A Judge has expressed concern about the processes for the appointment of insolvency practitioners, suggesting adverse relationships with their lawyers, leading to an abdication of adherence to their duties by practitioners in favour of the pursuit of a “profitable administration”.
There is much law and policy background as to issues of independence, remuneration and professional standards, including most recently considered by a parliamentary committee, which a comprehensive review of the insolvency system would best address.
In a winding up application against a cryptocurrency trader brought by ASIC, a question was whether the receivers to the company be appointed liquidators, or whether other liquidators with no connection should be appointed. Given the potential for the receivers to have a conflict of interest, and despite their extensive knowledge of the company’s affairs, Justice Roger Derrington appointed independent liquidators nominated by ASIC: Australian Securities and Investments Commission v A One Multi Services Pty Ltd (No 3) [2024] FCA 1209 (fedcourt.gov.au).
The Judge noted that it is generally assumed that the liquidator proposed by the applicant, usually a creditor, should be appointed, referring to Re El Zorro Transport Pty Ltd [2013] NSWSC 1082, though the appointment always remains at the discretion of the Court.
As an aside
Justice Derrington then made further comments “as an aside”: [11].
He said that it
“may be apprehended that the principle of appointing the insolvency professionals proposed by the applicant for winding up has many disqualifying features to it”.
“Experience has shown, all too starkly, that faithful adherence to the statutory duties required of liquidators and other external controllers, is often abdicated in favour of the pursuit of a profitable administration for the external controller”.
“It seems that, in many cases, external controllers regard themselves as restructuring professionals who, regardless of whether they are liquidators, receivers, administrators or deed administrators, seek to embed themselves in any process by which a company or its business is revitalised. With that, they tend to gravitate towards the creditor or other interested party who is most likely to fund the work required”.
He continued that the
“abandonment of the independence which external controllers are obliged to observe can also be seen in the long-standing relationships which have developed between regular applicants for winding up and their lawyers on the one hand, and insolvency practitioners on the other”.
He concluded that while this was not the occasion to explore that issue further,
“the time must shortly arrive where the courts will, by necessity, be required to develop a new process for the appointment of external administrators, being one which is not founded upon extant deep-rooted relationships and associations between external controllers and the applicants for appointment or, perhaps more accurately, their lawyers”.
Comment
These are interesting thoughts though perhaps too oblique on which to comment in detail but as a matter of general response, these random issues about the independence and standards of conduct of insolvency practitioners may assist.
Judicial comments and rulings about the independence of insolvency practitioners have been made many times before. A useful range of comments from the Courts is available in Bosnian Islamic Council of Australia [2024] NSWSC 247, including those since El Zorro.
Processes of appointment
As to their appointment, in Commonwealth Bank of Australia v Fernandez,[1] Finkelstein J gave an extensive, and informed, account of law reform proposals for processes of appointment of practitioners, including by way of tender or “auction”, and rotation from a pool. Nomination by the regulator is another option.
The 1988 Harmer Report and the 1997 Review of the Regulation of Corporate Insolvency Practitioners examined the issue. The then Trade Practices Commission’s Study of the Professions report of 1992 made recommendations from the perspective of the need to balance ‘efficiency and equity’ in the allocation of insolvency appointments, and the then need to ensure assetless companies were properly administered. That was in part attended to by “official liquidators” who were appointed by the court on a roster system and were required to administer a liquidation even if there were no funds for the liquidator’s remuneration.[2] This role was abandoned in 2017, the then government accepting that there may be an increase in the number of unscrutinised corporate failures.[3]
International examples, and guidance on processes, are also available, for example UNCITRAL’s Legislative Guide on Insolvency Law.[4]
Independence
The ARITA Code gives extensive guidance on independence generally and relevantly on referrals of work on any “understandings or requirements that work in the Administration will be given to a referrer”. More importantly, the Code gives guidance about the proper conduct of administrations, which is what this is really all about.
Remuneration
A connected issue is that of remuneration of liquidators, and their lawyers. In Re Stockford,[5] in the context of independence and referrals, Finkelstein J warned against practitioners having “cosy relationships with solicitors and counsel”, said that practitioners should shop around to ensure that they obtain the services of good lawyers at the best possible rate, and should closely monitor the fees as they are incurred.
On the particular issue of a liquidator engaging the solicitors who act for a petitioning or a substantial creditor, while this is said to be generally undesirable,[6] this is not an absolute rule. There are benefits, and in such cases the courts will often entrust the liquidator to maintain alertness to any conflict.[7]
Lawyers
Independence necessarily cuts both ways. Lawyers have independence requirements upon which insolvency practitioners who engage them should be able to rely. In fact, lawyers may be the best to advise the practitioner on their compliance with the relevant law. Also as to lawyers, insolvency practitioners’ independence requirements are based upon those of judges, as to which ALRC Report 138,[8] on judicial bias, is instructive, including as to apprehended judicial bias.
Court appointed special purpose liquidators
As to another particular issue, concern has been expressed about the courts’ too ready appointment of special purpose liquidators (SPLs), available to address independence concerns, but also appointed[9] simply as a creditor’s preferred appointee, the creditor unwilling to fund the incumbent liquidator, even though no issue of independence or other incapacity arises. What has been described as “the advent of “hired gun” SPLs may create new threats to independence and the integrity of the winding up process”.
Bankruptcy
Bankruptcy trustees have comparable independence requirements, and standards, with a comparable range of case law. AFSA guidance refers to the need for care in engaging lawyers for the petitioning or any creditor, certainly where the creditor’s claim might be disputed.[10]
Parliamentary Joint Committee on Corporations and Financial Services Report on Corporate Insolvency 2023
Consideration of the independence of insolvency practitioners was raised in this PJC report,[11] more in the context of whether insolvency practitioner independence requirements might be relaxed, and clarified, so as to allow more constructive pre-insolvency advice. There was also said to be a lack of clarity of approach between recent caselaw and that of professional bodies and ASIC, resulting in an unhelpful level of uncertainty.[12] The Committee ultimately referred such issues to its recommended comprehensive inquiry. It has not been an issue raised in personal insolvency.
Litigation costs
While a liquidator’s independence requirements are based on those of judges, that is, whether a fair minded lay observer might reasonably apprehend that the liquidator might not bring an impartial mind to the discharge of the liquidators functions, the courts acknowledge the reality that liquidators are engaged in a competitive business environment where they have to attract work, making it almost inevitable that they will develop contacts and relationships with those who are actual or prospective sources of referrals. Their success or otherwise will depend in part on their maintaining good professional reputations.[13] Hence, independence requirements must be seen in that context.
The PJC also heard of the financial impact of assetless administrations, such that the proceeds of voidable transaction litigation claims may often go to fund the administration, and other administrations, through cross-subsidisation, rather than to creditors. Insolvency practitioners must make practical commercial judgments, not necessarily to be second-guessed by a court.[14]
As well, concern about (overly) “profitable administrations” might usefully be addressed by the courts themselves inquiring into or monitoring the costs of the insolvency litigation of their “officers” and how the financial outcomes, if any, are distributed to creditors, if at all.[15]
In any event, assuming independence, the focus should really be on insolvency practitioners’ proper adherence to their statutory duties, always to be judged by the commercial and professional circumstances and exigencies under which they operate.[16] The subtleties involved might best be assessed in a comprehensive review rather than thorough judicial pronouncements, as to which this review may assist.
Comments welcome.
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[1] [2010] FCA 1487
[2] See Brian Cassidy Electrical Industries Pty Ltd v Attalex Pty Ltd (No 2) (1984) 9 ACLR 289; Australian Insolvency Practitioners as Unique Professionals: An Examination of the History of Liquidators and Trustees, Symes and Murray; What’s in a name. Is it official? (2006) April-June Aust Insolvency Journal 4, D Cowling.
[3] EM to the Insolvency Law Reform Bill 2017
[4] At pp 176ff.
[5] Korda, in the matter of Stockford Limited (Subject to Deed of Company Arrangement) [2004] FCA 1682
[6] Smarter Way (Aust) Pty Ltd v D’Aloia, [2000] VSC 408
[7] In the matter of Kala Capital Pty Limited (in liquidation) [2012] NSWSC 1073. See also GGPG Pty Ltd (Receiver and Manager Appointed) v Golden Eagle Property Group Pty Ltd [2024] FCA 1188 (fedcourt.gov.au)
[8] ALRC Report 138, December 2022, Without fear or favour, Judicial impartiality and the law on bias
[9] The “second opinion” special purpose liquidator: A second opinion — (2020) 20(8) INSLB 158
[10] Independence of personal insolvency practitioners | Australian Financial Security Authority (afsa.gov.au)
[11] Chapter 8
[12] [8.75]
[13] ASIC v Franklin (2014) 223 FCR 204; [2014] FCAFC 85
[14] See In the matter of St Gregory’s Armenian School (in liq) [2012] NSWSC 1215 at [32-34].
[15] Hall v Poolman [2009] NSWCA 64, generally.
[16] Rebuilding the structure of the Australian insolvency system, Murray and Harris (2022) 22(1&2) INSLB 14.
2 Responses
Another interesting article Michael. Perhaps the underlying issue is liquidators and trustees work where there are usually no funds. We are expected to perform our work to a high standard, impartially etc etc. However, the system does not provide for funds to do our work as you well know. Perhaps a revamped system should address the root problem of funding to underpin the required work to be done. In such cases there is never cause for any insinuation that a funding creditor may be favoured, or a lawyer is used because they know the issues and therefore cost less than bringing a new lawyer up to speed. His Honours observations are akin to wanting his cake and to eat it too. Lets start with the ATO paying every liquidator they appoint on a wind up and move from there with all companies paying an annual levy to fund the model they benefit from. The calculations for such a model have been around for a long time and not hard for anyone to replicate.
Rob, thank you.
Playing a little the devil’s advocate, I do get fed up with insolvency practitioners subserviently and continually going along with a system whereby they take on estates where there are often no funds. They need to work for change. I accept that insolvency inherently involves a lack of funds, and increasingly so. It does call for, as you say, a revamped system to address the root problem of funding necessary to underpin the required work to be done. Politically I can’t see that funding being provided and to be fair, there is not enough data to justify it; nothing much that the industry has produced anyway, nor the government – perhaps by design.
As to the required work to be done, the alternative is to reduce, perhaps to nil, the work done on most insolvent estates. The government in effect decided that in 2017 when it abolished the official liquidator role, resulting in more companies simply being deregistered; though it did say that if a creditor wanted to have a company wound up, it should fund the liquidator – ATO?
Another answer may be an annual levy, like a funeral fund.
But I really think that artificial intelligence (AI) and its offshoots will come to play an increasing role, as I said back in 2021: https://murrayslegal.com.au/blog/2021/05/04/13644/.
In particular, it can extract the data upon which law reform depends, in default of that data being provided by others. For example, what return to creditors is actually achieved by voidable transaction litigation?
It can help sort out the purposes of insolvency law and also provide a systems analysis of the insolvency processes – as the PJC has recommended – and otherwise assist in assessing all the rather complex benefits that an insolvency system is said to provide, and their value, and how they are best addressed, efficiently and effectively.
Thanks again.
Michael