Michael.1
Insolvency and related law and policy, and more

Michael Murray is an Australian author and commentator on corporate and personal insolvency law and related issues, in Australia and internationally. He has a strong law and policy background, is independent of any connections, and his views are his own. He gives no legal advice. 

Is “outrageous” too strong a term to describe some of our new insolvency laws?

The question as to what parts of the Insolvency Law Reform Act 2016 have commenced may be unclear to some but various provisions are being applied by the Judges as having commenced on 1 March 2017. A consequence is that we can find out at an early stage the views of the courts on the new regime and some of its problematic – in my view, outrageous – provisions, the power of the court to give directions being one.

The Court in Walley, in the matter of Poles & Underground Pty Ltd (Administrators Appointed) [2017] FCA 486 gave directions under s 90-15 of the Insolvency Practice Schedule (Corporations) in relation to a potential conflict of interest of the liquidators, whose firm had provided prior accounting services to the company in liquidation.

The Federal Court – Justice Jacqueline Gleeson – applied existing principles in relation to the giving of directions and the exercising of discretions under prior sections 479(3) and s 511 of the Corporations Act.

In applying new s 90-15, the Court contrasted new section 45-1, which was “less clear” in its intent. “On its face, s 45-1 is expressed in very general terms, and may provide power to make an order of the kind sought in this case”.

However, it was unnecessary to resolve this, the Court simply relying upon s 90-15.

Sections 45-1 and 90-15

Section 45-1 allows a court to make “such orders as it thinks fit in relation to a registered liquidator”.  It is contained in Division 45 – Court oversight of registered liquidators.

Section 90-15 allows the court to make “such orders as it thinks fit in relation to the external administration of a company” and is contained in Division 90 – Review of the external administration of a company.

Both provisions are otherwise nearly identical in the powers given but s 45-1 seems to be available in relation to alleged misconduct of a practitioner – akin to former s 536, and s 90-15 seems more like a directions power that may be needed in any administration. Its past equivalent was s 479(3), allowing a liquidator to “apply to the Court for directions in relation to any particular matter arising under the winding up”.

What Justice Gleeson did not comment upon was that, in contrast to the previous seventeen words in s 479(3), we now have an added 480 words giving the courts some examples of the orders they might make, only one of which – (a) – is a true directions order.

Orders that the Court might like to consider

The remainder are orders

                     (b) that the liquidator be removed;

                     (c) that another registered liquidator be appointed as a replacement;

                     (d)  in relation to the costs of an action (including court action) taken by the external administrator or another person;

                     (e)  in relation to any loss that the company has sustained because of a breach of duty by the external administrator;

                      (f)  in relation to remuneration, including an order requiring the liquidator to repay her or his remuneration,

with “matters that may be taken into account” (4) being

                     (a)  whether the liquidator has/is faithfully performing their duties; and

                     (b)  whether an action or failure to act by the liquidator is in compliance with the Act and Rules; and

                     (c)  whether an action or failure to act by the liquidator is in compliance with an order of the Court; and

                     (d)  whether the company or any other person has suffered, or is likely to suffer, loss or damage because of an action or failure to act by the liquidator; and

                     (e)  the seriousness of the consequences of any action or failure to act by the liquidator, including the effect of that action or failure to act on public confidence in registered liquidators as a group.

And as to costs, whether there should be orders that  

                     (a)  the external administrator or another person is personally liable for some or all of those costs; and

                     (b)  the external administrator or another person is not entitled to be reimbursed by the company or its creditors in relation to some or all of those costs.

And as to orders to make good loss sustained because of the administrator’s breach of duty, an order that:

                     (a)  the external administrator is personally liable to make good some or all of the loss; and

                     (b)  the external administrator is not entitled to be reimbursed by the company or creditors in relation to the amount made good.

With a saving provision that section 90-15 does not limit Court’s powers under any other provision of this Act, or under any other law, to have a go at the conduct of the practitioner.

Comment

This is quite an outrageous provision in the context in which its found, and generally.  It might well be seen that way by Judges, who are “invited” to consider some orders to make in case they are not sure what to order. 

The concept of an insolvency practitioner being an officer of the court is discounted or abandoned in the tone and content of this and other similar sections in the ILRA.

At the recent Traill Insolvency conference, on 1-2 May, the question was raised whether, in seeking directions, ASIC or AFSA should be notified in case any exercise of these discipline powers by the court might be needed. 

The question was also raised whether practitioners would avoid seeking directions at all.

That would of course be unwise, and impractical, given the legal complexity of issues with which practitioners are often confronted, including from unsatisfactory unreformed laws. A recent example is  Kite v Mooney, in the matter of Mooney’s Contractors Pty Ltd (in liq) (No 2) [2017] FCA 653, where directions were given in relation to an insolvent corporate trustee of a trading trust, under ss 424 and 511 of the Corporations Act, both sections soon to be replaced by s 90-15. 

Outcome in Poles and Underground

As to the issue in question, the Judge found no need for the drafter’s (un)helpful list of suggested orders. 

The liquidators’ firm was engaged by the company from April 2016 to review its financial affairs and performance as well as to provide a report arising from that review. This extended into reports to the company’s bank. The reports did not express any view as to the company’s solvency but they did provide commentary on the company’s financial position. A fee of $95,290 was charged and paid.  The company went into administration in November 2016.

Justice Gleeson took into account that no creditor had expressed any apprehension of a lack of impartiality or raised any complaint concerning the propriety of the liquidators remaining in office. Also, the liquidators had substantial knowledge of the affairs of the company which was likely to assist in the efficient conduct of the liquidation. 

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One Response

  1. it will be interesting to see how this section evolves and whether the equivalent under the Insolvency Practice Schedule (Bankruptcy) provisions are applied in the same manner remembering of course that the judges hearing and determining those applications are not only judges in the Federal Court of Australia but judges of the Federal Circuit Court of Australia. It is unfortunate that the provisions lack the precision previously adopted by legislative draftspersons.

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