Codes of conduct need to remain in step with on-going changes in the commercial and business worlds in which they operate. Otherwise they lose their relevance and purpose. That could then lead to a point where compliance with a Code is found to be contrary to the law, for which sanction may be meted. In an insolvency context, creditors or the court may express dissatisfaction, or more, with an insolvency practitioner’s resignation based on some too strict a rule of independence, to the consequent cost and delay involved in finding a replacement.
This is an opening question, not answered here but with the following comments presenting some lead-up to a view on that question being offered, in a later commentary.
Codes of conduct can be useful for those sharing common professional or trade skills – in order to set and maintain standards, to promote the skills of the group, to give clients or customers of the group some confidence of a good standard of service, and recourse if it is not met.
Codes cannot of themselves create law, or override it, but the place of the standards set by codes as “soft law” is well enough established in many fields.
Insolvency practitioners
Insolvency practitioners (IPs) in Australia are generally professional accountants, only, and as such are bound by the codes that apply under the auspices of the APESB, in particular APES 330 (insolvency services) and APES 110 (code of ethics).
If they are members of ARITA, they are bound by the ARITA Code, in place of APES 330. An IP need not be a professional accountant but if, for example, they are qualified as a lawyer, then relevant legal codes apply. This illustrates the scene.
| Insolvency practitioners |
Standard |
| Professional accountants, and ARITA members |
ARITA Code
APES 110 |
| Professional accountants, and non-ARITA members |
APES 330
APES 110 |
| Non-accounting professionals, eg lawyers, engineers |
Relevant professional code, as lawyers, engineers, turnaround (TMA) professionals |
Changing professional scene
What has been the subject of focus in the EU and the UK, and elsewhere, is the influence of changes in the professional scene and, in the face of codes unresponsive to change, gradual loss of function and relevance of applicable soft law.
In that context, the UK is reviewing its insolvency Code of Ethics, saying that market activities leading to insolvency appointments have changed since the Code was first introduced and that services offered by firms or groups in which IPs operate have extended beyond the traditional accountancy or legal practice. The UK review is examining the new avenues of obtaining specialist advice and services, different types of remuneration, and how insolvency appointments are referred and obtained.
Independence
Those are contentious issues in Australia in relation to an IP’s perceived independence. In particular, the law prohibits outside remuneration or influence. Independence is at the heart of these concerns.
An IP’s independence is a necessary feature of all insolvency regimes but it is a standard that depends on reasonably perceived concerns – whether a reasonable person might have concern that independence might be breached. Where insolvency is held in high regard as a profession, the level of reasonableness of concerns about a lack of independence may be set higher. Where it is less highly regarded, the threshold of reasonable concerns may be lower. The attitude of politicians, the media and the regulators often drives that level of regard.
The law’s concern is based on what is reasonably perceived to be a lack of independence, to a fairly low threshold. But it is not a reasonable concern, generally, if a liquidator is funded by a particular creditor; or if the directors elect the liquidator to wind up their company. But the law does have concerns about the unconscious process to which we are all subject, that of later being asked to vindicate our own decision,[1] such that a liquidator could not be appointed in circumstances where he would review his own conduct as administrator, or administer a liquidation if his relative were a creditor.
Views should remain open
Such reviews need not compromise the established principles of practitioners being seen to be independent; rather it involves a reassessment of when that view of a lack of independence is activated.
In Australia, despite the strictures of the ARITA Code, and despite an appeal court decision setting a certain standard of reasonable perception, case law is proceeding as if working its way around these strict standards. The recent decision in Network Ten[2] seems to have set new standards of independence, based on accepted changes in the market and in business. The ARITA Code was referred to but not relied upon.
It was preceded by a series of Federal Court decisions on independence which produced outcomes which lowered the relevant perceptions of conflict and the Code requirements. These cases include the validation of a liquidator’s appointment despite a prior audit relationship of the liquidator’s firm with a major creditor; liquidators and trustees in bankruptcy from the one firm being appointed to a liquidation and a director’s bankruptcy; independence being determined on the separation of files between state offices of the one national firm; a liquidators’ firm having been investigating accountants; and a judge saying that ASIC’s independence concerns were not
“beyond the capacity of the liquidators as well advised and experienced insolvency practitioners to assess and handle”.
Just as this is happening in the UK, Europe is laboratory testing different approaches from its member states, and NZ, as always, is quietly observing the scene and making its decision on the larger jurisdictions’ best practices.
Randomised liquidators
Our Australian government is now looking at panel liquidators, albeit in a limited way. This is perhaps the ultimate break away from the constant perception that a liquidator or trustee chosen by a director or debtor is thereby tainted. While insolvency has dealt with and dismissed that issue for a long time, perhaps there is now a need to break that nexus, for the sake of removing the issue altogether. Just as judges can’t be chosen, neither should quasi-judicial liquidators. As the High Court says in effect, rightly, our practitioners’ unconscious biases should be acknowledged.
Such a system has been considered before in Australia, and raised judicially,[3] and it does operate in various international jurisdictions. We could go the way of some of the eastern European jurisdictions, with their automatic randomised system of appointments. But any such arrangement is not as simple as it seems and it can adversely impact on the need to maintain a well-trained profession with a sound volume of work; rather than one based on a lottery and with sometimes “too random” a result.
That is a matter for law reform. But to the extent that our Codes aim to set and maintain standards, they need themselves to acknowledge the changing professional scene, and to maintain their relevance not only in setting standards but also continuing to develop them. Otherwise the law will disregard them, or take issue with those who continue to rely on outdated practice.
(Based on research for a forthcoming publication. Comments welcome).
[1] Isbester v Knox City Council [2015] HCA 20 at [46].
[2] Korda, in the matter of Ten Network Holdings Ltd (Administrators Appointed) (Receivers and Managers Appointed) [2017] FCA 914
[3] Commonwealth Bank of Australia v Fernandez [2010] FCA 1487
Codes of conduct
Codes of conduct need to remain in step with on-going changes in the commercial and business worlds in which they operate. Otherwise they lose their relevance and purpose. That could then lead to a point where compliance with a Code is found to be contrary to the law, for which sanction may be meted. In an insolvency context, creditors or the court may express dissatisfaction, or more, with an insolvency practitioner’s resignation based on some too strict a rule of independence, to the consequent cost and delay involved in finding a replacement.
This is an opening question, not answered here but with the following comments presenting some lead-up to a view on that question being offered, in a later commentary.
Codes of conduct can be useful for those sharing common professional or trade skills – in order to set and maintain standards, to promote the skills of the group, to give clients or customers of the group some confidence of a good standard of service, and recourse if it is not met.
Codes cannot of themselves create law, or override it, but the place of the standards set by codes as “soft law” is well enough established in many fields.
Insolvency practitioners
Insolvency practitioners (IPs) in Australia are generally professional accountants, only, and as such are bound by the codes that apply under the auspices of the APESB, in particular APES 330 (insolvency services) and APES 110 (code of ethics).
If they are members of ARITA, they are bound by the ARITA Code, in place of APES 330. An IP need not be a professional accountant but if, for example, they are qualified as a lawyer, then relevant legal codes apply. This illustrates the scene.
APES 110
APES 110
Changing professional scene
What has been the subject of focus in the EU and the UK, and elsewhere, is the influence of changes in the professional scene and, in the face of codes unresponsive to change, gradual loss of function and relevance of applicable soft law.
In that context, the UK is reviewing its insolvency Code of Ethics, saying that market activities leading to insolvency appointments have changed since the Code was first introduced and that services offered by firms or groups in which IPs operate have extended beyond the traditional accountancy or legal practice. The UK review is examining the new avenues of obtaining specialist advice and services, different types of remuneration, and how insolvency appointments are referred and obtained.
Independence
Those are contentious issues in Australia in relation to an IP’s perceived independence. In particular, the law prohibits outside remuneration or influence. Independence is at the heart of these concerns.
An IP’s independence is a necessary feature of all insolvency regimes but it is a standard that depends on reasonably perceived concerns – whether a reasonable person might have concern that independence might be breached. Where insolvency is held in high regard as a profession, the level of reasonableness of concerns about a lack of independence may be set higher. Where it is less highly regarded, the threshold of reasonable concerns may be lower. The attitude of politicians, the media and the regulators often drives that level of regard.
The law’s concern is based on what is reasonably perceived to be a lack of independence, to a fairly low threshold. But it is not a reasonable concern, generally, if a liquidator is funded by a particular creditor; or if the directors elect the liquidator to wind up their company. But the law does have concerns about the unconscious process to which we are all subject, that of later being asked to vindicate our own decision,[1] such that a liquidator could not be appointed in circumstances where he would review his own conduct as administrator, or administer a liquidation if his relative were a creditor.
Views should remain open
Such reviews need not compromise the established principles of practitioners being seen to be independent; rather it involves a reassessment of when that view of a lack of independence is activated.
In Australia, despite the strictures of the ARITA Code, and despite an appeal court decision setting a certain standard of reasonable perception, case law is proceeding as if working its way around these strict standards. The recent decision in Network Ten[2] seems to have set new standards of independence, based on accepted changes in the market and in business. The ARITA Code was referred to but not relied upon.
It was preceded by a series of Federal Court decisions on independence which produced outcomes which lowered the relevant perceptions of conflict and the Code requirements. These cases include the validation of a liquidator’s appointment despite a prior audit relationship of the liquidator’s firm with a major creditor; liquidators and trustees in bankruptcy from the one firm being appointed to a liquidation and a director’s bankruptcy; independence being determined on the separation of files between state offices of the one national firm; a liquidators’ firm having been investigating accountants; and a judge saying that ASIC’s independence concerns were not
Just as this is happening in the UK, Europe is laboratory testing different approaches from its member states, and NZ, as always, is quietly observing the scene and making its decision on the larger jurisdictions’ best practices.
Randomised liquidators
Our Australian government is now looking at panel liquidators, albeit in a limited way. This is perhaps the ultimate break away from the constant perception that a liquidator or trustee chosen by a director or debtor is thereby tainted. While insolvency has dealt with and dismissed that issue for a long time, perhaps there is now a need to break that nexus, for the sake of removing the issue altogether. Just as judges can’t be chosen, neither should quasi-judicial liquidators. As the High Court says in effect, rightly, our practitioners’ unconscious biases should be acknowledged.
Such a system has been considered before in Australia, and raised judicially,[3] and it does operate in various international jurisdictions. We could go the way of some of the eastern European jurisdictions, with their automatic randomised system of appointments. But any such arrangement is not as simple as it seems and it can adversely impact on the need to maintain a well-trained profession with a sound volume of work; rather than one based on a lottery and with sometimes “too random” a result.
That is a matter for law reform. But to the extent that our Codes aim to set and maintain standards, they need themselves to acknowledge the changing professional scene, and to maintain their relevance not only in setting standards but also continuing to develop them. Otherwise the law will disregard them, or take issue with those who continue to rely on outdated practice.
(Based on research for a forthcoming publication. Comments welcome).
[1] Isbester v Knox City Council [2015] HCA 20 at [46].
[2] Korda, in the matter of Ten Network Holdings Ltd (Administrators Appointed) (Receivers and Managers Appointed) [2017] FCA 914
[3] Commonwealth Bank of Australia v Fernandez [2010] FCA 1487
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