The most recent decision on insolvency practitioner independence confirms an ongoing trend of treating the fair-minded observer, whose view is determinative, of being more knowledgeable than in the past.
The 2014 appeal decision in Walton Constructions; ASIC v Franklin concerned issues of independence of administrators arising from the source of their appointment. The Full Federal Court considered that a fair-minded observer might have perceived that the administrators might not have been independent in the particular circumstances that applied.
Although the trial decision of Justice Gordon was overturned on appeal, the series of decisions since then, while acknowledging the Full Court’s decision, have in effect proceeded more in accord with Gordon J’s views.
These included her comments that the knowledge attributed to the fair-minded observer should include an awareness about the functions and duties of liquidators, that they have statutory duties and responsibilities that they must discharge, and that they are commonly referred insolvency work by solicitors, business advisors and accountants.
That is, that one must accord the fair-minded observer with some level of understanding and knowledge of how insolvency works – for example, that although a liquidator can properly be chosen by the directors to wind up their company, or that the liquidator can be funded by a particular creditor, the liquidator has a duty to attend to all creditors fairly and equally.
Ziziphus v Pluton Resources
In this decision on administrator independence, the WA Court of Appeal rejected a challenge to the appointment of the administrators of a deed of company arrangement (DOCA) as liquidators, by leave under s 532(2) Corporations Act, upholding the trial decision.
The focus was on whether a perception of a lack of independence existed. The practitioners had put forward and supported the DOCA, which was ultimately set aside. Under the DOCA, voidable transaction claims available in liquidation would not be pursued. It was said, in part, that a fair‑minded observer might reasonably apprehend that the practitioners, now appointed as liquidators, might not pursue those transactions with any vigour because of their past support of the DOCA.
Echoing Justice Gordon’s words, the Court of Appeal said (as paraphrased):
The fair‑minded observer would be taken to know that voluntary administrators may be appointed both by the board of directors of the company and by a secured creditor, and that the administrator is required to make a declaration of relevant relationships and indemnities, and provide a copy to creditors.
The criticisms of the DOCA were not matters upon which a fair‑minded observer might reasonably apprehend that they might not discharge their duties as liquidators with independence and impartiality. The master’s criticisms of the DOCA were tempered by his findings that he was ‘not in any way … critical of the conduct of the administrators’ …
A fair‑minded observer (as opposed to the uncharitably‑minded observer hypothesised by the appellants in oral submissions) might not reasonably apprehend that the liquidators might breach their duties as officers of the court and ‘run dead’ on the company’s liquidation claims, because of their past promotion of the DOCA.
Changing standards of the fair-minded observer
As the WA Court of Appeal is saying, we should reasonably assume nowadays that creditors have some understanding of the insolvency process. This would be assisted by the recent reforms under the Insolvency Law Reform Act 2016 whereby creditors are to be provided with more information, including about the right to replace a practitioner. Available resources from the regulators and industry bodies are extensive and readily accessible. Creditors would also be aware of the time and cost associated with a change in practitioner.
The fundamentals of the law of independence may not have changed but the knowledge standards of its stakeholders properly should have.
That fair-minded observed would readily enough and properly discount the denigration of the industry by some politicians and newspapers, for reasons of their public standing. Nevertheless, it does not help.
All this applies as much to bankruptcy trustees as to liquidators. Given the harmonisation of much personal and corporate insolvency, and the issues often raised by the intersection between the two, independence should be seen and assessed based on case law from both disciplines. In addition, bankruptcy law now has specific rules about independence which may prevail over case law, and codes.
Changing processes by which insolvency work is referred
The other area that has and is changing is the process by which liquidators and referred and accept work. The UK is acknowledging that the processes of referral of insolvency business have significantly changed in the last 30 years and it is considering whether those changes may need to be reflected in its insolvency practitioner independence rules. The fair-minded observer might properly take these changing relationships into account.
Rules of independence exist in a societal and legal context. That context must continue to be monitored for changes, in many areas of professional work, including that of the judiciary.
“whilst the fictional observer, by reference to whom the test is formulated, is not to be assumed to have a detailed knowledge of the law, or of the character or ability of a particular judge, the reasonableness of any suggested apprehension of bias is to be considered in the context of ordinary judicial practice. The rules and conventions governing such practice are not frozen in time. They develop to take account of the exigencies of modern litigation. At the trial level, modern judges, responding to a need for more active case management, intervene in the conduct of cases to an extent that may surprise a person who came to court expecting a judge to remain, until the moment of pronouncement of judgment, as inscrutable as the Sphinx”.
In the insolvency context, similar but more graphic examples have been drawn about the impracticality of allowing only limited pre-appointment relations between the practitioner and the directors before the insolvency knot is tied.
Codes of Practice
A point of interest for the ‘industry’ associations is that the courts are paying little attention to their codes of practice, the Court in Korda; Network Ten  FCA 914 saying that the ARITA Code, while “useful”, has no legal status and a failure to comply with it would not render a practitioner liable in law. Any question concerning independence
“must be determined according to law. It is not the Court’s function in a case such as this to either apply or interpret the code”.
Once a practitioner’s conduct is assessed at law, one would think that the practitioner could not then, on a matter of professional practice, be further assessed by an industry body.
With rules of independence continually being under review – see for example APES 330 – a wide perspective needs to be maintained if industry codes are to remain relevant.
 ASIC v Franklin  FCAFC 85
 Justice Gordon is now on the High Court. See ASIC v Franklin  FCA 68.
 Ziziphus Pty Ltd v Pluton Resources Ltd (r&m apptd) (in liq)  WASCA 193
 Parbery v QNI Metals Pty Ltd  QSC 231
 Johnson v Johnson (2000) 201 CLR 488;  HCA 48