Creditors - Independence of insolvency practitioners
What it means to be independent
When a company enters into voluntary administration, a deed of company arrangement or a liquidation, it is important that the person put in charge (the ‘external administrator’) is independent of the company and its directors, and acts in the interests of creditors as a whole.
There are different groups of people with different interests involved in the insolvency of a company. These include directors, shareholders, creditors who hold security over assets of the company, unsecured creditors, employees (who may also be creditors) and customers. The external administrator must treat all of these groups fairly and in accordance with their legal rights. For an external administrator to be independent, they must:
- not be biased towards any person or group
- not have, or have had, a close personal or business relationship with any person involved in the insolvency where that relationship would lead someone to suspect that they would favour the interests of that person, and
- not be in a position where their own personal or private interests conflict with their duties in the insolvency.
It is important that the external administrator is, at all times, both independent, and accepted as being independent, by those people interested in the affairs of the insolvent company. An external administrator may not be accepted as being independent if there is a real chance that circumstances exist that may threaten the person’s independence in the future.
A person appointed as an external administrator of an insolvent company must be a registered liquidator. They must also be an official liquidator if the appointment as liquidator is made by the court.
At the time of agreeing to take the appointment, the person must both be, and be accepted as being, independent. If the person knows at the time there is the real prospect of a threat to independence arising in the future, the person should not take the appointment (even if they tell creditors about the threat) without the court’s approval.
What relationships should an insolvency practitioner disclose?
If a liquidator is appointed by the court, they act as an officer of the court and they should tell the court before they are appointed of any circumstances they are aware of that might cause doubts about their independence.
A person who is consenting to be appointed as voluntary administrator or liquidator in a creditors’ voluntary liquidation must send to creditors, with the notice of the first meeting of creditors, a declaration about any relationships they may have. The declaration must:
- set out whether the person, their partners in a firm or their company or an associated company has, or has had in the past two years, a relationship with either:
- the insolvent company
- an associate of that company
- a former liquidator or former provisional liquidator of that company, or
- a secured creditor with security over the whole or substantially the whole of the company’s property, and
- state the person’s reasons for believing that none of the relationships result in the person having a conflict in accepting the appointment.
The declaration must also be tabled at the meeting of creditors.
If the voluntary administrator or liquidator later realises that the original declaration is out-of-date or contains an error, they must distribute a replacement declaration.
A person who is consenting to be appointed as voluntary administrator must also disclose in writing any indemnities provided to the person to cover their fees and costs (for an explanation of the meaning of an indemnity, refer to ASIC’s information sheet Insolvency: a glossary of terms (INFO 41).
The declarations must be given to creditors to allow them to consider the person’s independence and make an informed decision about whether they want to replace the person with someone of the creditors’ choice.
If, as a creditor, you receive a declaration of relationships or indemnities, and you are concerned whether the circumstances might cast doubt upon whether the person would be independent, you should ask the person about the circumstances that lie behind the declaration. You may also consider whether they should be replaced.
How to replace an insolvency practitioner
Before a person takes an appointment as an external administrator, they must make reasonable inquiries to ensure there are no real threats to their independence. The person must also continue to monitor their independence during the period of the appointment and take action should such a threat arise. Depending on the threat, this may involve applying to court or calling a meeting of creditors to give details of the potential threat and allow a decision to be made by the court or the creditors about how the threat should be managed and whether the person should continue to act or be replaced.
As discussed below, in some circumstances, you may seek to remove the person if you have doubts as to their independence and replace them with an external administrator of the creditors’ choice. Any replacement should also prepare the relevant declaration(s) about their relationships with various specified parties and, in a voluntary administration, also any indemnities they have been given for their fees and costs.
In a voluntary administration, you are given an opportunity to replace an administrator at the first meeting of creditors, if there is another administrator who has consented to taking on the role and a majority of creditors (in number and value) approve the appointment of that replacement administrator. For more information about this meeting see 'Meetings of creditors in voluntary administration'. (link to ‘Voluntary Administration’ page in Creditors' Room)
Deed of company arrangement
At the second creditors’ meeting in the voluntary administration where creditors agree to accept the proposal for a deed of company arrangement, they can also choose who they wish to be deed administrator. This person does not have to be the current voluntary administrator, but may be someone else of the creditors’ choosing.
If the deed of company arrangement fails and creditors resolve to terminate the deed and wind up the company, they can also choose someone other than the deed administrator to be the liquidator (provided the other person has agreed, in writing, to act as liquidator).
If the liquidator has been appointed by the court, only the court can remove the liquidator from acting. Creditors cannot remove a court-appointed liquidator by passing a resolution at a meeting of creditors.
In a creditors’ voluntary liquidation, the creditors may, by a majority in number and value, vote to replace the liquidator appointed by members at the first meeting of creditors. This meeting must be called within 11 days of the liquidator being appointed.
If, at the second meeting of creditors in a voluntary administration, creditors vote that the company go into liquidation, it is usual for the voluntary administrator to become the liquidator of the company. Creditors, by majority in number and value, may vote to appoint another person to act as liquidator.
Queries and complaints
You should first raise any queries or complaints with the external administrator. If this fails to resolve your concerns, including any concerns about their conduct, you can lodge a complaint with ASIC at http://www.asic.gov.au/complain, or write to:
Australian Securities and Investments Commission
GPO Box 9827
Your Capital City
ASIC will usually not become involved in matters of commercial judgement by an external administrator. Complaints against companies and their officers can also be made to ASIC. For other enquiries, contact ASIC's infoline on 1300 300 630 or make an enquiry at www.asic.gov.au/question.