deal with whistleblower complaints?
IPs are officers of the company they are appointed to, and as such, are eligible recipients of a whistleblower complaint.
Upon receiving a complaint, the IP must immediately assess whether the disclosure qualifies for protection under the Corporations Act and determine its credibility and associated risks, while ensuring the whistleblower’s identity remains strictly confidential.2
Even though IPs are independent appointees themselves, it is advisable in almost all circumstances to engage an independent investigator when conducting a whistleblower investigation.
It may be tempting for IPs to handle a complaint themselves, but engaging an independent investigator significantly reduces the compliance burden on the IP’s organisation (both during and following the appointment). Engaging an independent investigator also limits the scope for an IP to be criticised for their handling of an investigation.
If the complaint involves serious misconduct, the matter may need to be escalated to ASIC, APRA or even law enforcement. Reports to ASIC are commonplace in an insolvency but consideration should be given to other government bodies. Where misconduct is substantiated, internal disciplinary measures should be implemented, without compromising the whistleblower’s continued protection or breaching regulatory obligations.3 This latter procedure must be closely considered in the context of a trading business, with the potential for a restructure or sale as a going concern.
Mishandling a whistleblower disclosure may undermine the formal insolvency process and expose the IP to scrutiny from ASIC, civil penalties, or even personal liability for breach of the Corporations Act.
Balancing Insolvency Practitioners’ duties and whistleblower management
As officers of the company, IPs assume certain directors’ and officers’ duties, like the duty to act in good faith and in the best interests of the company.4 Addressing whistleblower concerns effectively is essential to maintaining the company’s legal compliance and reputation. A failure to do so may amount to a breach of these duties.
Officers also have a responsibility to ensure that the company has a thorough and clear whistleblower policy in place. This includes ensuring the policy is not only fit for purpose but is properly implemented and communicated to employees. Where an existing policy is found to be inadequate, it will be the IP’s responsibility to rectify it.
Managing confidentiality requirements with reporting requirements
IPs must also strike a balance between the Corporations Act’s strict confidentiality obligations as well as complying with the requisite reporting requirements that come with being an IP.
The Corporations Act imposes strict confidentiality obligations on recipients of a whistleblower disclosure from disclosing the identity of an eligible whistleblower unless:
- The whistleblower provides explicit consent.
- Disclosure is made to a legal practitioner for the purpose of obtaining advice.
- The information is provided to regulatory bodies, such as ASIC, or law enforcement agencies.5
These confidentiality obligations extend to inadvertent disclosure of an eligible whistleblower’s identity. The effect of this is that those managing whistleblower complaints are prohibited from disclosing any details of the complaint that inadvertently disclose the identity of the whistleblower.
In an insolvency context, IPs take control of the company and, as such, assume responsibility for managing any whistleblower disclosure. The strict obligations of confidentiality over the whistleblower’s identity will apply to the IP, which raises challenges in circumstances where the IP has a duty to report to creditors.6
Failure to maintain confidentiality over a whistleblower’s identity, including by inadvertent disclosure, exposes the company (and the IP personally) to serious civil penalties of:
- For an individual up to $1,565,000 or three times the benefit derived or detriment avoided.
- For a company up to $15,650,000 or three times the benefit derived or detriment avoided or 10% of the body corporate’s annual turnover (up to $782.5 million, 2.5 million penalty units).
Can IPs disclose the existence of a whistleblower disclosure to creditors?
The answer is not straightforward or well-developed by the authorities. It will largely depend on the circumstances, including whether disclosure of the existence of the complaint would expose the IP to the risk of inadvertently disclosing the whistleblower’s identity.
Before reporting the existence of a whistleblower complaint to creditors, the IP should consider:
- Whether the complaint is a protected disclosure under s 1317AA of the Corporations Act.
- Possible ways in which the whistleblower complaint can be disclosed in the report to creditors without disclosing the whistleblower’s identity.
- Whether the whistleblower complaint will qualify as a possible offence under s 438D of the Corporations Act.
As mentioned above, one exception to the confidentiality obligations is to enable disclosure to a legal representative for the purpose of obtaining advice. In the event an IP receives a whistleblower complaint, it’s highly recommend that you seek legal advice before disclosing to any person.
Protection from detrimental conduct
Eligible whistleblowers are also protected from detrimental conduct. Detrimental conduct can be:
- Dismissal of an employee;
- Injury of an employee in his or her employment;
- Alteration of an employee’s position or duties to his or her disadvantage;
- Discrimination between an employee and other employees of the same employer;
- Harassment or intimidation of a person;
- Harm or injury to a person, including psychological harm;
- Damage to a person’s property;
- Damage to a person’s reputation;
- Damage to a person’s business or financial position; or
- Any other damage to a person.7
We have seen attempts made by directors of a company to lodge a whistleblower complaint at a critical point immediately prior to the appointment of an IP in an attempt to disrupt the insolvency process. It remains to be seen whether a court would find that the appointment of an IP is detrimental conduct for the purposes of the Corporations Act.
Directors and insolvency practitioners should be wary of whistleblower complaints made to disrupt the process and obtain legal advice to interrogate whether the complaint is a genuine whistleblower complaint.
Liability considerations
The treatment of whistleblower complaints during an insolvency process remains relatively unexplored, with limited guidance available to form definitive conclusions. Pre-appointment contraventions of whistleblower protections, where the company has received (or during the course of the IP’s appointment) receives a penalty will likely impact the structure of sale processes. This may necessitate consideration of whether a deed of company arrangement is viable8 or whether only specific assets are sold to a purchaser (rather than the penalty receiving entity itself being sold).
Post-appointment, IPs clearly will want to ensure compliance with whistleblower protections to minimise the risk of personal liability for the IP. Once an IP assumes control of a company, an IP can be found to be personally liable for any breach of the whistleblower protections under the Corporations Act. In addition to the pecuniary penalties noted above, individuals may also be subject to criminal penalties of up to six months’ imprisonment in the case of breaching confidentiality and up to two years for detrimental conduct.
Next steps
Addressing whistleblower disclosures demands a careful balance between transparency and confidentiality. Missteps in either direction, whether failing to act on legitimate concerns or breaching confidentiality can have significant consequences.
Navigating this landscape requires a detailed understanding of legal duties, strategic risk management, and adherence to established investigative procedures. By correctly identifying protected disclosures, safeguarding sensitive information, and aligning with the protocols set out in the Corporations Act, IPs can reduce exposure and uphold trust among stakeholders during the administration process.
Get in touch
For further guidance and advice on whistleblowing in a distressed or insolvency context, please contact James Simpson or Nicholas Edwards.
1Corporations Act 2001 (Cth) s 1317AAA (Corps Act).
2Ibid S 1317AAE.
3Ibid Ss 1317AC;1317AD.
4Ibid S 181.
5Ibid s 1317AAE.
6Ibid s 439A.
7Ibid s 1317ADA.
8Generally penalties imposed by a court in respect of an offence against a law are not admissible to proof against an insolvent company pursuant to s 553B of the Corps Act and so cannot be compromised under a deed of company arrangement.
