Three potential grounds of apprehended bias
55 In this proceeding, ASIC identified three potential grounds on which the KordaMentha's pre-appointment work might be considered to give rise to a reasonable apprehension of bias.
56 The first identified ground was "the sheer volume of the work that was performed prior to the administrators' appointment. The fact that it went on for some three months, and the fact that [KordaMentha] was paid more than $1 million for the work".
57 The second identified ground was "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".
58 The third identified ground was:
…the fact that the administrators would have to consider, in the course of their investigations and reporting, 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.
59 As to the first possible ground, ASIC accepted, having had the benefit of Mr Korda's sworn evidence about the nature of the pre-administration work that, contrary to the impression created by both the first DIRRI and the second DIRRI, KordaMentha was engaged to prepare an administration contingency plan, in case the informal restructuring negotiations then being conducted by the Ten Group were unsuccessful. As counsel for ASIC submitted, "the extensive work that KordaMentha did was to describe the plan, take steps to prepare for its execution in the event that it was needed so that that could occur quickly and efficiently, and keep the board informed of the work that they were undertaking".
60 ASIC submitted, with considerable force, that if Mr Korda had made clear in the DIRRIs that which he explained in his detailed affidavit, a different view might have been taken earlier about the nature and effect of Mr Korda's pre-appointment involvement.
61 ASIC also submitted that directors contemplating potential insolvency should be encouraged to do the very thing that the Ten Group (including Gilbert + Tobin on its behalf) did, namely to engage with qualified professionals early, to develop restructuring plans that will increase the chances of rescue or maximise the amount that can be salvaged for the benefit of creditors and, if at all possible, members.
62 ASIC also submitted that, provided that safeguards are erected that guard against the existence or appearance of any conflict of interest, should an appointment subsequently prove necessary, then the fact that significant, long-term and highly-paid work is undertaken - for the purposes of planning and preparing for a prospective administration to which those planners and preparers are subsequently appointed - should not of itself cause a reasonable apprehension of bias.
63 I agree with each of those submissions.
64 ASIC submits that a fair-minded lay observer might reasonably apprehend that the administrators might not bring an impartial mind to the resolution of two issues in particular, namely the issues identified by ASIC in the second and third grounds described above. This is so, it was submitted, in light of the fact that the administrators were appointed by Gilbert + Tobin, have a referral relationship with that firm and were paid by that firm, and because the administrators:
(1) may have to investigate Gilbert + Tobin (ground two); and
(2) will have to consider, in the course of their investigations and reporting, whether their pre-appointment payments are voidable preferences in any subsequent liquidation (ground three).
65 Although Mr Zwier, on behalf of the administrators, urged the Court not to make such a finding, in my view, those circumstances establish two clear and distinct grounds upon which a fair-minded lay observer might reasonably apprehend that the administrators might not bring an impartial mind to the resolution of the issues identified.
66 As I said during the course of Mr Zwier's submissions, however, such a finding is not to be regarded as reflecting adversely on Mr Korda or his conduct, or the conduct of his firm. It seems to me that, in circumstances where any potential administrator engages in extensive preparatory work - by way of an administration plan or whatever it is to be called - along the lines of the work carried out by Mr Korda and his colleagues between February and June of this year (described in detail above), it will invariably follow that if administration leads to liquidation, questions will arise of the sort that I have ordered in this case should be dealt with and supervised by other experienced and wholly independent liquidators.
67 For the reasons I have given, a fair-minded lay observer might reasonably apprehend that the administrators might not bring an impartial mind to the resolution of two issues:
(1) the fact that the administrators were appointed by Gilbert + Tobin, have a referral relationship with that firm, were paid by that firm and may have to investigate it; and
(2) the fact that the administrators will have to consider, in the course of their investigations and reporting, whether their pre-appointment payments are voidable preferences in any subsequent liquidation.
68 ASIC did not suggest, in the circumstances of this case, that the two potential conflicts identified by ASIC should require the removal of the administrators. Removal would be disproportionate and, where an order of the type the Court has made here, handing responsibility to an experienced and wholly independent liquidator, is tailored to meet the circumstances of the case, it would be wholly unnecessary. It would also be disproportionate because Mr Korda and KordaMentha have obtained a considerable level of familiarity with the companies comprising the Ten Group, their operations, their financial circumstances and their financial arrangements, which would be lost if the administrators were removed. Mr Korda and KordaMentha have had dealings, and no doubt have established relationships with, major creditors, shareholders and advisers. They have also designed, during the pre-appointment engagement period, what ASIC agreed was "a well-developed and complex administration plan". That, after all, is the point of engaging a potential administrator.
69 I should also add that the power of the Court to "quarantine" the issues about which potential conflicts might arise, by making an order of the sort made here, is undoubted: see s 447A of the Act; Hughes v Receivers and Managers of Westgem Investments Pty Ltd (Receivers and Managers Appointed) (Administrator Appointed) (No 3) [2012] WASC 360 at [18]; and Re Obie Pty Ltd (in liq) (No 4) (1984) 8 ACLR 967 at 971.
70 As I mentioned earlier, there were two points of principle about which the administrators and ASIC disagreed, with which I should deal.
71 Firstly, the administrators submitted that the correct test to be applied was whether there would be a reasonable apprehension by any creditor, not by a reasonable fair-minded lay observer, of a lack of impartiality on the administrators' part. The administrators cited Advance Housing Pty Ltd (in liq) v Newcastle Classic Developments Pty Ltd (1994) 14 ACSR 230 at 234 per Santow J in support of the proposition that "bystanders have nothing to do with it" and that the relevant "observer" was "a fair minded lay creditor bystander".
72 The passage relied upon in Advance Housing Pty Ltd (in liq) v Newcastle Classic Developments Pty Ltd (1994) 14 ACSR 230 at 234 is as follows:
…the correct balance is struck by permitting a liquidator to act as such even if there be a prior involvement with the company in liquidation, provided that involvement is not likely to impede or inhibit the liquidator from acting impartially in the interests of all creditors or be such as would give rise to a reasonable apprehension on the part of a creditor that the liquidator might be so impeded or inhibited. In short the question should be whether there would be a reasonable apprehension by any creditor of lack of impartiality on the liquidator is part in the circumstances, by reason of prior association with the company or those associated with it, including creditors, or indeed any other circumstance.
(Emphasis added.)
73 Counsel for ASIC submitted that, to the extent that that passage is to be read as standing for the proposition contended for by the administrators, it is wrong.
74 ASIC submitted that the test for apprehended bias in respect of an administrator is the same as that which applies to the judiciary and to administrative decision makers, citing Australian Securities and Investments Commission v Franklin (2014) 223 FCR 204 at 218 [59]-[61] per White J, with whom Jessup and Robertson JJ agreed. The paragraphs cited by ASIC are as follows:
It was common ground at first instance, and on the appeal, 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". Gleeson CJ, McHugh, Gummow and Hayne JJ went on to say (at [8]) that the application of this test requires two steps:
First, it requires the identification of what it is said might lead a judge (or juror) to decide a case other than on its legal and factual merits. The second step is no less important. There must be an articulation of the logical connection between the matter and the feared deviation from the course of deciding the case on its merits. The bare assertion that a judge (or juror) has an "interest" in litigation, or an interest in a party to it, will be of no assistance until the nature of the interest, and the asserted connection with the possibility of departure from impartial decision making, is articulated. Only then can the reasonableness of the asserted apprehension of bias be assessed.
The "double might" test stated in Ebner has been regarded as relatively undemanding and, on occasion, has been described as "Spartan". Nevertheless, the degree of independence and impartiality to be expected of a decision maker may differ from one statutory context to another. As Spigelman CJ observed in McGovern v Ku-ring-gai Council [2008] NSWCA 209; (2008) 72 NSWLR 504 at [11], "the judicial paradigm is not universally applicable". Similarly, this Court observed in Cabcharge Australia Ltd v Australian Competition and Consumer Commission [2010] FCAFC 111 at [27] that, "although the test for apprehended bias is ordinarily the same wherever it arises, the precise language used in applying the test has frequently varied depending on the context in which it falls to be applied". This means, in the present case, that particular regard must be had to the position of liquidators in a voluntary winding up.
Liquidators are officers of the court and are, accordingly, expected to conduct themselves with independence, impartiality and integrity. However, questions of bias in relation to liquidators arise in a context which differs in material respects from that of the judiciary or administrative decision makers. Liquidators are themselves engaged in business in a competitive environment. They have to attract work. This makes it almost inevitable that they will develop contacts and relationships with those who are actual or prospective sources of referrals. Further, the success or otherwise of liquidators will depend in part on their maintaining good professional reputations.
75 ASIC contended that, because in that case the question of the appropriate test to apply was common ground, both at first instance and on appeal, I am not, strictly speaking, bound to follow it. ASIC contended, however, that the test applied by agreement of the parties is undoubtedly correct and that the apprehended bias test is not to be limited to an apprehension reasonably held by creditors of the company, as the administrators contended.
76 In support of that submission, Mr Maiden pointed to the objects clause contained in s 435A, in Pt 5.3A of the Act, which is headed "Administration of a company's affairs with a view to executing a deed of company arrangement". Section 435A relevantly provides:
Object of Part
The object of this Part, and Schedule 2 to the extent that it relates to this Part, is to provide for the business, property and affairs of an insolvent company to be administered in a way that:
(a) maximises the chances of the company, or as much as possible of its business, continuing in existence; or
(b) if it is not possible for the company or its business to continue in existence - results in a better return for the company's creditors and members than would result from an immediate winding up of the company.
(Emphasis added, note to s 435A omitted.)
77 Objects clauses have a role to play in statutory construction. The Full Court recently summarised the position in Australian Building and Construction Commissioner v Powell [2017] FCAFC 89, stating (at [48]):
...an "objects" provision within a statute "does not control clear statutory language" but, rather, is properly to be considered as an aid in construing the statute: Minister for Urban Affairs and Planning v Rosemount Estates Pty Ltd (1996) 91 LGERA 31 at 78 per Cole JA; CSL Australia Pty Ltd v Minister for Infrastructure and Transport (No 3) [2012] FCA 1261; 297 ALR 289 at 314 [99] per Robertson J. Such a provision does not definitively determine the meaning of the statutory text. This is not, however, to say that a statement of the legislative object is not an important assistance in interpreting the words of the statute; it is one aspect of considering the meaning and reach of the words used by Parliament.
78 For those reasons, the fact that the objects clause in question here expressly provides that the object of Pt 5.3A is, relevantly, to provide for the business, property and affairs of an insolvent company to be administered in a way that "results in a better return for the company's creditors and members" means that to exclude members from the definition of a fair-minded observer would not be consistent with that object.
79 Mr Maiden further submitted during his oral submissions on behalf of ASIC that:
…the impact of the s 435A objectives is that a reasonable fair-minded observer cannot be restricted to a reasonable fair-minded creditor. Part 5.3A is a corporate rescue mechanism. And paragraph (b) of section 435A makes explicit the fact that interests of creditors and members are relevant. In that context, to require the reasonable fair-minded observer to view the world through the prism of a creditor would mean that the reasonable fair-minded observer was no longer reasonable or fair-minded because he or she would approach the question with a particular motivation, the motivation being that peculiar to the creditors of this particular company.
…the reasonable fair-minded observer could be any reasonably educated and intelligent person fully apprised of the facts…that person has an interest in the independence of insolvency practitioners merely by virtue of the fact that they are participants in our market. And everyone with an interest in our market has an interest in the effective operation of our insolvency system. And the effective operation of our insolvency system relies on the trustworthiness and independence of its registered practitioners. The community puts its trust in insolvency practitioners to act objectively in investigating, in reporting, in adjudicating on proofs of debt, and where necessary, in litigating as responsible officers.
80 I agree with those submissions. Assuming that the decision in Australian Securities and Investments Commission v Franklin (2014) 223 FCR 204 is not, strictly speaking, binding on me in determining this application, then, for the reasons advanced by ASIC, the test which the parties in that case regarded as the applicable test (both at first instance and on appeal) is, in my view, the correct test to apply. The fair-minded observer is not to be understood as being restricted to a fair-minded creditor, whatever suggestion to the contrary might be found in some of the cases.
81 The second point of principle about which the administrators and ASIC did not agree was whether the voluntary nature of the disclosures made by the administrators - that is, disclosures concerning the matters that I have now ordered be carried out by Ferrier Hodgson - "cured" any reasonable apprehension of bias that would otherwise have arisen.
82 The administrators were unable to cite any authority in support of the proposition that such disclosures operate to cure any apprehension of bias. In my view, they do not operate in that way.
83 First, s 436DA of the Act, which appears under the heading "Declarations by administrators - indemnities and relevant relationships", requires administrators, as soon as practicable after being appointed, to make a declaration of relevant relationships and a declaration of indemnities.
84 The Explanatory Memorandum to the Corporations Amendment (Insolvency) Bill 2007 (Cth) contains a section headed "Part 2 - Better informing creditor decisions". The sub-heading reads: "Administrators and liquidators to make available declarations of relevant relationships and indemnities". The Explanatory Memorandum records the fact that "notwithstanding the requirements under common law and statute, concerns have been raised about the independence of administrators". The Explanatory Memorandum goes on to say (at [4.69]) as follows:
For example, there may be a perception of a lack of independence where the administrator earlier acted as an adviser to the appointing Board of Directors, particularly where the administrator is subsequently required to consider the possibility of offences, negligence or breaches of duty or trust by the current and former directors.
85 The Explanatory Memorandum also notes as one of the "key changes" the new requirement obliging administrators to declare any relevant relationships and declare any indemnities that have been provided. It is said that such declarations "will allow creditors to make a more informed decision about whether to replace the administrator". Of particular relevance for current purposes is [4.7] of the Explanatory Memorandum, which provides as follows: "Including a relationship in a declaration will in no way 'cure' any conflict of interest or conflict of duties that may arise out of that relationship, even if creditors approve the appointment after the declaration is made".
86 As counsel for ASIC submitted, that is consistent with the position at common law concerning judicial impartiality. The duty of disclosure exists to give litigants the ability, if they choose to do so, to waive any apprehended bias: see Gascor v Ellicott [1997] 1 VR 332 at 361 per Ormiston JA, Brooking and Tadgell JJA agreeing.
87 In Dovade v Westpac Banking Group (1999) 46 NSWLR 168, the Court said (at [105]):
We acknowledge that the statements in the preceding paragraph are categorical in form, even when confined to disclosure by judges and the facts of this present case. Nevertheless, the propositions are (we believe) correct and consistent with remarks of Ormiston JA in Gascor [v Ellicott [1997] 1 VR 332] (at 353-362) with which we respectfully agree. That case deals with the disqualification of an arbitrator and, for that reason, the views expressed by Ormiston JA apply with even greater force to a Supreme Court judge. Like Ormiston JA (see at 356) we would not see it as controversial to assert that every judicial officer should feel obliged, if he or she does not decide to withdraw of his or her own accord, to bring to the attention of the parties as soon as practicable any fact or circumstance which could lead to disqualification for apprehended bias. Disclosure would only be required if the judge thought waiver was possible, for otherwise withdrawal would be imperative. It is common sense to require such disclosure if only because ordinarily the facts are not available to the parties and it is ordinarily desirable to bring to their attention any grounds for disqualification, in order to determine if the disqualifying facts will be waived, before the parties have expended time or effort in preparing for a dispute before a tribunal which must otherwise be reconstituted.
(Emphasis added.)
88 Further, in Kirby v Centro Properties Ltd (No 2) (2008) 172 FCR 376, Finkelstein J recused himself, having promptly disclosed circumstances going to the question of apprehended bias (being, in essence, that his Honour had held certain shares relevant to the proceeding, which had been sold by the time the matter came on for hearing). His Honour noted (at [12]): "When the matter came on for hearing, I advised the parties that the shares had been sold. This information did not, as I anticipated it would, appease anyone. To the contrary, it seemed to have an inflammatory [effect], although, as one would expect, counsels' submissions were restrained".
89 Subsequently, having considered counsel's submissions in support of recusal, Finkelstein J held (at [16], citing Ebner v Offıcial Trustee in Bankruptcy (2000) 205 CLR 337):
In the face of these considerations, I decided in the end that I should recuse myself. I consider that in a case such as the present, where there is real doubt about the matter, the better course is to be cautious … I should make it clear that I am not at all troubled by the possibility that an appellate court might have taken a different view had I refused to recuse myself. What does concern me, however, is the delay an appeal would have caused, as well as the additional cost the parties would have incurred in what is already an expensive piece of litigation.
(Citations omitted.)
90 In none of these instances, or in any decision of which I am aware, has it ever been suggested that the voluntary disclosure itself cured any reasonable apprehension of bias.
91 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.