The decision of the Supreme Court of Western Australia Court of Appeal in Ziziphus Pty Ltd v Pluton Resources Ltd (receivers and managers appointed) (in liq) [2017] WASCA 193 provides guidance to insolvency practitioners regarding independence in the course of successive appointments.
Before taking an appointment the practitioner must be independent and seen to be independent. In assessing perceived independence, the Court is required to ask whether a fair minded observer might reasonably apprehend that the appointee is not independent. In doing so, the Court of Appeal provided guidance as to the state of knowledge of the ‘fair minded observer’.
Background
Pluton Resources Ltd (Pluton) was a distressed iron ore miner. As part of a recapitalisation plan proposed by its senior secured creditor General Nice Recursos Commercial Offshore De Macau Limitada (GNR), voluntary administrators were appointed to Pluton on 8 September 2015.
Ziziphus Pty Ltd (Ziziphus) was a shareholder and unsecured creditor.
On 9 December 2015, the creditors resolved to execute a DOCA, which was executed on 4 January 2016. GNR had an overwhelming majority vote.
Ziziphus made an application to terminate the DOCA, place the company into liquidation and replace the incumbent administrators. Ziziphus succeeded in having the DOCA terminated, but orders were made for the incumbents to be appointed as liquidators. Ziziphus appealed the decision to appoint the incumbent administrators as liquidators.
Appeal decision
The ground of appeal put by Ziziphus was that in appointing the liquidators, the Master erred by failing to consider whether a fair minded observer might reasonably apprehend that they might not discharge their duties as liquidators with independence and impartiality.
The apprehension of lack of independence was contended by Ziziphus because the liquidators:
- Were appointed as voluntary administrators by Pluton’s board at a time when the board was controlled by GNR companies;
- Recommended the DOCA and variations to it when:
- its effect was, in a large part, to fund the liabilities of the GNR companies;
- it did not provide for anything like sufficient working capital to return Pluton to viability; and
- the promotor of the DOCA was unable to carry it out in accordance with its original terms and failed to meet promises to pay money under the DOCA and its variations;
- May not pursue voidable transactions in the liquidation because of their prior recommendation to creditors to vote for a DOCA; and
- Were promoting the interests of the GNR companies.
Commenting on the position of the hypothetical ‘fair minded observer’, the Court of Appeal said:
“The fair-minded observer would be taken to know that voluntary administrators may be appointed both by the board of directors of the company and by a secured creditor… [and] required to make a declaration of relevant relationships and indemnities, and provide a copy to creditors.”
The Court of Appeal found the evidence before the Court supported a finding that the administrators legitimately recommended the DOCA on the basis that unsecured creditors would be better off under the DOCA than a liquidation and that it was without merit to allege that a fair-minded observer would apprehend that the liquidators, officers of the Court, were conflicted and may ‘run dead’ on the voidable transaction claims because they had recommended a DOCA.
What does it mean for practitioners?
The judgment is a welcome reminder that practitioners can take a practical approach to assessing their perceived independence that reflects the realities of the industry where successive appointments encourage efficient and cost-effective administrations and may not result in any real conflict or lack of independence for the appointee.
This article was written by Neil Perl, Senior Associate in our Melbourne Office.
Publication Editor: Grant Whatley