It goes without saying that it is important for an insolvency practitioner to be independent and to be seen to be independent when accepting an appointment or continuing to act in an existing appointment. The recent Federal Court decision of ASIC v Franklin [2014] FCA 68 provides some welcome guidance on what this means in practice and also on the contents of a declaration of independence, relevant relationships and indemnities (commonly known as a “DIRRI”).

FACTS

Walton Construction Pty Ltd and Walton Construction (Qld) Pty Ltd (are related companies that were placed into voluntary administration (and subsequently liquidation) late last year.  The firm of insolvency practitioners that accepted the appointment had been referred the matter by a corporate advisory group with which the insolvency firm enjoyed an ongoing commercial relationship.

ASIC applied to Court for the removal of the liquidators on the basis that there was a reasonable apprehension that they lacked independence and impartiality.  ASIC’s concerns stemmed from the referral to the insolvency firm by the corporate advisory group, which occurred in circumstances where:

  • the corporate advisory group had been advising the Walton companies prior to their collapse;
  • the companies transacted asset sales and debt assignments with companies connected with the corporate advisory group shortly before they went into administration and any liquidator would need to investigate these transactions; and
  • those investigations ought to include investigations as to whether the corporate advisory group was involved in any possible breaches of the Corporations Act.

In short, ASIC argued that the circumstances gave rise to a reasonable perception or apprehension that the liquidators would not bring an impartial mind to investigate the pre-appointment transactions, and would favour the corporate advisory group whether consciously or not.

The relationship between the insolvency firm and the corporate advisory group was disclosed in the DIRRI.  However, ASIC also sought a declaration that the liquidators had contravened s463DA of the Act because the DIRRI did not explain that the transactions involving the corporate advisory group may need to be investigated.

Decision

Independence

In order to remove a liquidator, the Court must be satisfied that a hypothetical fair minded observer would apprehend an apparent lack of independence or impartiality.  This is a test to be determined on the particular facts of each case. 

In the present case, the Court found that the hypothetical fair minded observer would:

  • have knowledge of the functions, statutory duties and responsibilities of liquidators;
  • be aware of that the liquidators have a duty to investigate voidable transactions and whether there was any breach of the Corporations Act; and
  • be aware that insolvency firms are commonly referred work by solicitors, business advisors and accountants and that commercial relationships may exist between referring firms, as had occurred in the present case.

Her Honour Justice Davies was not satisfied that there was a basis to conclude that the ongoing referral relationship between the two firms gave rise to a heightened apprehension of a lack of independence or impartiality.  This was the case even though there was a likelihood that the investigations by the liquidators would include investigations into the conduct of the corporate advisory group. Her Honour was satisfied that a fair minded observer could reasonably conclude that a liquidator in the present circumstances would discharge their statutory duties and responsibilities impartially and uninfluenced by their relationship with the corporate advisory group. 

The DIRRI

With respect to the DIRRI, the Court was satisfied that it was enough for the liquidators (then administrators) to disclose the firm’s business association with the corporate advisory firm.  ASIC had submitted that creditors needed to know that the corporate advisory group may be the subject of investigation in order to be able to make an informed decision as to whether to replace the administrators.  The Her Honour held that this was not a requirement of the Corporations Act.  Under the Act, all that is required is for the DIRRI to:

  • disclose relationships with the company or its associates; and
  • explain why those relationships do not disqualify the external administrator from acting.

For the purpose of the Corporations Act, the administrators’ DIRRI was sufficient.  The liquidators had disclosed their firm’s business association with the corporate advisory group and explained why the referral relationship did not compromise their independence.  Accordingly the application and declaration sought by ASIC were both refused.

Comment

This decision provides some valuable guidance in relation to the area of potential conflicts and shows that the Court appreciates the commercial reality that referrals are a common business practice and alone are not indicative of a lack of independence or impartiality.

It is important for insolvency practitioners to recognise that the Corporations Act sets the minimum benchmark as to what is required by a declaration of relevant relationships.  In some circumstances, it may be that the requirements under the ARITA Code of Professional Practice are more onerous and an insolvency practitioner should consider the requirements of the Code whenever he or she considers accepting a new appointment.