The new section 588GA of the Corporations Act 2001 (Cth) (Act) provides a “safe harbour” from insolvent trading claims for directors who, when suspecting a company may be or is insolvent, start developing a course of action that is reasonably likely to lead to a better outcome for the company. In deciding whether a course of action provides protection for the purposes of the section, regard may be had to whether the person obtained advice from an appropriately qualified entity who was given sufficient information to give appropriate advice (s 588GA)(2)(d)).
In this article we explore some of the issues which may be relevant to a practitioner’s decision as to whether to act as an advisor in the safe harbour period, as well as some issues that may arise during an engagement.
Can a practitioner provide safe harbour advice and later accept appointment as administrator/liquidator?
Liquidators and administrators are expected to be free from both actual and apprehended bias when accepting an appointment. “Apprehended” bias will exist if, in short, a fair minded person might reasonably think that the administrator/liquidator might not bring an impartial mind to the resolution of questions they may be called upon to decide (see Re Recycling Holdings Pty Ltd  107 ACSR 406 per Brereton J at ).
This does not mean that practitioners cannot have any interaction with a company prior to an appointment.
By way of recent example, in Korda, in the matter of Ten Network Holdings Ltd (Administrators Appointed) (Receivers and Managers Appointed)  FCA 914, the Federal Court (O’Callaghan J) considered KordaMentha’s involvement as “potential administrators” of the Ten Group prior to the appointment of administrators, and was satisfied that removal of the administrators was not necessary, as conflict issues could be adequately addressed by orders to the effect that a wholly independent administrator prepare a report regarding those areas where a conflict was perceived. The Court accepted that at no time did KordaMentha provide advice to the board, any directors, or the management of the Ten Group in relation to the management of the Group, the affairs of the Group, the Group’s insolvency, or the obligations and duties of the board, individual directors or management.
The ARITA Code of Professional Practice (Code) also acknowledges that there may be some interaction between practitioners and insolvents prior to an appointment, by providing a number of exceptions to the “two year rule” in Part 6.8 of the Code. However, these exceptions make it clear that any pre-appointment advice should be restricted to the financial situation of the insolvent, the solvency of the insolvent, consequences of insolvency and alternative courses of action available in the case of insolvency.
The provision of advice to a director for the purposes of the safe harbour provisions does not fall squarely into any of the exceptions to the “two year rule”. It is possible following the Ten Network Holdings decision, that a Court may take a more flexible approach than the Code in considering whether circumstances amount to a conflict of interest. However, in any event, both Justice O’Callaghan and the Code appear to draw the line at advice being provided directly to directors in relation to the affairs of a company or the director’s obligations and duties.
In terms of safe harbour advice, the drafting of s 588(GA)(2)(d) is open, in that the nature of the advice to be obtained for the purposes of relying on s 588GA is not defined. At one extreme, a person may intend to rely upon a safe harbour defence in s 588GA by developing a course of action reasonably likely to lead to a better outcome for the company, and for that purpose obtain advice on only one limited issue (for example on the company’s solvency position and the consequences of insolvency). Alternatively, a director may seek detailed advice in relation to the development of an appropriate course of action, and whether it is likely to lead to the desired better outcome. In that instance the advice will go to the very heart of whether the defence is likely to succeed.
In the latter situation, it is difficult if not impossible to envisage circumstances where an insolvency practitioner would be able later accept an appointment as administrator or liquidator without being subject to either actual or apprehended bias. Section 588GA appears to proceed in the basis that the advice will be provided to the director (or other person claiming the protection of s 588GA), and the advice would likely, necessarily, extend to the affairs and management of the company.
A practitioner who has given such advice could not (or would be perceived as being unable to) later bring an independent mind to determining, for example, whether the company has a cause of action against the director/officer for insolvent trading, or the availability of a safe harbour defence.
On the other hand, if the practitioner is engaged for the purposes of giving limited advice, such as that considered in the Ten Network Holdings decision, or for a purpose consistent with one of the exceptions set out in the Code, then the fact that a director may also later seek to rely upon that limited advice for the purposes of a safe harbour defence should not necessarily mean that the practitioner is any more conflicted than they would have been before the safe harbour provisions had come into effect. Such potential conflicts should be determined in accordance with the usual principles.
Nevertheless, the practitioner would have to carefully limit its retainer and be careful not to stray into more detailed advice, recognising that any subsequent appointment requires completion of the DIRRI.
Separating advising and appointee roles
A question also arises as to whether, if a practitioner in a firm provides advice for the purposes of the safe harbour provisions, another practitioner within that firm could be appointed administrator or liquidator of the company.
The provisions of the Act requiring the DIRRI make it clear that it is not only the appointee’s direct relationships that must be declared, but relationships of the appointee’s partners.
This issue has yet to be tested. Technically, any prospect of being able to maintain a subsequent appointment would depend upon clear procedures being put in place at the time of the engagement but even then it is hard to see how independence can still be seen to be maintained.
If a practitioner is providing advice for the purposes of the safe harbour provisions, they should ensure that their professional indemnity insurance extends to any claims or loss connected with such advice.
The scope of advice that may be sought and relied upon for the purposes of the safe harbour provisions is potentially very broad.
If a practitioner has accepted an engagement to provide such advice, care should be taken to avoid becoming a “shadow director” of the company. A person will be a shadow or de facto director if they act in the position of a director, or the directors of the company are accustomed to act in accordance with the person’s instructions or wishes.
The legislation (s 9 of the Act) expressly states that a person will not be a shadow director merely because the directors act on advice given by the person in the proper performance of functions attaching to the person’s professional capacity. Take care to ensure the practitioner involvement is limited to providing advice, which the company assesses and makes its own decision.