As part of the significant reforms to insolvency and bankruptcy laws introduced by the Insolvency Law Reform Act 2016 (ILRA), parliament has sought to condense and simplify the requirement for external administrators to avoid conflicts of interest. Section 60-20 of Schedule 2 of the Corporations Act 2001, which came into effect on 1 September 2017, is titled “External administrators must not derive profit or advantage from the administration of the company” and prohibits external administrators from directly or indirectly deriving a profit or advantage from the administration of the company.
This does not, of course, require external administrators to work for free. That much is made clear in the exception (see subsection (3)(a) and the notation contained therein), which states that the prohibition “would not, for example, prevent the external administrator from recovering remuneration for necessary work properly performed by the external administrator”.
Some examples of prohibited conduct are listed in subsection (2) and include:
- The external administrator directly or indirectly derives a profit or advantage from a transaction (including a sale or purchase) entered into for or on account of the company;
- The external administrator directly or indirectly derives a profit or advantage from a creditor or member of the company; and
- A related entity of the external administrator directly or indirectly derives a profit or advantage from the external administration of the company.
It should also be noted that the ILRA has introduced an identical provision to section 60-20 that applies to bankruptcy trustees.
ASIC continues to investigate and prosecute external administrators for alleged improper conduct. By way of example, in January 2017, ASIC lodged an application in the Supreme Court of NSW requesting an inquiry into the conduct of liquidators Andrew Wily and David Hurst concerning the joint liquidations of 12 companies connected to Crystal Carwash Café Pty Limited. ASIC has alleged:
- A lack of independence and a failure to disclose potential conflicts;
- Failure to report to ASIC suspected shadow directors and offences underlying suspected illegal phoenix activity; and
- A failure to undertake basic investigations into the companies’ affairs.
Whether section 60-20 will raise the bar remains to be seen. However, it is clear that the ILRA reinforces the importance of ensuring that external administrators are not only independent but also perceived to be independent. External administrators should continue to ensure that transactions are carried out at “arm’s length” and, where appropriate, ensure that full disclosure is made to creditors.