Pre-appointment advice and the independence of administrators when is too close for comfort?

The case of Huxtable, in the matter of Calnan Oldfield Pty Ltd (ACN 120 195 833) (Administrator Appointed) [2010] FCA 769 outlines the issues surrounding the appointment of an insolvency practitioner as an administrator of a company where the practitioner previously provided advice to the company.

Facts

Calnan Oldfield Pty Ltd (the company) operated a real estate sales and property management business. In February 2010 Mr Calnan, a director of the company, met with an insolvency practitioner, Mr Huxtable, and informed him of the structure of the company and the issues it was facing. Mr Huxtable advised Mr Calnan of the possible processes in a voluntary administration and a liquidation scenario.

In June 2010, after the ATO had issued penalty notices against the directors, Mr Calnan and Mr Huxtable met to again discuss the appointment of Mr Huxtable as administrator. On 18 June 2010, in the absence of the other director’s consent, Mr Calnan signed a director’s resolution appointing Mr Huxtable as administrator.

Mr Huxtable then applied to the Federal Court to have Part 5.3A of the Corporations Act 2001 (Cth) (Act) confirm his appointment as procedurally valid. The other director and a shareholder of the company acknowledged that an administrator should be appointed to the company, but opposed the appointment of Mr Huxtable on the basis that Mr Huxtable was in a position of conflict of interest.

Decision

In determining the independence of Mr Huxtable, Justice Barker examined the interaction between Mr Huxtable and Mr Calnan, in particular the meeting held in February 2010.

Barker J referred to the length and content of this meeting as well as the involvement of Mr Huxtable in receiving or providing advice throughout the meeting. Justice Barker referred to Mr Huxtable’s notes from this meeting and considered that this “... was a meeting about insolvency and not some strategic discussion as to how Mr Calnan might be able to sharpen his sword for other proceedings or actions of a corporate nature against the defendants (ie the other director and the shareholder) with Mr Huxtable’s assistance.”

Justice Barker remarked that it is understandable that when an insolvency practitioner’s advice has been sought at an early stage of a commercial dispute, that a question may arise whether these early interactions affect his or her appointment as an administrator.

However, Barker J referred to Mr Huxtable’s membership of the Insolvency Practitioners Association of Australia (IPA) and stated that Mr Huxtable fully appreciated his responsibilities under the Act.

Justice Barker decided in favour of Mr Huxtable and held that the appointment of Mr Huxtable could continue and that he was an appropriate person to conduct the administration.

Comment

This decision highlights that advice given by an insolvency practitioner is not an absolute barrier to subsequent appointment as an administrator on the grounds of a conflict of interest. This case shows that the advice provided by the insolvency practitioner as well as the level of the insolvency practitioner’s involvement in the affairs of the company, will be important considerations in the determination of an administrator’s independence.

We also note that the IPA is presently reviewing the ”pre-appointment advice” part of its Code of Professional Practice and all IPA members should stay apprised of any changes at the IPA website.