Pre-appointment work – where is the line?

The importance of a Declaration of Independence, Relevant Relationships and Indemnities (DIRRIs) and the independence of external controllers has been a focus for an extended period of time, since before the ASIC v Franklin decision.  In increasingly large and complex insolvency matters, the issues of independence and its perception of independence are matters that not only trouble courts and creditors, but that will continue to evolve.

The recent decision of Korda, in the matter of Ten Network Holdings Ltd (Administrators Appointed) (Receivers and Managers Appointed) [2017] FCA 914, highlights some important issues to consider for insolvency professionals involved as “potential” administrators, prior to a company going into administration or liquidation.

Background

Mark Korda, Jarrod Villani and Jennifer Nettleton were appointed as joint and several administrators (Administrators) of Ten Network Holdings Ltd, and other companies comprising the Ten Group (Ten Group) pursuant to section 436A of the Corporations Act 2001 (Cth) (Act) on 14 June 2017.

The Administrators filed the application seeking orders regarding the extension of the convening period for the second meeting of creditors, the form of notice to be given to creditors, and orders regarding the role of Mr Gothard, a registered liquidator and partner of Ferrier Hodgson, appointed pursuant to section 447A of the Act to prepare a limited report to be included in the report prepared by the Administrators pursuant to section 447A of the Act, and other relevant orders.

For approximately three months prior to their appointment, the Administrators had acted in the capacity as “potential” administrators of the Ten Group. Australian Securities and Investments Commission (ASIC) sought leave to appear as amicus curiae, regarding the actions of the Administrators prior to their appointment, regarding the “boundaries of pre-administration” work, and whether the Administrators could continue to act. This issue became the “principal issue” to be determined in the application.

Key issues considered 

The key issues that were considered in this decision were:

• The principal issue regarding the extent of involvement available to an insolvency professional to a company prior to it entering voluntary administration; and
• The importance of the requirement of the DIRRI, and the apprehensions of bias.

Involvement pre appointment

In late February 2017 KordaMentha, the firm of which the Administrators were members, was retained by the law firm Gilbert + Tobin. Gilbert + Tobin were the Ten Group’s legal advisors. The retainer was limited to “ensure that KordaMentha would be in a position to accept the appointment of administrators…”¹

The retainer made it clear that all instructions were to come from Gilbert + Tobin, that any advice was provided by KordaMentha in its capacity as consultant to Gilbert + Tobin, and that “[a]t no stage will [KordaMentha] assume any role in advising the Company’s board or individual directors on their duties under the Corporations Act, the management of the Company or in managing the affairs of the Company”. ²

Evidence was provided by Mr Korda that personnel of KordaMentha, including himself, had meetings with the Ten Group’s management to allow them to understand the operation and financial position of the group. An “administration plan” was also prepared. Personnel from KordaMentha also attended meetings between the Ten Group and its financiers.

Between 28 February 2017 and 13 June 2017, members of KordaMentha attended approximately 50 meetings with the Ten Group management, directors, financiers, shareholders and advisors.

The evidence of Mr Korda demonstrated that at no time did the administrators or any personnel at KordaMentha provide advice to:

• The board of the Ten Group;
• The directors of the Ten Group;
• Management of the Ten Group;
• Any creditors of the Ten Group; or
• Any other stakeholders of the Ten Group (including, the Shareholder Guarantors or financiers).

In relation to the management of the Ten Group, managing the affairs of the Ten Group, the Ten Group’s insolvency, or the obligations and duties of the boards, individual directors and management.

The Court found that the evidence of what role KordaMentha took pre-appointment was consistent with what a potential administrator should and should not do.

The work conducted by the Administrators prior to their appointment, and post their appointment, importantly did not include:

• A concluded agreement being reached with creditors; or
• Advice being provided directly to the board of directors, the directors, the management group, or creditors or other stakeholders, of the Ten Group by the Administrators.³

His Honour Justice O’Callaghan described the safeguards that should be adopted by a potential administrator, which included a clear scope in the retainer, and a “sufficient record of the nature of the tasks performed, so that, for the purposes of proceedings like this (and doubtless for other purposes) evidence can be adduced to address such issues about conflicts of interest that may arise.”

DIRRI and bias

ASIC adopted the position that the Administrators had not properly disclosed the circumstances prior to their appointment in the DIRRI and there was a “perceived lack of independence”.⁵ The Administrators subsequently lodged an updated DIRRI (at the request of ASIC), which included details of relevant attendances prior to their appointment.⁶

ASIC submitted that there were three grounds upon which there may have been a reasonable apprehension of bias, which was ultimately reduced to two points after the provision of evidence and the updated DIRRI:

• The “…fact that the administrators were appointed by the law firm Gilbert + Tobin, have a referral relationship with that firm, were paid by that firm and may have to investigate that firm in the exercise of their…investigative and reporting functions”;⁷ and
• “Whether… the pre-appointment fees of their firm might be voidable preferences in any subsequent liquidation when reporting to creditors about the various options available to them at the second meeting for the purposes of creditors making an informed decision about whether or not to put the company into liquidation.”⁸

A disagreement between ASIC and the Administrators concerned the correct test to be applied regarding who is to have a “reasonable apprehension of bias”.⁹ After a detailed review of various decisions and relevant provisions of the Act, His Honour held that the applicable standard is that provided in the matter of Australian Securities and Investments Commission v Franklin (2014) 223 FCR 204 (whilst not strictly binding on His Honour),¹⁰ relevantly¹¹ (emphasis added):
“… that the test for apprehended bias in a liquidator is the same as that which applies to the judiciary and to administrative decision makers. That is the test stated by the majority in Ebner v Official Trustee in Bankruptcy [2000] HCA 63; (2000) 205 CLR 337 at [6], namely, whether “a fair-minded lay observer might reasonably apprehend that the judge might not bring an impartial mind to the resolution of the question the judge is required to decide”.

His Honour ultimately held regarding this issue that:¹²

“In any event, in the circumstances of this case, the fact that the administrators voluntarily disclosed the matters giving rise to a reasonable apprehension of bias cannot, as ASIC submitted, “change the facts that render it inherently improbable that the administrators could bring an independent mind to bear” in relation to the need to investigate payments to their own firm (that is, KordaMentha) and the conduct of the law firm that engaged and paid them to undertake the pre-appointment work.”

Orders were made by His Honour for the appointment of Peter Gothard as a registered liquidator, to prepare a “limited report” to be included in the 439A Report, regarding:

• Any claims arising from the conduct of the directors, officers, advisors (including Gilbert + Tobin) and/or KordaMentha as prospective administrators of each of the Second Plaintiffs prior to the appointment of the First Plaintiffs; and
• Whether the remuneration received by KordaMentha in respect of work undertaken by KordaMentha prior to the appointment of the First Plaintiffs are voidable preferences”.

Further, Mr Gothard was to supervise the Administrators’ conduct to “satisfy himself that the First Plaintiffs are acting consistently with their statutory duties and fiduciary obligations as administrators of the Second Plaintiffs in relation to any claims which Ferrier Hodgson identify in the report prepared pursuant to this Order that the Plaintiffs may pursue or should further investigate.”

Key learnings 

The key points to take away from this decision are:

• Larger and more complex administrations may require additional work and innovation in approach to give them the best chance of achieving the goals of Part 5.3A of the Act – to preserve value and businesses where possible.  This does not however mean that traditional considerations are ignored;
• In the event of pre-appointment work, the scope of work to be provided by a potential administrator prior to appointment should be clearly defined, and not involve giving advice directly to the company’s board, directors and/or creditor.  Even limiting the role in this respect does not guarantee you that you will not be challenged; and
• The DIRRI must be comprehensive and include details regarding work conducted by a potential administrator, prior to appointment. Failure to do so may result in an apprehension of bias, even if later steps are taken to clarify the work.

This article was written by Warren Jiear, Partner, Sarah Hamilton, Senior Associate, and Erin Donald, Solicitor in our Brisbane office.

Publication Editor: Grant Whatley.

¹Korda, in the matter of Ten Network Holdings Ltd (Administrators Appointed)(Receivers and managers Appointed)[2017] FCA 914 at [28]
²Ibid at [28]
³Ibid at [20] and 34
⁴Ibid at [37]
⁵Ibid at [41]
⁶Ibid at [46]
⁷Ibid at [57]
⁸Ibid at [58]
⁹Ibid at [50]
¹⁰Ibid at [80]
¹¹Ibid at [74]
¹²Ibid at [91]