Insolvency practitioner independence – how commercial is the fair-minded observer?

A pending WA appeal decision may address the issue of the extent to which commercial considerations surrounding the appointment of insolvency practitioners can be relevant in assessing their independence. 

A feature of the law concerning the independence of insolvency practitioners – IPs – is that it must be assessed in the context of the commercial environment in which they operate and are required to operate.  There is no lack of independence, for example, simply because the directors choose the IP to be the voluntary administrator of their company; or because a creditor chooses the person to be the trustee of the debtor’s bankrupt estate. 

Even in more complicated scenarios, the courts nevertheless maintain this approach.  Various of these cases have been reported here, one of the latest being that of the WA Supreme Court in GD Pork Holdings [2021] WASC 42.  While that decision was a little clouded because it was ASIC that raised the independence issue coupled with a challenge to the IPs’ remuneration, Justice Kenneth Martin was quite strong in emphasising the commercial scenario in which the appointments were properly taken. Importantly, the fair-minded observer needs to have those commercial considerations in mind in deciding whether they might reasonably apprehend that the administrators ‘might not bring an impartial mind to the resolution of questions they may be called upon to decide’.

While IPs have a similar independence test to that of judges, IPs’ roles differ in material respects from those of the judiciary or administrative decision-makers.

“Liquidators are themselves engaged in business in a competitive environment. They have to attract work. This makes it almost inevitable that they will develop contacts and relationships with those who are actual or perspective sources of referrals. Further, the success or otherwise of liquidators will depend in part on their maintaining good professional reputations”: ASIC v Franklin (liquidator), in the matter of Walton Constructions Pty Ltd [2014] FCAFC 85; 

The fair-minded observer must be assumed to know this and the way that IPs are appointed and to know the relationships they will inevitably have beforehand. 

As the WA Court of Appeal said in Ziziphus v Pluton Resources [2017] WASCA 193,

“The fair-minded observer would be taken to know that voluntary administrators may be appointed both by the board of directors of the company (under s 436A of the Act) and by a secured creditor (under s 436C of the Act), and that the administrator is required to make a declaration of relevant relationships and indemnities, and provide a copy to creditors (s 436DA of the Act). A fair-minded observer would also be taken to know that the GNR-appointed receivers, and Mr Marsden and Mr Vickers, were accountants and professional insolvency practitioners in a competitive market, and that it would expected that the former would be familiar with the latter’s competence, expertise and professionalism”.

The Court rejected a submission that

“a fair-minded observer (as opposed to the uncharitably-minded observer hypothesised by the appellants in oral submissions) might reasonably apprehend that Mr Marsden and Mr Vickers might breach their duties as officers of the court and ‘run dead’ on the company’s liquidation claims, because of their past promotion of the DOCA”.

As if warning against too restrictive a view, Justice Martin said in GD Pork that [280]

“The imposition of an objective standard towards delivering independent and unbiased decision making by a voluntary administrator (or liquidator) ought not be fashioned into a Trojan horse to deliver an hypothesised reasonable observer with limited commercial instincts or who holds some activist expansionary agenda to be silently progressed”.

Bankruptcy case law has taken a similar commercial approach: see for example BC39 Pty Ltd v Rambaldi [2014] FCA 1076 [as to claimed intra firm conflicts]; Boensch v Pascoe [2007] FCA 1977 (13 December 2007) ( [as to claimed conflict in litigation that would provide remuneration for the trustee].

And as I said in an earlier comment, there can be a

“undue fixation upon the independence of insolvency practitioners that does not allow for commercial reality, that fixation given more by the regulators and the professional bodies than by the courts and the law.  That can have a negative impact in other respects”.

Finally, and importantly, this comment now is prompted by my being alerted, belatedly, to the fact that the decision in GD Pork, delivered in December 2021, is on appeal, with a decision still pending.  In a recent article,[1] Dr RP Austin reviewed the law of independence in relation to corporate insolvency practitioners, and in respect of his analysis of the decision in GD Pork, he doubted whether the “commercial approach” of Justice Martin would survive, with the WA Court of Appeal judges perhaps feeling “some uneasiness” about it.[2]  The article bears close reading.

In light of this view, and its source, it seems that this appeal decision will be highly relevant to the law of independence.  It will be reported when it is delivered. 

See also


[1] The duty of independence (2023) 35(1) ARITA J 20

[2] At 24.

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