Australia: Disclosure Requirements For Insolvency Practitioners After 31 December 2007

Amendments to the Corporations Act coming into effect on 31 December 2007 mean that from that day administrators and liquidators will have to provide declarations of relevant relationships. Administrators will also have to provide a declaration of indemnities.

The new declaration requirements are a small number of the many amendments to the Corporations Act coming into effect on 31 December 2007 and over the following months. Unlike most of the other amendments to the Corporations Act the new declaration requirements will require the implementation of systems by administrators and liquidators to ensure compliance. A failure to comply with the new requirements is an offence.

Declarations of indemnities and declaration of relevant relationships

A new section 436DA of the Corporations Act will require an administrator to:

• make a declaration of indemnities and a declaration of relevant relationships as soon as practicable after being appointed; and

• give a copy of both declarations to the company's creditors at the same time as giving notice of the first meeting of creditors; and

• table a copy of both declarations at the first meeting of creditors.

A new section 449CA of the Corporations Act essentially repeats section 436DA in respect of administrators appointed to fill a vacancy under section 449C.

A new section 506A of the Corporations Act requires liquidators in a creditors' voluntary winding up to:

• make a declaration of relevant relationships before convening a meeting of creditors under section 497 of the Corporations Act;

• give a copy of the declaration to the company's creditors at the same time as giving notice of the section 497 meeting to creditors; and

• table a copy of the declaration at the section 497 meeting.

Section 506A of the Corporations Act does not apply to court appointed liquidators, who have no obligation to provide a declaration of relevant relationships. Court appointed liquidators must still be mindful of possible conflict of interest and duty.

Declarations of relevant relationships must be kept up to date and errors must be corrected (more below). A failure to make a declaration required by sections 436DA, 449CA or 506A of the Corporations Act, keep it up to date or correct any error is an offence under section 1311 of the Corporations Act.

Voluntary administrators — declaration of indemnities

The "declaration of indemnities" will be a new definition in section 9 of the Corporations Act. A declaration of indemnities must set out whether the voluntary administrator has been indemnified in relation to an administration for:

• any debts for which the administrator might be personally liable under section 443A or 443BA of the Corporations Act; and

• his or her remuneration as determined under section 449E of the Corporations Act.

If an administrator benefits from such an indemnity the declaration of indemnities must set out:

• the identity of each indemnifier; and

• the extent and nature of each indemnity.

The declaration of indemnities does not need to include reference to the statutory indemnity under section 443D of the Corporations Act.

Voluntary administrators and liquidators — declaration of relevant relationships

A new section 60 will be inserted into the Corporations Act to define the content of a "declaration of relevant relationships". The content of the declaration is slightly different for voluntary administrators and liquidators. A voluntary administrator's declaration of relevant relationships must state whether:

• the administrator;

• if so, stating the administrator's reasons for believing that none of the relevant relationships result in the administrator having a conflict of interest or duty.

A liquidator's declaration of relevant relationships must state whether:

• the liquidator;

has, or has had within the preceding 24 months, a relationship with:

• if so, stating the liquidator's reasons for believing that none of the relevant relationships result in the administrator having a conflict of interest or duty.

An "associate" is, relevantly, defined in section 11 of the Corporations Act to include a director or secretary of the company, a related body corporate (defined in section 50 of the Corporations Act) and a director or secretary of the related body corporate. The use of "associate" in the new section 60 significantly broadens the operation of the section.

What is a "relationship"?

All of the new sections 436DA, 449CA and 506A use the word "relationship" but there is no definition of "relationship" in the Corporations Act. The explanatory memorandum for the amendments to the Corporations Act provides some guidance:

The question of whether a 'relevant relationship' exists... will be a matter of fact and degree. However, the term should be interpreted in light of the object of the provision to alert the creditors to relationships that may not give rise to a conflict, but which may be relevant in considering whether to replace an administrator. This would include relationships where a conflict might be perceived to exist in the absence of full disclosure. It does not require the disclosure of trivial interpersonal connection.

In Re National Safety Council of Australia, Victorian Division [1990] VR 29 the Full Court of the Supreme Court of Victoria found (quoting McPherson on Company Liquidations) that the, "The guiding principle in the appointment by the court of a liquidator is that he must be independent and must be seen to be independent. In Commonwealth v Irving [1996] 65 FCR 291 Branson J quoted the above with approval. Branson J went on to find "a mere professional acquaintanceship" did not create a perception of bias or a reasonable perception of bias. However, in Commonwealth v Irving the facts of the long-standing professional and personal relationship between the administrator and one of the company directors, in the view of Branson J, should have precluded the administrator from taking the appointment.

A relationship is something more than the "trivial interpersonal connection" referred to in the explanatory memorandum. It is also probably something more than the "mere professional acquaintanceship" referred to in Commonwealth v Irving. The concepts of "relationship" would likely encompass (without limitation):

• a long-standing professional relationship with the company or a director or associate of the company;

• a long-standing personal relationship with a director of the company or an associate of the company; or

• in the case of administrators—previous professional appointments, such as an appointment as a receiver or investigating accountant by a secured creditor of the company.

Point 3 (which is the type of relationship in the new section 60(1)(a)(vii) of the Corporations Act) is likely to pose the greatest problems for administrators. An administrator will have to declare that he/she (or a member of his/her firm) has previously been appointed by Bank X as a receiver or investigating accountant if the administrator takes an appointment over a company and Bank X has a charge over the whole or substantially the whole of that company's property. It appears that the administrator does not have to disclose individual appointments from Bank X but only a general disclosure that the administrator (or a member of his/her firm) has previously had a professional relationship with Bank X.

Administrators should remember that the declaration of relevant relationships must be kept up to date (see below). Amongst other things, this will require a new declaration if the administrator (or a member of his/her firm) for the first time obtains a professional appointment from Bank Y and Bank Y happens to have a charge over the whole or substantially the whole of the property of a company over which the administrator has already been appointed.

Conflicts of interest or duty

It is only where an administrator or liquidator identifies a relationship that needs to be disclosed in the declaration of relevant relationships that the administrator or liquidator needs to explain why the relevant relationshipdoes not result in a conflict of interest or duty. In Re National Safety Council of Australia the Full Court referred on a number of occasions to "a conflict of interest and duty" to mean a conflict between the personal interests of the liquidator in that case and the liquidator's duty to creditors. In Bovis Lend Lease Limited v Wily (2003) 45 ACSR 612; (2003) 21 ACLC 1737 Austin J said:

even a cursory review of the scope and objects of Pt 5.3A [of the Corporations Act] would establish that voluntary administrators have implied duties of independence and impartiality, which are part of the very marrow of voluntary administration system. It has therefore been held that the principles of independence and impartiality developed and applied to liquidators are equally applicable to voluntary administrators (see e.g. Commonwealth v Irving) — although differences in the circumstances in which they are required to work (especially the speed at which the administrator must work) may affect the standard required to be observed in particular circumstances.

If an administrator or liquidator has to declare a relevant relationship then the administrator or liquidator must explain why the relationship does not give rise to a conflict between the administrator's/liquidator's personal interests and the interests of creditors or cause the administrator/liquidator to fail to be or be seen as independent or impartial. It is important to understand that the disclosure of a relevant relationship will not cure any conflict of interest or duty. If such a conflict exists, the administrator or liquidator must consider whether he or she should refuse the engagement.

Continuous disclosure — keeping declarations up to date

Both administrators and liquidators are required to keep their declarations up to date and to correct any error. Ifthe administrator or liquidator becomes aware that a declaration has become out of date or contains an error:

• in the case of an administrator:

• in the case of a liquidator:

Practical considerations for declarations of relevant relationships

The explanatory memorandum for the amendments also provides that "the declarations should be expressed in simple language. They should be no more than two pages in length." With respect to the drafters of the explanatory memorandum, given that a failure to properly disclose a relevant relationship is an offence, the declaration of relevant relationships should be as long as it needs to be and not arbitrarily limited to 2 pages. However, perhaps if an insolvency practitioner is faced with a declaration of relevant relationships exceeding 2 pages, he or she may need to consider whether he or she should be take the appointment in the first place.

If an administrator or liquidator is prosecuted for an offence relating to failing to provide a declaration, failingto keep a declaration up to date or failing to correct an error in a declaration it will be a defence that the administrator or liquidator:

• made reasonable enquiries; and

• the administrator or liquidator had no reasonable grounds for believing that the matter should have been included in the declaration.

It will assist administrators and liquidators to comply with their new declaration obligations (as well as to make out the above defences should it come to that) for their firm to have in place a formal system of:

• recording professional engagements in a central conflicts database;

• prior to accepting an engagement—checking against that database the company(s) and associates, secured creditors, former administrators, former liquidators, former provisional liquidators and former deed administrators of the company(s) over which the appointment is about to be accepted; and

• notifying other members of their firm of potential conflicts as they arise (to assist that other member to comply with his/her obligation to keep his/her declarations up to date).

Any conflicts check should be thorough enough to identify all relationships between:

• on the one hand:

• on the other hand—the company and associates, former liquidators, former provisional liquidators, former administrators, former deed administrators of the company and secured creditors.

The above two points mean that any conflict checking system must be able to identify a complex web of relationships.

It is unlikely that an administrator or liquidator would be properly discharging their declaration obligations or be in a position to make out the defence referred to above merely by relying on a system of sending emails to other members of their firm and assuming that no response meant there was no relevant relationship. Administrators and liquidators will need to ensure that there is a documented and formal conflict checking system that will identify all relevant relationships both before and after any engagement is accepted.

• if the administrator's/liquidator's firm is a body corporate—that body corporate or an associate of that body corporate; and

• on the other hand—the company and associates, former liquidators, former provisional liquidators, former administrators, former deed administrators of the company and secured creditors.

The above two points mean that any conflict checking system must be able to identify a complex web of relationships.

It is unlikely that an administrator or liquidator would be properly discharging their declaration obligations or be in a position to make out the defence referred to above merely by relying on a system of sending emails to other members of their firm and assuming that no response meant there was no relevant relationship. Administrators and liquidators will need to ensure that there is a documented and formal conflict checking system that will identify all relevant relationships both before and after any engagement is accepted.

Compliance on and after 31 December 2007

The new declaration requirements apply to administrators and liquidators of a company only if they are appointed on or after 31 December 2007.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.