Generally speaking, other than in limited prescribed situations, an insolvency practitioner can only be removed by Court order. Often applications are made for the removal because of a perceived bias, however these are not always successful, as was seen in Cote v Devine [2013] WASC 79, handed down last week. New reforms allowing creditors to resolve to remove insolvency practitioners without recourse to the Court have the potential to significantly affect this.

The requirement for impartiality and independence

The Insolvency Practitioners Australia Code of Conduct provides that members “must exhibit the highest levels of integrity, objectivity and impartiality in all aspects of administrations and practice management.” But proving to a Court that a practitioner has not acted with integrity, objectivity and impartiality can be problematic. 

There have been a number of recent cases where creditors have attempted to convince the Courts that an insolvency practitioner should be removed, and tried to pin that claim on bias. However, the Courts have made it clear that unless there is a clear conflict of interest, for example, where a liquidator who was employed by a company that had a common owner with one of the creditors, they will not remove the relevant practitioner.1 Merely a hostile relationship between an insolvency practitioner and a creditor, differential treatment of creditors2 or the relatively common practice whereby a creditor funds an insolvency practitioner’s investigations3 will not necessarily suffice as evidence of a lack of impartiality or independence.  The threshold is similar to that necessary for a reasonable apprehension of bias of a judicial officer.1

Cote v Devine [2013] WASC 79

This case is a good example of the Courts’ attitude to allegations of bias.  This was an urgent application heard by Justice Allanson on 5 March 2013. The application was made by three creditors to restrain the conduct of the second creditors’ meeting of two companies in voluntary administration to be held that same afternoon. The application was made in the context of proceedings brought by the creditors to remove the administrators on the basis they had not conducted themselves impartially or independently.

The creditors relied on around 1,000 pages of affidavit material to allege, amongst other things, the administrators had:

  • failed to disclose previous working relationships with the directors of the two companies;
  • failed to contact all creditors of the two companies and give them notice of the first creditors’ meeting;
  • incorrectly accepted certain proofs of debt by rejected others; and
  • submitted an administrators’ report with significant deficiencies.

Despite the creditors’ discontent with the administrators’ conduct, Justice Allanson was not convinced these issues passed the evidentiary hurdles necessary to ground any reasonable apprehension the administrators were biased. Indeed, he pointed to the fact the administrators were receiving independent legal advice as an important indicator of impartiality. Accordingly, he dismissed the application and the second creditors’ meeting went ahead that afternoon.

Proposed reforms to the Corporations Act

The Insolvency Law Reform Bill 2013 seeks to greatly streamline the process for removing an insolvency practitioner, by allowing creditors to resolve to remove a practitioner and appoint a replacement without any need to involve a Court. 

If the reforms are passed, their effects will be significant. Creditors would be able to avoid the need for the preparation of the significant evidentiary material referred to in Cote v Devine to prove allegations of bias, as well as the pressure created by such urgent situations and the costs and time associated with briefing solicitors and counsel, making applications to the Court and having them heard. 

On the flipside, the reforms may create uncertainty for insolvency practitioners, whose professional reputations and livelihoods could be subject to the whims of their companies’ creditors, rather than the considered objectivity of the Courts. There is also the potential for the process to be open to abuse. In any event, it will be interesting to see whether the reforms are passed and if so, their implications. Watch this space.