ASIC appealed the first instance decision of Justice Martin in the Western Australian Supreme Court, Australian Securities and Investments Commission v Jones [2023] WASCA 130. This decision had rejected ASIC’s claim. It found that the respondents were not in a position of actual or potential conflict of interest, nor of bias and, in any event, even if such allegations were established, they would have amounted to an insufficient basis to deny the respondents their reasonable remuneration for work they had done.

Key takeaways

• An insolvency practitioner isn’t necessarily precluded from providing pre-appointment advice prior to a formal appointment.

• The insolvency practitioner should have some regard to the scope of the pre-appointment advice.

• Insolvency practitioners should consider the terms of the payment of their fees for any pre-appointment work. If their pre-appointment advice fees are paid just prior to the appointment of an administrator, that payment is likely a voidable payment which will need to be investigated by a liquidator. If their pre-appointment advice fees are not paid prior to the appointment of an administrator, then the operation of s448 of the Act prevents them from accepting the appointment without leave. Ideally, these fees would be paid in advance.

• In exercising its discretion to review an external administrator’s remuneration pursuant to s60-11 of schedule 2 of the Corporations Act 2001 (Cth) - Insolvency Practice Schedule (Corporations) (IPS), the Court will take a pragmatic approach and consider a wide range of factors.

• It is important that insolvency practitioners remain cognisant about potential conflicts of interests and also be mindful of how certain decisions may be perceived by a lay observer. The perception of a conflict of interest is as problematic as an actual conflict of interest when determining whether apprehended bias exists.

Facts

On 25 July 2018, Mr Jones of Ferrier Hodgson was engaged to provide advisory work to GD Pork Pty Ltd and GD Pork Holdings Pty Ltd (together, the Companies).

This engagement involved providing advice and assistance to the Companies in relation to negotiations with the Companies’ secured creditors as to a proposed restructure of the Companies, and in relation to negotiations with unsecured creditors as to standstill/debt reduction arrangements (July Engagement).

On 19 October 2018, Ferrier Hodgson invoiced the Companies for services provided in respect of the July Engagement in the amount of $100,124.38 (excl GST). This invoice was paid prior to 31 October 2018.

On 31 October 2018, Mr Jones and Mr Smith of Ferrier Hodgson were appointed voluntary administrators (Administrators) of the Companies.

On 5 December 2018, the creditors of the Companies approved the Administrators’ remuneration for work performed between 31 October 2018 and 5 December 2018.

The Administrators subsequently applied to the Supreme Court of Western Australia for orders permitting them to draw on the remuneration approved by the creditors. ASIC applied for a review of the Administrators’ remuneration on the basis that the pre‑administration work by Ferrier Hodgson gave rise to conflicts of interest or apprehended bias on the part of the Administrators in carrying out some of their core functions as administrators.

Justice Martin in the first instance found in favour of the Administrators finding that there was no real or sensible possibility of conflict and no apprehended bias thereby permitting them to draw down the remuneration. ASIC then sought leave to appeal this decision.

Ruling

ASIC appealed the decision of the primary judge on a number of grounds. Although it succeeded in establishing some of those appeal grounds, the Court ultimately dismissed the appeal.

Conflict of Interest

The primary ground of appeal was that the primary judge erred in finding that the respondents did not have a real or sensible possibility of conflict as voluntary administrators of the Companies and there was no apprehension of bias, arising from the payment in respect of the July Engagement made 10 days prior to the appointment of the Administrators.

ASIC contended that the respondents’ duties as administrators effectively required them to opine on, and report to creditors about, a potential voidable transaction claim against their own firm. Further, ASIC submitted that a reasonable person would have thought that the respondents had a financial interest in avoiding a disgorgement of the fee payment amount, which conflicted with their reporting function as administrators.

The respondents submitted that, when one bore in mind the actual responsibilities undertaken by the respondents; the onerous, urgent and consequential nature of those responsibilities; the uncontested observations of the primary judge as to the role of administrators; and the actual content of the duty upon which ASIC relies, no reasonable person would consider that there was a real, substantial and sensible possibility of the respondents being swayed by any personal interest relating to the fee payment. The respondents further submitted that no expansive duty on administrators to investigate, opine on, and report to creditors about whether there appeared to be any voidable transactions is found in the Corporations Act or in the IPR.

After a lengthy analysis of the legal principles underpinning administrators and apprehended bias, the Court found that at the time of the respondents’ appointment, a real, sensible possibility that the respondents’ duty and interests would come into conflict existed. The Court also found that a fair-minded lay observer might reasonably have thought that, having regard to the respondents’ personal interest in avoiding disgorgement of the payment of the July Engagement, they might not have brought an impartial mind to the investigation and reporting on potential voidable transactions in a liquidation scenario.

Ultimately, the Court clarified that, this did not mean that administrators may never undertake pre-administration work for the companies to which they are subsequently appointed finding that each particular case will turn on a close analysis of the relevant circumstances, including, importantly the arrangements made for payment of the pre-administration work. For instance, the Court opined that if the payment for pre-administration work performed was made in advance (and not in payment of an unsecured debt) to remove the possibility of the payment being a voidable transaction, then the problem would not arise.

Review of remuneration in light of finding of conflict

Given the Court of Appeal identified errors in the primary judgment (including that there was a conflict of interest as discussed above), it was necessary for the Court of Appeal to consider whether the finding of conflict formed a basis upon which the Court could exercise its discretion to review the respondents’ remuneration pursuant to s 60-11 and/or s 90-15 of the IPS.

The Court found that on a proper construction, s 60-11 and/or s 90-15 of the IPS did empower the Court to review the remuneration payable to the respondents for work performed in circumstances of a conflict or apprehended bias. However, the Court ultimately exercised its discretion under s 60-11 to decline to review the respondent’s remuneration, having regard to the following considerations:

• although in the primary proceedings ASIC sought to disallow more than $900,000 in remuneration, which was more than 88% of the total remuneration approved for the respondent’s work in relation to the Companies, at appeal, it only sought to impugn that remuneration relating to the respondents’ work in investigating and reporting on potential recoveries in a winding up, including the respondent’s work in investigating and reporting on the date of insolvency of the Companies, which represented only a small proportion of the total fees charged by the Administrators;

• the breaches of duty, in investigation and reporting on potential recoveries in circumstances of conflict of interest or apprehended bias, were inadvertent not deliberate;

• there was no suggestion that the respondents were delinquent in the due performance of their duties as administrators;

• given that no DOCA was proposed and given the resignation of the sole director, the only option available as to the future of the Companies was liquidation. Therefore, the respondents’ investigations, reporting and recommendations to the creditors were not affected by their interest in avoiding a possible preference claim;

• there were considerable benefits and cost savings to the administration of the Companies as a result of the information gained by the respondents in providing pre-administration advice; and

• the Companies’ creditors resolved to approve the respondents’ remuneration after the respondents disclosed the relevant facts and ASIC’s concerns.