My analysis below of the law of insolvency practitioner independence, written in October 2016, is reissued in February 2020 in light of the thesis of Dr Elizabeth Streten and her findings about ARITA Code and what she suggests is a disconnect between the law and the code.
Given the findings of Dr Streten about Australian practitioners, it is accepted that many would blanch at the comments of Dr John Tribe in the UK that pre-insolvency advice given by a practitioner should not necessarily preclude that practitioner later taking an insolvency appointment.
Dr Tribe has asked “where is the trust in IPs’ professionalism and objective independence? Why is it assumed that IPs would act in their own interest? … There is “more danger” in allowing other than insolvency practitioners in the initial advising stage, than in “self-interested IPs” seeking to take the appointment “to add to their own fees”.[vii]
Have our perceptions of the need for the independence of liquidators and bankruptcy trustees become too strict?
Recent views from the UK, and NZ, and the courts themselves, suggest so.
The independence of insolvency practitioners is important, given the role that they play in dividing up the assets of an insolvent business between competing creditors.
The perception of their independence is the more difficult aspect. There is an inherent focus on the decisions of a practitioner, in case they are seen to unfairly favour one person or group over another. Such a focus is universal, a healthy benefit from transparency in decision making, whether that be by courts, local councils or government.
Insolvency practitioners are however affected by the fact that in voluntary appointments, they are “chosen” by the insolvent company to take on the administration. Whatever is said, the appearance of favouring the person appointing them often remains.
Apart from that rather settled arrangement, in Australia at least, practitioners’ independence has to be perceived in the context in which it arises based on the view of the reasonable fair minded observer, apprised of the facts. That reasonableness test pervades the law, balancing in this case the perception of a lack of independence against the reality of how insolvency is structured in Australia and the standing and role of the liquidator.
The Walton Constructions decision[i] is important in its finding that such an adverse perception would arise from the fact that the requirement of the liquidators to challenge the conduct of an important business connection for their firm was such that they could not reasonably be perceived to be independent, and they were replaced.
It was decided on its facts. In its subsequent application by the courts, on different facts, it has been applied quite liberally, in fact more attuned to the single judge decision that it overturned.
A reasonable fair minded observer
Its test – whether a fair minded observer, apprised of the circumstances, might reasonably apprehend that a liquidator might not be impartial -is one that applies more broadly in the law. It is relevant for example in assessing the independence of a decision maker on a disciplinary board, or a tribunal member who also advised clients in the industry, or a judge who had a financial interest in the matter litigated[ii]
The test necessarily gives credit to the understanding of the fair minded observer, just as standards of care in tort are assessed according to the reasonable person. It is often the case that a person is in an apparent conflict but a reasonable and fair assessment allows their role to be maintained.
Just as insolvency itself has to allow expediency over the full pursuit of claims,[iii] independence has to give way to the reality of the complexity of our society and the need for acceptance of the basic integrity of the system.
Allowing a less than reasonable assessment of independence is impractical and itself would create an unreasonable apprehension of concern about any appointee.
Concerns about liquidator independence should be assessed at a reasonable level of understanding of the fair minded person. As Justice Davies said in the trial judgment in Walton Constructions,[iv] the knowledge attributed to that person
“would include an awareness about the functions and duties of liquidators as that provides the context for the consideration. … that liquidators have statutory duties and responsibilities that they must discharge, … that the liquidators would similarly discharge their statutory duties and responsibilities impartially and as required by law in the conduct of the liquidations in issue, uninfluenced by their relationship [in that particular case]”.
It was on the facts that the decision was overturned, but the statement of the level of understanding of “the fair minded observer, appropriately informed” seems unexceptional.
In fact subsequent court decisions referring to Walton Constructions have tended to apply it with that understanding, taking a more commercial and practical view about conflicts than that taken by others.
It appears to be on that basis that these decisions, after Walton, were decided:
- the court in Queensland Mining Corporation v Butmall allowed a prior audit relationship of the appointee’s firm with a major creditor;
- the court in Icicek Holdings Pty Limited allowed liquidators and trustees from the one firm to be appointed; and
- in BC39 v Rambaldi, where separation of issues between state offices of the one national firm were held to suffice.[v]
In that last case, the Judge said that:
“As Walton Constructions makes clear, a relevant apprehension of bias will not arise merely because a theoretical possibility of conflict of duty or interest exists. There 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. …
Professional standards anticipate the possibility of the appearance of conflict arising because of events occurring in the course of an administration. They contemplate that there will be circumstances in which the trustees may continue to perform their duties notwithstanding such events especially when the events were beyond their control. Remedial steps may be taken to obviate the ongoing appearance of partiality”.
None of this is to discount the importance of independence but to see its place not only in insolvency but also in the wider context of societal and business relationships and the need for maintenance of perceptions of justice being done, and in fact being done.
Like many an aspect of the pursuit of justice, that does come at a price – for example, the costs and delay resulting from a change in liquidators now evident in the administration of Walton Constructions;[vi] and in replacing the experience and knowledge of existing appointees.
The other cost occurs up front – the effective exclusion of experienced insolvency practitioners from fully advising insolvent or financially troubled companies. If they do so advise, and attempt a restructure as a pre-insolvency adviser, they may not take the appointment, under general rules of independence.
That may be said to allow unregulated and unethical advisers to fill that gap.
However, this restriction is not beyond argument, and its dangers have been raised, in the UK.
England and Wales
A restriction on pre-insolvency advisers becoming the liquidator is accepted in England, as it is in Australia. However, in relation to the assumption that insolvency practitioners should be so constrained, in a recent English law reform paper, Dr John Tribe asks
“where is the trust in IPs’ professionalism and objective independence? Why is it assumed that IPs would act in their own interest?”
Dr Tribe goes on to say that there is “more danger” in allowing other than insolvency practitioners in the initial advising stage, than in “self-interested IPs” seeking to take the appointment “to add to their own fees”.[vii]
At a certain level, one might agree, otherwise we would not visit the dentist, the doctor or the car mechanic because of the same perverse perception. At another level, insolvency practitioners have higher and fiduciary responsibilities which makes their situation different. Nevertheless we should not assume that a liquidator will not act with integrity any more than we would a doctor.
Would an assumption be made that a judge would act in his or her own interest in deciding a matter?[viii]
New Zealand offers another viewpoint as well. Under section 280(1)(ca) of the NZ Companies Act, insolvency practitioners are prohibited from taking appointments where they (or their firm) have provided professional services to the company within two years prior.
The NZ government’s current insolvency law reform discussion paper[ix] is questioning this. It says 
“practitioners who have been brought in at the end of the company’s trading life and who provide professional advice at that stage are then prevented from acting as the liquidator. The problem is especially acute for investigating accountants who are usually also insolvency practitioners”.
The paper goes on to say that this situation is problematic because 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 paper says that the professional Insolvency Engagement Standard offers a useful and less restrictive approach, which allows relationships occurring from
“the appointment of the member or the firm by, or at the instigation of, a creditor, or other party having an actual or potential financial interest in the entity, to investigate, monitor or advise on the affairs of the entity.”
Insolvency in Australia does suffer from the inherent issue of its near total privatization. The fact that its practitioners are in many cases selected by the insolvent company, or by regular creditors or referrers – a bonus in any other commercial enterprise – will always remain as an issue. We could take a note from Europe, where Hungary for example doles out appointments according to computer based allocations, reflecting the location and workload of the liquidators. Such ideas have however already been considered here.[x]
Unreasonable perceptions in insolvency are perhaps unhelpfully assisted by the great focus on independence. In one article, the warning from the regulator to creditors was not about the directors and related parties, but about the liquidator. In another, the Judge went so far as to acknowledge the creditor’s concern that “the liquidator will not act as hard for the creditors as one appointed by the creditors”.[xi]
Back-handed judicial compliments do not help.
The liquidators of NZNet Internet Services Limited, who appointed by the shareholders, pursued those shareholders and the directors through a series of successful litigation claims. In expressing confidence in the liquidators’ conduct of the administration, the New Zealand High Court Judge said that they:
“ .. were appointed by shareholders’ resolution. Unlike some vanilla liquidations, they have pursued the interests of creditors of NZNet Internet Services Ltd vigorously …”.[xii]
The law supports this unfair perception, or presumption, by allowing the practitioner to be removed by the creditors, for no reason, but impliedly because the directors have selected them as ‘friendly liquidators’.
This is now more of an option under the Insolvency Law Reform Act 2016 changes. In fact a reasonably fair minded creditor reading that Act might consider that lack of independence is a major concern against which they should constantly be on guard. Not only that but that unless the liquidator is there solely acting for them, he or she should be removed.
A liquidator should be assumed to be properly conducting a matter, and to be neither friendly nor unfriendly. Our society expects and relies upon the integrity of many comparable positions – politicians, government decision makers, judges, police and more. Actual and perceived independence is very important, but it should not be allowed to succumb to uninformed and unfair perceptions.
October 2016, Michael Murray
Postscript: for an excellent statement of the law in relation to practitioner independence, which prompted my own comments, see Pre-insolvency Advisors and Other Relationships, Sam Kingston, Senior Associate, Maddocks.
[i] ASIC v Franklin (liquidator), in the matter of Walton Constructions Pty Ltd  FCAFC 85
[ii] As examples, see SRBP and Tax Practitioners Board (Taxation)  AATA 292; Ego Pharmaceuticals Pty Ltd and Minister for Health and Ageing  AATA 113; Ebner v Official Trustee in Bankruptcy  HCA 63.
[iii] Ogilvie-Grant v East  Qd R 314
[iv] ASIC v Franklin (liquidator), in the matter of Walton Constructions Pty Ltd  FCA 68
[v]  FCa 16;  FCA 1381;  FCA 1076
[vi] McCann v Mawson Restructures and Workouts Pty Ltd, in the matter of Walton Construction (Qld) Pty Ltd (In Liq)  FCA 1152
[vii] The not-so-great reformation? R3 journal Recovery: Autumn 2016, p 30, Dr John Tribe, University of Liverpool
[viii] Sadly, that was the case in the US, and was one reason for the reforms in the 1970s.
[ix] Review of Corporate Insolvency Law, Report No 1, July 2016
[x] Commonwealth Bank of Australia v Fernandez  FCA 1487
[xi] Baker v Gilbert  NZHC 3311
[xii] See the original decision in Grant v Johnston  NZHC 611; NZNet Internet Services Limited (in Liq) v Engini Limited  NZDC 19835; and NZNet Internet Services Limited (in Liq) v Engini Limited  NZHC 2713. See also Andrews v Grant  NZHC 2934 where the liquidators successfully pursued the shareholder who appointed them to claw back shares that had been disposed of to avoid payment to the liquidators. https://www.lawsociety.org.nz/lawtalk/lawtalk-archives/issue-882/appointment-of-liquidator-by-shareholders. Taken from ‘Appointment of liquidator by shareholders’, 25 February 2016, Brent Norling, NZ Law Society.