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Michael Murray’s on-going commentary on issues in corporate and personal insolvency law and related policy and law reform, in Australia and internationally. Given the scope of insolvency, this extends to business, consumer and professional conduct, and ethics, governance and regulation, criminal, tax, environmental and administrative law, and the courts and government.

 

An expansion of the Banking Code, or is a change in the law needed?

The story about the conduct of bank officers in the Sydney Insolvency News prompts my suggestion for a widening of the banking code, or even a banking code. Similar “stories”, including my own, support this.

SiN reported the story as “Grant Thornton Excoriated over Arrium”, GT being an accounting firm and Arrium being a mining company in receivership and liquidation. 

SiN reports that, in light of GT’s acceptance of an appointment as administrator to Arrium, certain banks “have ‘benched’ GT’s restructuring and advisory divisions for a period”.

SiN asks

“Can this be retribution for accepting an appointment (to Arrium, as receivers)?”.

The issue raised here is rather particular and confined, and unsympathetic to some, but is perhaps indicative of a wider problem with which others can identify. It comes from stories of bank’s dealings with insolvency practitioners, or IPs, and from my own experience.

I suggest this could be covered by a proper banking code, or the law could be changed to deal with it in another way.

The Banking Code has an important, but rather narrow focus, on retail customers, suggesting that banks do not have influence or responsibilities in other larger forums.

Banks are big and significant enough to adopt a principle code of conduct for all their commercial and lending arrangements.  This is the case without even mentioning the stories to which I refer. 

Briefly, banks should adopt a code of conduct and model litigant obligations generally, or aspects of them.

In the insolvency context to which I initially referred, banks should have a particular code in their dealings with those advising bank clients, and with IPs appointed to them.

In particular, banks should acknowledge and accept that any adverse commercial or other decisions about an IP or their firm must not be influenced by the adverse consequences, or otherwise, of the proper performance by the IP of their role and compliance with their duties.

Any actions by banks that seek to unfairly or improperly qualify or limit the role of an IP can have a detrimental impact on the beneficial and constructive purposes of the insolvency regime. The regime benefits individuals and small-medium businesses and its current processes of reform acknowledge that. Any such action by a bank in a particular matter, for example to dissuade or impede access by an insolvent bank customer to an IP would likewise be detrimental.

The role of the IP

IPs perform an important public and private function in the administration of insolvency companies, and individuals. They are officers of the court and are often appointed by the court, and at times on the application of ASIC as the regulator in the public interest.

In other circumstances they consent to being appointed to a company at the request of the directors acting under a duty to attend to the insolvency of their company.

They have ethical responsibilities of fairness and some model litigant obligations.[2]

In discharging their responsibilities IPs may need to investigate those who have had prior dealings with the insolvent, including its suppliers, customers and lenders.

A lender without security or without a registered or perfected security is an unsecured creditor. A secured creditor is generally able to stand outside the insolvency and rely on its security. An IP might nevertheless challenge the validity of the security or the time or circumstances of its entry.

IPs therefore, in discharging their duties may bring claims against banks, or make decisions adverse to them, as they may against government, or any other significant entity, including employees and unions.

Particular concerns

The SiN article prompted stories that over time banks had try to deter an IP from accepting an appointment by way of what may be termed ‘commercial threats’ or disincentives. The issue goes beyond this, that IP’s are deterred – other than on legal bases – from bringing proceedings or investigating a matter involving a bank.

Hypothetical examples

Hypothetical examples are based on what is the common circumstance in the insolvency and banking professions that IPs are appointed by banks to act as receivers, or as administrators or liquidators. Banks also engage the experience of IPs in advising on the financial circumstances of a customer, and in a range of other investigative, forensic and accounting related work.

SMEs and individuals, and creditors – invariably all bank customers – also seek out the assistance of IPs to formally administer their insolvent business or debtor.

In that general scenario, assume a bank informs an IP that if the IP:

  • brings legal action against the bank, or
  • rejects or queries the bank’s proof of debt, or
  • consents to act as liquidator of a particular company,

then the bank will

  • no longer give work to that IP as receiver, or liquidator administrator; or
  • reduce the credit limit of the IP’s firm; or
  • take other such action as the bank’s position allows.

Conversely, a bank might inform an IP that if the IP does not bring available legal action against the bank, the bank will give more work to that IP as receiver, and so on.

An IP may well be acting unlawfully if they acted on the basis of such communications. IPs have high standards of independence including in relation to business relationships with parties involved in the insolvency.[3] 

Unlawful?

It is for others to assess whether such conduct is unlawful, or that any of the circumstances described would amount to contempt of court or breach of the existing Code, or the law, or other bank standard.

Actions by outside parties that seek to prevent the IP, as an officer of the court, performing their duties has been held to be a serious contempt.[4]

At the same time, it might be said that a private bank can choose whatever IP or firm it decides in its own private discretion, on whatever bases, even if petulant. That would be subject to the duties of the company officers to its shareholders and other legal duties.

In contrast, a government entity or officer could be subject to challenge if such perverse decisions were made. As a parallel, IPs will often sue government, and it would be improper or unlawful for government to then take some action prejudicial to the interest of the IP or their firm.[6]   

Suggestion

My suggestion is therefore that banks adopt something in the nature of the model litigant obligations of the Commonwealth and state governments. There is some parallel between government and banks, banks are particular entities, offered some protection under the law, separate from trading and business operators. They would consider themselves as having public interest obligations. The law recognises this. In any event, many of the model litigant obligations are not inconsistent with good commercial or business conduct, certainly of a major public entity.

The model litigant obligations[7] are binding on government agencies that handle claims or conduct Commonwealth litigation and on private-sector lawyers acting for the Commonwealth.

The written policies provide guidance on what conduct is required of a model litigant. They variously refer to specific duties, some of which have long been recognised by the courts at general law. None should be controversial or difficult for a bank. They include to deal with claims promptly; minimise delay in proceedings; make early assessments of prospects; pay legitimate claims without litigation; act consistently; participate in alternative dispute resolution where appropriate; and not take technical points unless their interests would be compromised. Model litigants are also required to apologise when they or its lawyers have acted wrongfully or improperly.

There are views that the law and court rules now impose model litigant obligations on any litigant in any event, including banks.[8]

Conduct which is the subject of this suggestion is not specifically addressed in the Model Litigant guidelines, perhaps only because it would hardly have been thought necessary.

If banks needs that proscription, I suggest the Banking Code could say that in dealings with an IP who is properly attending to their duties, no adverse commercial or other decision should be made about the IP or their firm based solely or largely on any action taken by the IP in relation to the bank.

Such a proscription would need principles-based and thoughtful drafting.

My experience

In insolvency, the UK removed the right of banks and other secured creditors to appoint a receiver some years ago. The appointee – the administrator – is appointed to act in the interests of both the secured creditor/s and the unsecured creditors.  This change was said to have been made over concerns that the law as it then stood (similar to our present law) gave too much power to banks, and was “inimical to corporate response through a collective insolvency proceeding”.[9] It has been the subject of much academic and professional analysis.

In 2015, I reported on that issue at a public forum on my return from a study visit to the UK.  Within a day or so, anonymous “word” was relayed to me that “the banks were upset” at my mention of this idea …..

The idea is still there, better or best reported in this article in the ARITA journal: The end of receivers and managers and the beginning of a streamlined and collective VA procedure? (2010) 22 A Insol J 8, Walter.

This might be a second best but good alternative to a better Banking Code? 

‘Word back to me’ can be emailed to here.

[2] The “rule in ex parte James”.

[3] ASIC v Franklin (liquidator), in the matter of Walton Constructions Pty Ltd [2014] FCAFC 85.

[4] Ames v Birkenhead Docks [1855] EngR 351; 52 ER 630.

[6] Ethical and other obligations are imposed under the Commonwealth Public Governance, Performance and Accountability Act 2013 (PGPA Act).

[7] The Commonwealth’s policy is set out at Appendix B to the Legal Services Directions 2005, made under s 55ZF of the Judiciary Act 1903 (Cth).

[8] See Federal Court Central Practice Note: National Court Framework and Case Management (CPN-1), 25 October 2016, referring inter alia to the Civil Dispute Resolution Act 2011 and sections 37M and 37N of the Federal Court of Australia Act. See also section 56 of the Civil Procedure Act 2005 (NSW) and the Legal Profession Uniform Law. See also Model Litigant Principles? To apply to all? by Gregory Ross, 30 March 2018, Blog.

[9] Discussed in Principles of Corporate Insolvency Law, 10-05, 4th ed, 2011, Sir Roy Goode. 

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