Insolvency practitioner independence – law and practice

One of Australia’s insolvency bodies, ARITA, has issued a reminder to its members about the need for liquidators to maintain their independence, saying that ‘it’s the law’ and that the recent COVID-19 reforms in Australia ‘do not impact the legal position’.[1]

The law and practice don’t always coincide.

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Australia has always taken a strict line on independence, or the industry has, given that a relevant prior relationship can exclude a firm from a big job, and allow another competitor to take it on. The commercial pressure to secure or retain an appointment leads to a

‘natural tendency for an insolvency practitioner affected by conflicts of interest to trivialise them or to assert that they can or have been managed and that they will not affect (or have not in fact affected) the officeholder’s impartiality or independence’.[2]

The many pages of a declaration of independence of the administrators of Virgin Australia Holdings illustrates that focus.[3]

Unfairly minded

But the insolvency industry’s sometimes hard-line view of (someone else’s) independence is often not endorsed by the courts, which are not as ready to assume that the fair-minded observer is in fact ‘uncharitably-minded’ in claiming to reasonably apprehend that the practitioner in question would breach their duties as officers of the court because of some past connection.[4] The courts often resolve independence issues and can go to the extent of authorising a liquidator to perform an act that would otherwise involve a conflict.[5]

English law – common sense and pragmatism

English law seems less hard-line and more practical than ours. A 2018 High Court decision[6] sets out a number of principles previously accepted by the English courts that may not find favour, at least with industry bodies here. It cites authority that the English courts have approached the issues of conflicts in a

‘common sense and pragmatic way … noting that licensed insolvency practitioners are professional men who are well used to dealing with conflicts’.

That was in the context of a single office-holder appointed to a group of companies where the focus was on managing conflicts ‘if and when necessary’; with options including the taking of independent legal advice, the appointment of an additional partner from the same[7] or a different firm, or applying to the court for directions. ‘Conflicts liquidators’[8] in the UK and special purpose liquidators in Australia are another option if a conflict later arises, or calling in an independent expert.[9]

Unpleasant disputes

Judges have expressed frustration when competing practitioners are offered at the time of a winding up order. While it could become an ‘unpleasant task’, as one judge said, an arbitrary decision would not be in the best interests of the parties. But he continued that if the dispute were to become

‘disgusting … I shall hope to find means to confine it within proper limits’.[10]

Another option?

Perhaps with a similar sense of frustration in dealing with competing claims of EY and KPMG, but also with the public interest in mind, one English judge suggested that

“to deal with the conflicts faced by all the major firms of insolvency practitioners in liquidations such as this, serious consideration will have to be given to leaving the Official Receiver as a liquidator and authorising him to employ his agents and insolvency practitioners of his choice and to requiring him to monitor their costs and expenses.”

From a public interest perspective, in some of the UK’s nationally significant insolvencies, the Official Receiver is the appointed liquidator, with private firms appointed as special managers on particular and on-going tasks. Examples are Thomas Cook with its world-wide impact and repatriation requirements, and British Steel which apart for its economic impact has serious environmental issues.

That option is not available in Australia with the administration of our nationally significant insolvencies remaining in the hands of private practitioners.

Bankruptcy

It may be that as we have an independent Official Trustee in Bankruptcy, ARITA did not address or explain independence issues in bankruptcy, which of course exist.

Practice v law

The seriousness with which the professional bodies take independence may be because as accountants they see the law in more black and white terms, and their own members’ conduct, but more so because, as said earlier, independence raises issues of competition for work between their members.

That severity is evident in Deloitte UK being fined nearly a million pounds by the English accounting body ICAEW, by consent, in relation to the firm’s acceptance of insolvency appointments in the collapse of electrical goods retailer Comet back in 2012. ICAEW found that Deloitte’s client engagement policy did not comply with ICAEW’s Code of Ethics.

Again though, the courts’ more ‘pragmatic’ approach in England was evident in Re Polly Peck International plc, where there had been open criticism of the practitioners having accepted appointments as administrators in spite of a claimed conflict of interest.

The Court drew a distinction between the need for insolvency practitioners to comply with their professional standards and the actual need for the insolvency to be properly administered. The Judge said that, perhaps pointedly, that the ICAEW

“is, of course, concerned with the integrity and objectivity of its members and has laid down guidelines for the conduct of their professional duties. I am concerned with the interests of the administration.”

The Judge went on to say that he could make no possible criticism of the practitioners.

Nevertheless, the two administrators were later fined in disciplinary proceedings brought by the ICAEW for accepting the appointment.[11]

Replace the practitioner

One final point, for the moment, is that creditors can replace an administrator not only if they think that person is conflicted, but also for no given reason at all, irrespective of what a judge would decide. The first meeting in a voluntary administration is one example.

COVID-19

As to ARITA’s helpful reminder in its ‘Independence & taking appointments’ in the context of COVID-19, more on that soon.

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[1] Independence & taking appointments, 16 April 2020

[2] SISU Capital Fund Limited v Tucker [2005] EWHC 2170, as was submitted to the Judge.

[3] 21 April 2020.

[4] Ziziphus Pty Ltd v Pluton Resources Ltd (in liq) [2017] WASCA 193 at [92].

[5] See Re Go Energy Group Ltd (in liq) [2019] NSWSC 558.

[6] Tailby v Hutchinson Telecom FZCO [2018] EWHC 360 (Ch), referring to SISU Capital at [91]-[120] and the Privy Council decision in Parmalat Capital Finance Ltd v Food Holdings Ltd [2008] UKPC 23.

[7] Re York Gas [2010] EWHC 2275

[8] A UK concept not explained here but see Re Arrows Limited [1992] BCC 121; Re Barings plc [2001] 1 BCLC 159; and Re Angel Group Ltd [2015] EWHC 3624 (Ch).

[9] Re Go Energy Group Ltd.

[10] Re Austral Knitting Mills Ltd (1926) 23 WN 131 at 132.

[11] Sisu Capital Fund Ltd & Ors v Tucker & Ors [2005] EWHC 2170 (Ch); and see Huxford v. Stoy Hayward & Co. [1989] BCC 421.