The concept of “potential” or “putative” insolvency administrators who have had “recent, long-term, substantial and remunerative involvement” with the company before they are appointed to administer it has been raised in Korda, re Network Ten:  FCA 914. There, the Federal Court accepted the continuation of Korda Mentha as administrators, but ordered the appointment of an independent liquidator to review and report on aspects of the firm’s prior involvement.
This decision will be much debated, though not here. This commentary simply highlights earlier reports on this website that might usefully be considered in assessing the outcome of the Network Ten decision.
In brief, those earlier reports cover a review of insolvency practitioner independence codes being undertaken in both the UK and New Zealand in light of what are seen as changes in insolvency practice, consistent with the evidence given in Network Ten. Also, other case law in Australia following ASIC v Franklin supports Network Ten, and New Zealand courts have dealt with independence challenges in a similar way.
Modern day corporate restructuring
Before highlighting those, the context in Network Ten was set out the evidence of Mr Mark Korda, about the nature of modern day corporate restructuring. In part, it was that
“it is now usual for a company or corporate group and/or its advisors (particularly, if that company or group is complex and large) to, at the same time as pursuing restructuring options, engage an insolvency practitioner to undertake contingency planning for a possible future administration, in case the restructuring options do not succeed”.
His evidence went on to say that when this contingency work is undertaken, it is performed on the basis that the turnaround strategies being pursued will work.
“One of the best chances a company has to avoid an insolvency is often to carefully plan for it and retain a proposed administrator early in that process”.
This planning process also allows the insolvency practitioner to gain an understanding of the business and its cash flow, so that if appointed, they are more able to keep the business operating.
Based on that evidence, and a review of the case law, the Federal Court made its orders.
There have been more recent developments, and other cases, not referred to in Network Ten, that generally support this outcome.
- In Cargill International S A v Solid Energy New Zealand Limited  NZHC 1817, Korda Mentha’s independence was challenged where the firm was originally engaged in 2013 to advise major unsecured creditors of the Solid Energy group, NZ’s then largest coal mining company, which was experiencing financial difficulties. Before their appointment as administrators in 2015, KM had become involved in the development of a complex deed of company arrangement, along with others. The Judge rejected a challenge that this work compromised the deed, saying that pre-appointment work, including involvement in the drafting of a proposed deed, is not unusual in the corporate insolvency context and does not preclude subsequent appointment as a deed administrator.
“There would be major efficiency losses, to the detriment of all creditors, if new insolvency practitioners were required to be appointed purely for form’s sake”.
- In Application by Bridgman & Bennett  NZHC 933, PwC undertook a high-level review of the company’s financial position and provided advice about potential restructuring options during March and April 2016, and also gave limited advice about the options to address the company’s cash flow problems. PwC also had a continuing business relationship with a secured bank. In giving leave to PwC to take the appointment, the Court noted that the bank’s security was likely to cover the amount owing, and the bank supported the appointment. The practical knowledge already acquired by PwC supported the application, leading to “an efficient and cost effective administration …”.
The Court also noted that the creditors would later have the opportunity to vote to remove PwC if they wished.
In Network Ten, the Federal Court refers to ASIC v Franklin, re Walton Constructions  FCAFC 85, as to the test for determining whether a fair-minded observer might consider there might be a lack of independence.
While the threshold for that test is low, courts since then have tended to apply a higher test based on the understanding that the observer is someone who is aware of the insolvency context in which the independence assessment is being made, illustrated by this series of cases:
- the court in Queensland Mining Corporation v Butmall allowed an appointment despite a prior audit relationship of the appointee’s firm with a major creditor;
- in Icicek Holdings Pty Limited the court allowed liquidators and trustees in bankruptcy from the one firm to be appointed; and
- in BC39 v Rambaldi, separation of issues between state offices of the one national firm were held to suffice.
- In Walley, in the matter of Poles & Underground, the court allowed liquidators’ appointments despite their firm having previously undertaken an investigating accountant role over six or more months, and being paid fees of $95,000; and
- in Mighty River v Hughes, the trial judge rejected a challenge to the administrator’s independence, saying that his conduct in the pre-appointment phase was “exemplary”. Decision confirmed in Mighty River v Hughes  WASCA 152.
In BC39, the Judge said that:
“As Walton Constructions makes clear … (t)here must be “a real” conflict … [which] must be shown to be likely to impede or inhibit the trustees from acting impartially … It is also necessary to have regard to the circumstances in which any relevant conflict is said to have arisen – when and how the conflict arose, and whether any conduct on the part of the trustees gave rise to the conflict. … Remedial steps may be taken to obviate the ongoing appearance of partiality”.
Relevance of pre-packs?
The Federal Court in Network Ten discussed the history of ‘pre-packs’ in the UK up to 2013 as raising independence problems where the pre-insolvency adviser became the insolvency appointee. The UK has in fact moved on, with a restriction on “insolvency practitioner” advisers becoming the appointed “administrator”: see Statement of Insolvency Practice 16. This is reinforced by SIP 13 Disposal of assets to connected parties in an insolvency process – see Pre-packaged insolvencies – new English standards from 1 December 2016
Also, the Small Business, Enterprise and Employment Act 2015 has created a reserve power for the government to regulate pre-packs, to be used only if certain voluntary measures adopted by the professional bodies prove unsuccessful. These measures include SIP 16 as well as the establishment of a ‘pre-pack pool’ of senior practitioners to oversight the process. The UK Insolvency Service is also closely monitoring these arrangements.
New Zealand and England
Returning overseas, in New Zealand, a government insolvency law reform paper has also questioned the independence rules about prior engagements, the restriction being “especially acute for investigating accountants who are usually also insolvency practitioners”. The paper goes on to say that this
“excludes the very practitioners who are the most suitable for appointment (i.e. because they already have a good understanding of the business of the company and are well placed to carry out the insolvency procedure efficiently and effectively)”.
The NZ professional Insolvency Engagement Standard which offers a less restrictive approach is being considered, and RITANZ is in the process of reviewing its Code of Practice.
And the Joint Insolvency Committee in England is reviewing its independence code in light of what it sees as changes in referral sources and other developments in insolvency practice.
As to the ARITA Code, the Judge in Network Ten noted that it was seen by KM as an independent basis “upon which they might be permitted to continue to act as administrators”. But the Judge said that while the Code is useful in providing “guidance on standards of practice and professional conduct expected of ARITA members”, and it may be taken into account by a court, it has no legal status.
“Any question relating to the appearance of impartiality 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”.
Also, if a conflict arises, and legal advice may be needed to substantiate the conflict, it is not for the liquidator to devise means to resolve it, under any code, or otherwise; it is for the court: Australian Executor Trustees Ltd v Provident Capital Ltd  FCA 1461. A court then has power to “quarantine” the issues about which potential conflicts might arise, by making an order of the sort made in Network Ten.
While that may be so, code guidance can be a valuable reference point, and can, as with SIP 16, lead the debate.
But codes can also restrict the development of good practice. They need
“to keep close to commercial and professional practice, otherwise they risk a diminution in their compliance and influence. … Codes also need to have regard to the law”.
Over to the insolvency industry and the legal profession, among others …