Does a potential administrator’s involvement in pre-administration contingency planning give rise to a conflict of interest, such that the potential administrator should be disqualified from accepting the formal appointment?

Korda, in the matter of Ten Network Holdings Ltd (Administrators Appointed) (Receivers and Managers Appointed) [2017] FCA 914

In major Australian distressed company restructurings, it is common for the company to engage an insolvency practitioner to undertake contingency planning for a possible future administration if the company’s ‘informal’ restructuring strategies fail. In that event, the insolvency practitioner engaged to undertake the contingency planning (the ‘potential administrator‘) will often later take the role as administrator of the company under s 436A of the Corporations Act 2001 (Cth) (the ‘Act’). Does the involvement in pre-administration contingency planning give rise to a conflict of interest, such that the potential administrator should be disqualified from accepting the formal appointment?

That question was considered by the Federal Court of Australia in Korda, in the matter of Ten Network Holdings Ltd (Administrators Appointed) (Receivers and Managers Appointed) [2017] FCA 914 (O’Callaghan J).

Ten Network Holdings Ltd (‘Ten’) was the publicly-listed parent of a group of companies conducting a television broadcasting and internet business. In an effort to extract itself from severe financial difficulties, Ten sought to renegotiate valuable contracts with its content providers, and to extend and increase its loan facilities. While those efforts were continuing, Ten’s lawyers retained the firm KordaMentha to undertake contingency planning.

KordaMentha’s retainer was to prepare for its partners to be appointed as administrators of the Ten group if necessary. Critically, KordaMentha did not provide advice to the board, directors, management, creditors or other stakeholders of the group. The Court accepted evidence from Mr Korda that:

KordaMentha’s role in this case was to prepare an administration contingency plan, in case the informal restructuring negotiations then being conducted by the Ten Group were unsuccessful. [Mr Korda] was not in any sense retained to be, nor did he act as, a professional adviser to the Ten Group, the board, management or any other director.

Ten’s lawyers paid KordaMentha for its work.

Ten’s negotiations failed, and it appointed Mr Korda and two of his partners as voluntary administrators. The administrators sought directions of the Court under s 447D of the Act that they were justified in remaining as administrators. There was no contradictor to the application, but counsel for ASIC was granted leave to make submissions as amicus curiae.

In considering the application, the Court had to determine whether the administrators could comply with their implied duties of independence and impartiality – requiring that they be free of actual or potential conflicts of interest and actual or apparent bias. Apprehended bias exists if “a fair-minded lay observer might reasonably apprehend that the administrators might not bring an impartial mind to the resolution of questions they may be called upon to decide”: Re Recycling Holdings Pty Ltd (2015) 107 ACSR 406, [94] (Brereton J).

The administrators argued that:

  • the ‘fair-minded lay observer’ whose hypothetical view the Court had to assess was a fair-minded lay creditor;
  • no apprehension of bias existed; and
  • any apprehension of bias was ‘cured’ by voluntary disclosures of the pre-appointment work in the notices circulated in advance of the first meetings of creditors.

ASIC argued that:

  • the ‘fair-minded lay observer’ was not a creditor, but the same observer whose hypothetical opinion is considered on questions of apprehended judicial bias;
  • two grounds of apprehended bias existed; and
  • mere disclosure cannot ‘cure’ apprehended bias.

The Judge agreed with ASIC on the first and third points.

As to the existence of apprehended bias, the parties agreed, and the Court found, that the mere fact that the administrators had done significant, long-term, remunerative work prior to their appointment did not necessarily create an apprehension of bias. His Honour found that the scope of the work performed by KordaMentha was “consistent with what a potential administrator should, and should not, do” (at [35]), and accepted ASIC’s submission that:

Directors contemplating potential insolvency should be encouraged to engage with appropriately-qualified professionals early to develop restructuring plans which will maximise the chance of rescuing a viable business or returning as much value as possible to the relevant stakeholders should a later appointment prove necessary. A reasonable fair-minded observer would appreciate that as a common characteristic of large and complex corporate distress situations. Provided that appropriate safeguards are put in place to avoid the existence or appearance of conflict should an appointment subsequently prove necessary, significant, long-term and consequently remunerative work undertaken for such purposes should not of itself preclude the practitioner from taking a formal appointment …

His Honour went on to state that the safeguards that should be adopted by potential administrators and their appointees included:

  • advising directors and executives that the potential administrator might become a voluntary administrator and have to investigate and sue them;
  • ensuring that the potential administrators do not “sit inside the tent” and advise the company or participate in decision-making; and
  • clearly defining the scope of the retainer and keeping sufficient records of work performed.

His Honour found that KordaMentha’s pre-appointment work did not of itself give rise to an apprehension of bias. However, an apprehension of bias arose from the need for the administrators to investigate and report to creditors about:

  • the fees paid to the lawyers who appointed them; and
  • the potential for KordaMentha’s remuneration to be recovered as a preference in the event of liquidation.

The Court held that the apprehension of bias was adequately met by an order (agreed between the administrators and ASIC) under which an independent registered liquidator would be appointed to prepare a limited report to creditors. The independent report was to consider (among other things) prospective claims arising from the pre-administration work and the question of whether KordaMentha’s fees might be preferences.

The case is important because it clarifies that the common practice of engaging voluntary administrators to undertake pre-appointment work does not, of itself, create an apprehension of bias that would disqualify those administrators from taking a formal appointment. The Court’s decision provides clear guidance that to minimise any apprehension of bias, the scope of the appointment and the duties that are undertaken should be well defined and controlled, and the arrangements for the payment of fees should be carefully constructed. Administrators and those advising them should approach such engagements with caution and with one eye on justifying the arrangements after formal appointment (whether in seeking directions that they are justified in remaining on, or in defending against challenges to their independence).