“industry codes with their precepts, guidance and aspirational verbiage cannot dictate the proper construction and application of the relevant statutory provisions”

Soft law in Australia takes a rather strict approach in assessing the independence of insolvency practitioners, more so than, for example, the UK: for a recent example, see Re Nationwide Accident Repair Services Ltd & Ors [2020] EWHC 2420 (Ch), a pre-pack.  But as I have said, the law itself as applied by the Courts to particular facts is not so strict, in a number of cases: Too much independence. While soft law can assist, ultimately it is the law itself that must be applied.  This is perhaps indicated by the decision in Habrok v Gascoyne.

The decision

The plaintiff Habrok challenged a deed of company arrangement under Part 5.3A of the Corporations Act on a variety of grounds including the adequacy of the administrators’ investigations and their consideration of competing proposals, and including “the pre-appointment involvement of FTI Consulting (FTI), a firm associated with the administrators …” and their lawyers. The company had sought and been given “safe harbour” advice purportedly in terms of s 588GA of the Corporations Act.

At this stage, I don’t purport to explain the challenges to practitioners’ independence in this decision, beyond noting that Justice Beach set out the facts of the “pre-appointment involvement” – he referred to “duelling DIRRIs” – and extracting the comments below from his judgment.

The 2017 decision in Network Ten was raised by Habrok, where pre-appointment involvement had raised a conflict but Justice Beach gave a number of reasons why that decision should be distinguished, saying:

“In any event there are no hard and fast rules. In my view, the involvement of FTI pre-appointment did not compromise its independence or objectivity on, inter-alia, any insolvency analysis, whether as a matter of reality or appearance by a hypothetical fair minded observer”.

Some extracts

Some extracts from Justice Beach’s decision follow:

501    Now s 436DA of the Corporations Act required the administrators to make a “declaration of relevant relationships”. Section 60(1) of the Corporations Act sets out what this entails. What was required was a written declaration of a prior “relationship with” the GCY Group. That required a statement of the prior connection between the administrators and the GCY Group. This is not a requirement to state, in the minutiae, each and every occasion where the disclosed connection occurred.

502    In my view, the administrators disclosed their relationship or connection with the GCY Group. Mr Ryan candidly identified some meetings that were not disclosed in the [Declaration of Independence, Relevant Relationships and Indemnities – DIRRI]. Yet, what was required was no more than disclosure of the prior relationship or connection. The alleged omissions from the DIRRI do not show that there was non-disclosure of the prior relationship or connection. The disclosure was made in compliance with s 436DA.

503    Further, in my view, the nature of FTI’s prior involvement would not have been sufficient to support the administrators’ removal nor ground the assertion that they have not properly investigated the GCY Group’s position. It is commonplace for a company to seek professional advice as to apprehended insolvency and for advice to be received as to voluntary administration; this does not preclude the advisor from becoming the administrator.

504    As I have said, FTI was not involved in the management of the GCY Group before the administrators’ appointment. And FTI did not have any substantial involvement with the affairs of the GCY Group before the administrators’ appointment such as to be disqualifying.

505    Let me at this point say something about industry standards.

506    On the question of the administrators’ independence, Habrok placed much emphasis on publications of the Australian Restructuring Insolvency and Turnaround Association (ARITA), particularly its Code of Professional Practice: Insolvency Services, Practice Statement Insolvency 1, and Practice Statement Insolvency 2.

507    Now putting to one side that the versions of these documents in evidence were approved only on 16 September 2019, being after the date of the administrators’ appointment, but accepting that prior versions were in similar terms, the fact is that industry codes with their precepts, guidance and aspirational verbiage cannot dictate the proper construction and application of the relevant statutory provisions.

See Habrok (Dalgaranga) Pty Ltd v Gascoyne Resources Ltd [2020] FCA 1395

For debate

Others will no doubt debate this outcome and the guidance from this decision, as some have already begun to do so.

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