RSM Australia

Insolvency Reform Edition 13 | Is Independence Dead?

This article of Insolvency Reform covers the recent court challenge around independent insolvency practitioners.

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Law reform occurs in many ways.

network ten challenge into  independent insolvency practitionersThe reserved decision of the recent hearing in the Federal Court regarding the Network Ten administration has the potential to change the face of corporate insolvency.

 

The Network Ten hearing is a challenge to the underlying principle of the requirement for an external administrator appointed to a company be independent (fact based) and be seen to be independent (perception based).

 


The role of independence

Australian corporate insolvency law requires the appointment of an independent third party to administer the affairs of an insolvent company. Independence of the insolvency practitioner is a cornerstone of Australian insolvency law and practice. It is imposed by statute, court rules and various professional standards. It promotes public confidence in the insolvency process.

Independence is described as independence of mind and independence in appearance. The independence of company administrators has been a concern since the commencement of the voluntary administration provisions in 1993. The Insolvency Practitioners Association of Australia (IPAA), the predecessor of Australian Restructuring Insolvency and Turnaround Association (ARITA) and the Australian Securities Commission (ASC), the predecessor of the Australian Securities and Investments Commission (ASIC) recognised these concerns and explored avenues to promote independence in the insolvency profession.


ARITA’s efforts

The IPAA commenced work on the development of best practice statements in 1999 on various matters including independence of company administrators. By 2002 the IPAA had issued a Statement of Best Practice on Independence of Company Administrators. 

The IPAA’s various Statements of Best Practice were incorporated in the first edition of the Code of Professional Practice for Insolvency Practitioners (the Code) issued by the IPAA in 2007. This document has been revised and amended by the ARITA (formerly IPAA) since that time. The independence requirements of the Code have been largely adopted by the Accounting Professional & Ethical Standards Board in AEPS 330 Insolvency Services.

Initially the IPAA prohibited the performance of work (paid or unpaid) by an appointee or an associated entity of an appointee for the Company within 2 years of the appointment. The prohibition was replaced following representations from practitioners who practiced in large multidisciplinary practices. The exemption for an immaterial professional relationship was incorporated into the Code to satisfy these concerns. 


ASIC and the legislature’s efforts

The efforts of the IPAA were not in isolation. The ASC (now ASIC) had conducted a review of company administrations in the late 1990’s.  ASC supported the IPAA’s efforts to develop their statements of best practice. The legislature imposed on company administrators the requirement to make a declaration of relevant relationships and indemnities (DIRRI) in 2007.  This implemented the recommendations of the 1988 Australian Law Reform Commission General Insolvency Inquiry (Harmer Report) and 1994 Parliamentary Joint Committee on Corporations and Financial Services (Corporate Insolvency Laws: a Stocktake).


Independence and the turnaround culture

Independence has come to the fore again recently with the debate on the Government’s safe harbour proposal. A director will not be personally liable for debt incurred in undertaking a course of action reasonably likely to lead to a better outcome for the company than the appointment of an administrator, or liquidator of the company. One of the tests prescribed in the safe harbour provisions for establishing whether a course of action is reasonably likely to lead to a better outcome for the company is obtaining advice from an appropriately qualified entity (the navigator) given enough information to give appropriate advice.Turnaround culture - the challenge to  independent insolvency practitioners

The role of the navigator is likely to include access to confidential financial and accounting information of the company. The navigator may be involved in negotiations with creditors and other stakeholders in assisting the formulation of a restructuring plan. The navigator may attend director’s meetings and advise directors in their area of expertise.

If a restructuring plan requires the appointment of an administrator to implement the plan, is it appropriate for the navigator to be appointed as administrator of the company? This may present a commercial and ethical dilemma for some navigators. It is sad but true, self-interest can be difficult to resist. Ethical rules are meant to assist in these deliberations.

Whether or not an actual conflict of interest exists is sometimes irrelevant. The Courts, ASIC and professional associations are mindful of the perception of a conflict of interest. Administrators are required to be and be seen to be independent.  A navigator will be required to consider a number of issues in establishing whether they can accept a formal appointment.  Can and should the navigator be asked to forget everything seen and heard in the pre-appointment role? What is the external perception of the navigator’s pre-appointment role? How will the navigator identify a perceived conflict of interest and more importantly an actual conflict of interest?


Why is the Network Ten case important?

Whilst being reported as a spat between millionaires, the Network Ten case may set a precedent on the circumstances that may result in a pre-appointment engagement prohibiting a formal appointment to a company.

It is reported the Court has appointed an independent insolvency practitioner to examine fees paid to the administrators for pre-appointment work performed during the three and a half months prior to their appointment as administrators and legal advice provided by the company’s legal adviser which is reported to have referred Network Ten to the administrators.  The Court has not removed the administrators.

ASIC and ARITA are reported to have commenced investigations following disclosures contained in the DIRRI lodged by the administrators. ASIC is reported to have sought additional information from the administrators. ASIC is said to be concerned only about the appearance of bias following the provision of additional information by administrators.

The decision once handed down may provide an answer to restructuring and insolvency professionals whether a pre-appointment advisory role is a prohibition to a subsequent formal insolvency appointment. If not a prohibition, the decision may provide an outline of the factors the Court will take into account in determining whether the line has been crossed.


Will common law relax the independence requirements of company administrators?
How will the Government, ASIC and ARITA respond? 

If you have any questions in relation to this article, please contact your local RSM adviser or David Kerr.


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