Introduction
In a recent decision of the Western Australian Court of Appeal, ASIC unsuccessfully claimed that the administrators of two companies should have their remuneration reduced on the ground that the administrators lacked the requisite independence. This article explores the facts surrounding this case and provides some takeaways for insolvency practitioners who are, or are likely, to accept formal appointments where their independence may be put into question.
Background
ASIC v Jones related to the voluntary administration of two companies that operated a large-scale pig farm. Prior to being placed into administration, the respondents provided advice to the companies about solvency-related issues and assisted them with negotiating with two major secured creditors. This advice was provided over a period of months and culminated in a recommendation that the respondents be appointed as the administrators of the companies. Approximately $100,124.37 was paid to the respondents for these preliminary services. Soon after providing these preliminary services, the respondents were appointed as voluntary administrators of the companies.
Substantial work as company administrators was conducted by the respondents before ASIC expressed concerns that the pre-appointment services provided may cause an actual or potential conflict of interest and apprehension of bias. Particularly, ASIC was concerned that the $100,124.37 in remuneration could be the subject of an unfair preference claim, and the administrators may prefer a set of circumstances such as liquidation where this amount could be clawed back.
The administrators, in response to ASIC’s concerns, agreed to make an application to the Court for remuneration, rather than draw down on any remuneration approved by the creditors. At the subsequent second creditors’ meeting, the administrators informed the creditors of the findings of their investigations and the creditors approved their remuneration.
Reasonable Apprehension of Bias
The Court of Appeal found that the $100,124.37 paid to the administrators for their pre-administration services could give rise to a reasonable apprehension of bias. It was held that a fair-minded lay observer might reasonably have thought the respondents would not bring an impartial mind to investigating and reporting on this potentially voidable transaction that may ultimately be clawed back.
The Court otherwise rejected ASIC’s submission that payments to third parties, made on the advice of the respondents during the pre-administration period, could similarly give rise to a reasonable apprehension of bias.
Remuneration Reduction?
The question then turned to whether, as ASIC submitted, an administrator’s remuneration could be reduced for acting outside the scope of work ‘necessarily performed’. Importantly for all company administrators, the Court of Appeal held that the Court has the power to reduce an administrator’s remuneration if a conflict of interest or apprehension of bias is found. Interestingly though, the Court refused to exercise that discretion in this case for the following reasons:
- a Court, if applied to, would have been likely to provide judicial advice directing the appointment of the administrators prior to the respondents’ appointment given the urgency and importance of maintaining the ongoing operation of the piggery;
- the Court was satisfied the breach was inadvertent;
- work relating to investigating and reporting unfair preferences represented a small proportion of the work done by the administrators. Had the respondents acted as liquidators in which unfair preference claims took a far greater focus, the result may have not been as favourable;
- there was no suggestion the work carried out by the administrators was improperly carried out; and
- the creditors resolved to approve the respondents’ remuneration.
Takeaways for Insolvency Practitioners
This decision should be seen as an amber light for company administrators that have engaged in pre-administration services. While not necessarily fatal to later acting as an administrator, a close analysis of the individual circumstances will determine whether a practitioner’s remuneration should be reviewed. Importantly, even full disclosure of a potential conflict of interest cannot cure the requirement for independence.
An early application to a Court seeking directions that the administrators would be reasonable and justified in accepting the appointment should be seriously considered, particularly when due to the pre-administration work completed they are likely best placed to accept the role.
A comprehensive review into the independence of company administrators was recommended in a recent Parliamentary report into corporate insolvency in Australia. That report, along with this action by ASIC, emphasises the growing focus on the independence requirements of insolvency practitioners. For this reason, practitioners should remain vigilant to perceived conflicts, particularly where they have engaged in pre-administration services.
Where possible, practitioners should engage in active steps to safeguard themselves from perceived conflicts of interest. This may include requesting payment for fees upfront to allay the risk of an unfair preference and carefully sculpting the scope of any pre-administration work.
If you are a company administrator seeking advice on your independence requirements, contact Pragma Lawyers’ insolvency specialists for expert advice at hello@nullpragma.law or call (08) 6188 3340.
