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Australia | Publication | September 2023
The Supreme Court of Western Australia – Court of Appeal's decision in ASIC v Jones1 provides additional welcome clarification on the issue of insolvency practitioner independence in the context of pre-administration services. The decision is broadly consistent with the decision in Ten Network2, in which the Federal Court of Australia held that a conflict of interest can be mitigated but not cured by disclosure and consent. However, the decision in ASIC v Jones provides further clarity on the factors that a Court will consider when assessing independence.
The voluntary administrators were appointed to two companies, GD Pork Pty Ltd and GD Meats Pty Ltd in October 2018 (Companies).
Prior to their appointment, one of the voluntary administrators (via the practitioner’s firm) provided advice to the Companies over a period of 3 months immediately before the Companies were placed into administration. The practitioner’s firm was paid a fee of circa $100,000 for that advice, before the commencement of the voluntary administration.
ASIC alleged that the voluntary administrators lacked independence because of a conflict of interest. It was alleged the conflict of interest arose from the fact that the fee paid for their pre-administration advice may be a voidable preference in a liquidation. ASIC also argued that the practitioners should have their remuneration reviewed and reduced because of the conflict of interest.
The Supreme Court of Western Australia dismissed ASIC's case at first instance. Justice Kenneth Martin found that there was no real or sensible possibility of conflict and no apprehended bias because the fee for their pre-administration advice was reasonable. Justice Martin also found that even if there had been a conflict of interest, it would not have been sufficient to warrant a review of the insolvency practitioners' remuneration. ASIC appealed.
The Court of Appeal found that the fee did give rise to a conflict of interest and a reasonable apprehension of bias. However, the Court of Appeal concluded that it should not exercise its discretion to review the insolvency practitioners’ remuneration because:
Accordingly, although some of the grounds of appeal were established, the Court of Appeal did not disturb the orders made by Kenneth Martin J and dismissed the appeal.
The Court of Appeal has clarified that a conflict of interest will not necessarily disqualify an insolvency practitioner from acting, where the conflict of interest is inadvertent, no creditor raises a concern, and the evidence shows that the practitioner was not deflected from the due performance of any aspect of their duties as administrators.
Specifically, the Court of Appeal pointed to the fact that the Companies were placed into liquidation instead of entering into a deed of company arrangement (i.e. if a deed of company arrangement had been recommended by the voluntary administrators and approved by the creditors, this would have meant that their fee would not be at risk of disgorgement as an unfair preference). Liquidation was the only option, so there was ‘no doubt’ that the voluntary administrators’ recommendation that the Companies be placed into liquidation was ‘unaffected’ by their interest in avoiding a possible preference claim.
The Court of Appeal also clarified that there must be sufficient circumstances to warrant a review of an insolvency practitioner's remuneration.
The decision does not deviate from prior judgments on the issue of insolvency practitioner independence. The decision is consistent with the decision in Ten Network, where the Court held that a conflict of interest can be mitigated by disclosure and consent and seeking the assistance of the Court.
In Ten Network, relief was sought by the administrators in respect of their (and their firm’s) substantial pre-administration work. The Court accepted this was to prepare an administration contingency plan in case the formal restructuring negotiations being conducted by the Ten Group (and not the insolvency practitioners’ firm), were unsuccessful. The insolvency practitioner was not retained, nor did he act as, a professional adviser to the Ten Group, its board, management or any other director. In Ten Network, the practitioner’s firm was retained by the Ten Group’s solicitors and not by the Ten Group directly. This is to be contrasted with the Companies’ direct engagement of the voluntary administrators’ firm, and one of the eventual administrators, in ASIC v Jones.
The decision in ASIC v Jones provides further clarity on the factors that a Court will consider when assessing independence, including:
Some key lessons for insolvency practitioners include:
- making it clear to the board of directors that the practitioner may become the administrator if other measures to restructure the company do not succeed;
- ensuring that the retainer is clearly defined;
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