A court decision concerning insolvency practitioner independence and pre-insolvency advice usefully raises issues recommended for law reform review by the Parliamentary Joint Committee Report on Corporate Insolvency.
The WA Court of Appeal has dismissed an appeal by ASIC from a decision concerning the independence of practitioners, and their remuneration. ASIC had unsuccessfully claimed that the practitioners lacked independence, and that their remuneration should consequently be reviewed and reduced. AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION -v- JONES  WASCA 130 – eCourts Portal (justice.wa.gov.au)
The practitioners were voluntary administrators of the relevant companies from 31 October 2018 until 28 May 2019, when the creditors resolved to wind up the companies. They had given advice to the companies in the months before their October 2018 appointment for which a fee of $100,000 had been charged and paid.
Justice Martin had found that ASIC’s concerns as to conflict of interest, or of ostensible bias, were not established. But even if they were, that would be an insufficient basis to deny the administrators their reasonable remuneration for the valuable benefit they provided to the corporations by their services across the 7 month period of administration. See Any insolvency remuneration review as sought by ASIC “would be unprincipled and ultimately, wholly pointless” – Murrays Legal.
While the Court of Appeal found some errors in the trial decision of Justice Martin – the $100,000 in fees did give rise to a conflict of interest and a reasonable apprehension of bias – these were not enough to revisit the remuneration of the practitioners.
Justice Martin’s views have since been critically described as a “commercial approach” to independence about which the WA Court of Appeal judges might feel “some uneasiness”. That is not borne out by the Court of Appeal decision, although it is not as strident as Justice Martin in its views of ASIC’s claims.
While the Court of Appeal said that a lack of independence could impact an IP’s remuneration, there were discretionary reasons in this case why the remuneration should not be reduced. These reasons provide a useful commercial perspective when considering the independence of practitioners:
- the $100k fees of the administrators, which may have been preferences in any liquidation, were only a small proportion of the total fees charged;
- the practitioners’ acceptance of the appointment, “while subject to a real, sensible possibility of conflict of interest and a reasonable apprehension of bias, was inadvertent”;
- there was no suggestion that they were in fact deflected from the due performance of any aspect of their duties as administrators, nor was there any criticism of their work;
- their opinion was that liquidation was the only viable option, and there was no basis to doubt the correctness of that opinion;
- there were considerable benefits and cost savings to the administration in being appointed, given the information they gained in providing pre-administration services. In fact, had they sought directions before they accepted the appointment, a court would likely have directed they be appointed despite the potential conflict of interest and apprehension of bias;
- creditors had resolved to approve their remuneration after the practitioners had fully disclosed the relevant facts and ASIC’s concerns;
- the conduct of a remuneration review would have required remittal of the case and would involve further expense and delay, in a context where the proceedings had already taken a substantial period of time and consumed considerable resources.
In my earlier comments, I said that too much a focus on independence can have a negative impact in other respects, including on advice available to the debtor. A debtor wanting comprehensive and objective advice about their business will not obtain that from any IP who wants to leave open the opportunity to take an appointment: PJC recommendation – pre-insolvency advisers – Part 1 – Murrays Legal. This is evident from the various decisions cited by the Court of Appeal as to the need for any prospective appointee not to ‘cross the line’ by giving personal advice to the debtor. There is also a restriction on giving comprehensive advice to a debtor in their different capacities. As the 2023 PJC Report recorded the problem from one submission –
“the impediments to giving effective advice to the company in distress when the practitioner is focused on avoiding any apprehension of a lack of independence”.
That intersection of independence and pre-insolvency advice explains recommendation 15 of the PJC Report, as to whether the current independence requirements for insolvency practitioners are achieving their intended purpose, and/or whether there should be a separation of the roles of advice and restructuring from formal insolvency appointments.
The PJC Report notes various submissions saying that an adjustment of the insolvency practitioner independence requirements, including pre-pack reforms, could be worth exploring.
Others called for the relaxation of independence requirements on voluntary administrators associated with pre-appointment work.
One comment was that it was at least arguable that those rules over-emphasise the risks associated with poor corporate behaviour by insolvency practitioners, to the detriment of the cost saving benefit of having an existing adviser familiar with the position of the company and the corresponding advantage of being able to more effectively plan and prepare for the appointment. As one UK academic put it, 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”. 
Another comment was that there is a lack of clarity of approach between recent caselaw and the approach of professional bodies and ASIC as to the interpretation of independence requirements, resulting in an unhelpful level of uncertainty, perhaps borne out by the ASIC v Jones case.
With these limitations on what IPs can advise, and given the importance of independence, it may be that a good pre-insolvency advice sector should be supported and regulated. At the same time, independence rules of IPs could be relaxed to allow advice to be given, that is, objective and comprehensive advice.
The balancing of the various competing interests will be a matter for any comprehensive review of insolvency law.
 The duty of independence (2023) 35(1) ARITA J 20 at 24, RP Austin.