The appointment of the banks' nominees
60 Whether to appoint Messrs Crosbie and Carson as the substitute administrators is a difficult question. It is made all the more difficult because their appointment is opposed by one growers group. In part, that opposition is based on the fact that Messrs Crosbie and Carson have been nominated by the banks. It is also based on the circumstance that Messrs Crosbie and Carson have worked for one of the banks in connection with the Willmott Forests group.
61 At the heart of the opposition are two propositions: (1) the interests of the banks and of creditors (especially growers/creditors) are likely to be in conflict; and (2) the banks' nominees will not be seen to be independent. I am bound to say that neither proposition is farfetched. The first (the potential for conflict) is obviously true. The banks hold security for their debt. Mr Webster says that the banks' debt will not be satisfied by the security. In that event the banks' receivers will be duty bound to maximise the banks' return. That may lead to action which will be contrary to the interests of the unsecured creditors and will likely be detrimental to the interests of the investors. Of course there are obligations a secured creditor and its receivers owe to the mortgagor and to those claiming through the mortgagor. As these obligations are limited, it is important that there is an independent person who will take on the banks if necessary.
62 This is the reason why the second point (the perception of partiality) is not so easily put aside. It cannot be emphasised too much that an administrator must be both independent and impartial. Not only that, the independence and impartiality must "be manifestly seen to exist": Re Allebart Pty Ltd (in liq) [1971] 1 NSWLR 24, 30 per Street J, speaking of the office of liquidator.
63 An administrator is a fiduciary and should have imposed on him/her the same duty to act impartially as courts of equity impose on trustees: Parbery v ACT Superannuation Management Pty Ltd (2010) 79 ACSR 425, [34]; Re Eaton Electrical Services (2006) 58 ACSR 403, [9]. The court will not appoint as a trustee a person who will protect the interests of only some of the beneficiaries: Re Tempest (1866) LR 1 Ch App 485. So, for example, the court will not appoint as a trustee a solicitor who acts for one only of the beneficiaries: Re Kemp's Settled Estates (1883) 24 Ch D 485 and Re Spencer's Settled Estates [1903] 1 Ch 75. The court should be equally cautious when appointing an insolvency practitioner to the position of liquidator or administrator.
64 It was once the rule that that an insolvency practitioner should not take up the office of liquidator or administrator if s/he had prior dealings with the company, its directors, major shareholders or creditors: Re Chevron Furnishers Pty Ltd (in liq); Qld Amalgamated Industries Pty Ltd v Harris [1995] 1 Qd R 125, 130. But, as with so many sound rules, commercial expediency has led to them being watered down. In National Australia Bank Ltd v Market Holdings Pty Ltd (in liq) (2001) 37 ACSR 629 Young J acknowledged (at [194]) that the rules have been "slightly eroded" by three practices: (a) permitting a company which has consulted an insolvency accountant about its future to nominate that accountant as liquidator; (b) permitting a voluntary liquidator to be appointed who has given financial advice to the directors; and (c) permitting creditors to nominate a liquidator in an ordinary winding up in insolvency.
65 In this case I am asked to erode the principle by one more practice - permitting an administrator to be appointed who has given advice about the mortgagor to the secured creditor. In their DIRRI Messrs Carson & Crosbie advised they had been engaged by the CBA on 17 August 2010 to prepare a report in respect of the bank's exposure to the group and its investment schemes. Their view was that this retainer was not an impediment to their appointment. The declaration stated: "We understand our obligations to all stakeholders and our engagement by CBA in relation to the Group should not be taken to constitute a bias or lack of independence on our behalf".
66 The need for the appearance of independence by the proposed administrators was sufficiently important that the matter could not be left at that. Further disclosure was required. Accordingly on 15 October 2010 I requested the CBA to provide a copy of the report they had received from Messrs Carson & Crosbie. A copy was provided to me, to ASIC and, in a redacted form, to counsel and solicitors for the parties. Following receipt of the report, I invited counsel to make such further submissions as they may be advised. In the event, no further submissions were forthcoming.
67 Probably this was because the report was an innocuous affair. All PPB did in its report was to identify topics for future examination. Those topics included the current state of the group, potential risks to the bank and the kind of risk assessments that should be undertaken by the bank. PPB undertook no substantive analysis on any issue.
68 There was, however, another problem. Late on 13 October 2010, the Willmott Growers Group indicated that representatives of BRI Ferrier were still interested in being appointed as the substitute administrators. Thus, I was asked, in effect, to choose between two insolvency firms. No doubt, if a wider enquiry of potentially interested firms was made, more candidates would have come forward.
69 This problem, indeed this whole proceeding, is the direct consequence of Pt 5.3A being drafted to permit the "private ordering" of administrators. The Harmer Committee (Australian Law Reform Commission) whose report "General Insolvency Inquiry" (Report No 45) led to the enactment of Pt 5.3A, considered two methods of selecting an administrator. One was selection by the directors. The second method was an appointment based on a roster system.
70 The Harmer Committee rejected a roster system approach. The Harmer Report stated (at [70]): "A roster system would detract from the voluntary nature of the procedure. The quality of administrators would inevitably vary from person to person. The directors may have proposals for dealing with the company's insolvency. In fact, the existence of these proposals may have encouraged the directors to have the company voluntarily submit its affairs to a particular insolvency administrator. Therefore it is important that the company, at least in the initial stages, should have some freedom of choice in appointing the administrator".
71 The choice which the Harmer Committee set for itself was, of course, a false choice. The alternative to an appointment by directors was not simply a roster system, which could, I accept, be a poor alternative. Another, to my mind preferable, but not the only, alternative, is for an administrative organ of government (eg ASIC) to nominate the administrator from a panel of qualified insolvency practitioners. To nominate an appropriate person ASIC would need certain information about the practitioners on the panel including: (1) the nature of the firm of which the practitioner is a member; (2) the work that has been performed in the past by the practitioner and his/her firm; (3) the fees the practitioner charges (including details of the gross fees charged in previous insolvencies); (4) whether the practitioner is sufficiently independent; and (5) the financial capacity of the practitioner to finance the administration. Armed with this information ASIC would be able to match a particular practitioner to a new administration.
72 Recognising that private ordering had the potential to cause problems the Harmer Report proposed certain procedures to safeguard the independence of the administrator. Those features (all of which were, over time, adopted in Pt 5.3A) were (1) persons eligible to be appointed as administrators must be registered insolvency practitioners; (2) certain persons having a close connection with the company cannot be its administrators; (3) the administrator must declare associations with the company and any circumstances which may make it difficult for the administrator to act impartially; (4) directors cannot remove an administrator; and (5) a lack of independence of an administrator may be a ground for removal by the court (Harmer Report [72]).
73 Notwithstanding those safeguards (which are not dissimilar to those that exist in the case of liquidators) the appointment of insolvency practitioners is a matter of continuing concern. In December 1993 the then Commonwealth Attorney-General established a Working Party to consider and make recommendations as to whether changes should be made to the system for the registration, appointment and remuneration of insolvency practitioners. The Working Party published its report, "Review of the Regulation of Corporate Insolvency Practitioners", in June 1997.
74 In its review the Working Party looked at the appointment of liquidators by the court, noting that the court is not involved in the appointment process in other administrations, except when the party's appointment is challenged. As regards liquidators the Working Party examined whether the appointment should be made through a nomination or rotation system. The arguments in favour of using a nomination system were identified (at [9.19]) as (1) selection of a liquidator by the market encourages competition; (2) the most skilled and efficient liquidators would be rewarded; (3) the number of liquidators required would be set by market forces; and (4) creditors would be encouraged to appoint the most able and competitive liquidators based on skill, experience, efficiency and costs. The main arguments in favour of a rotation system were identified (at [9.20]) as being (1) preventing inappropriate relationships developing between liquidators and creditors; (2) avoiding entrenching liquidation work in a small number of large firms; (3) ensuring all liquidators receive a reasonable amount of work, thereby maintaining their experience levels; (4) enabling less experienced practitioners to gain more experience than they may otherwise obtain; and (5) spreading the burden of assetless administrations.
75 In its discussion on the rotation system the Working Party mentioned (at [9.24]) that "one of the virtues of a rotation system for the selection of official liquidators is that it assists to ensure the independence of the practitioner". They went on to mention two concerns about inappropriate relationships which might arise if a nomination system were used rather than a rotation system. They were (1) the formation of "clubs" comprising lawyers and liquidators who refer work to each other; and (2) the independence of the insolvency practitioner from any particular party involved in the liquidation, such as a creditor.
76 The Working Party gave no separate consideration to the appointment of administrators under Pt 5.3A. Nonetheless, in my view, the concerns the Working Party expressed about inappropriate relationships that result from a nomination system apply equally to the private ordering of administrators.
77 Another investigation into the appointment, removal and functions of insolvency practitioners was undertaken by the Parliamentary Joint Committee on Corporations and Financial Services. The Joint Committee published its report in 2004 - "Corporate Insolvency Laws: a Stocktake". The Report makes clear that the Joint Committee received many submissions concerning the lack of independence of insolvency practitioners. Several, including a submission from the Commercial Law Association of Australia (extracted at [3.17]), noted the difficulty of overcoming the perception among creditors that an administrator appointed by the directors is not impartial. Nonetheless, the Joint Committee was of the view (at [3.37]) that the Harmer rationale for the appointment of administrators by directors remained persuasive. In its report the Joint Committee observed (at [3.38]) that creditors have the opportunity to replace the administrator with one of their own choice. It also observed that a creditor could apply to the court to prevent abuses. At least the Joint Committee acknowledged that creditors may not have the resources to exercise that option: ie that recourse to the courts is often not a realistic option.
78 The most recent examination into the regulation of insolvency practitioners is that undertaken by the Economic References Committee of the Senate - "The regulation, registration and remuneration of insolvency practitioners in Australia: the case for a new framework" (Sept 2010). When dealing with the remuneration of insolvency practitioners (a major topic of the Committee's report), the Committee discussed (at [10.61]-[10.78]) a number of possible methods of keeping fees down. They included a set fee, broadening the recruiting base for insolvency practitioners, better disclosure on fees and competitive tendering. As regards this last proposal the Report (at [11.50]) stated that competitive tendering was "appealing in principle" but the Committee felt that it would be unreasonable given the potential complexity of an insolvency job was not often apparent at the outset.
79 With the greatest of respect, I have a different view from that taken by the Senators. A competitive tendering process or "auction" has many benefits both in keeping fees down and more generally. First and foremost it will secure the independence of the practitioner. Second, creditors will inevitably benefit from lower fees because it is to be expected that the fees tendered would be less than those agreed through private negotiations. This is the usual consequence of competition where the insolvency practitioner will be cutting unnecessary expenses and developing innovative ways of providing their services in order to make the best bid. Third, it will produce information which will enable an assessment to be made of what are reasonable fees. Fourth, it will increase the pool of experienced insolvency practitioners by creating new opportunities for new insolvency practitioners to enter the market. Fifth, it will prevent cosy relationships being developed between insolvency practitioners and large creditors (eg lenders such as banks and finance companies) and between lawyers and insolvency practitioners who refer work to each other.
80 Naturally there are some downsides. The goal of an appointment is to maximise the recovery by creditors and to provide fair compensation to the insolvency practitioner. A tender or auction process may not take into account that a higher bidder often factors in the necessary resources that would increase the possibility of a better return for creditors. Put another way, it is possible that a lower bid will result in lower quality work that will be performed. Moreover, the need to put in a lower bid may entice the insolvency practitioner to cut corners to maintain his/her profit margin. Then there is the difficulty of comparing bids. For example, how is one to determine which bidder is better able to carry out the work? It is necessarily the case that a bid should not be assessed just on price. There must be some quality control. Hence subjective judgments will be made on matters such as the quality of the insolvency practitioner and his/her staff, their experience, resources, etc. If the tender or auction is to be supervised by the court it may be beyond its capacity to properly assess the bids. There is also the risk that there will be a shortage of bidders of high quality. Insolvency practitioners may forego the opportunity to bid because they are not willing to bid against lower quality firms on the basis of price. And, insolvency practitioners may drop out of the tender or auction process if they feel they cannot win or incur the costs of participating in the auction/tender process.
81 Although I was very much tempted to conduct a mini-tender process to fill the vacancy created by Mr Fernandez's removal, I thought it inappropriate for three reasons. First, Dr Bigos, who appeared for ASIC, told me that, at present, there are few insolvency firms in Victoria that have sufficient resources and experience to do the work. He pointed out, in a submission in part based on an article in the Australian Financial Review, that most of the major accounting firms are involved, in one way or another, in the collapse of several large agribusiness managed investment schemes. He said, and I accept, that it would be undesirable to allocate the administration of the Willmott Forests group to one of those firms because of their potential lack of capacity to take on another large administration.
82 The second reason is one of timing. To conduct an effective tender or auction process it would be necessary either to advertise the process or invite nominated insolvency practitioners to bid. That would take time, and time is not a luxury available in this administration. As it is, things are at a standstill and that position could not be allowed to remain given the stakes involved and the risk of more losses being suffered if the affairs of the schemes are not in safe hands.
83 The third reason is the means of selection of the successful bidder. This is not a task a judge could undertake, at least not without assistance. A judge does not have the requisite information about the skill and capacity of each bidder plus the other information that is necessary to make an informed choice. It would take time to build up the stock of information that is needed. In the meantime it would be necessary for the judge to be assisted by, eg, a creditors' committee or ASIC. Once again, this would take time.
84 Thus the issue comes down to this: Should I appoint Messrs Carson & Crosbie as the banks want. Or should consideration be given to the appointment of BRI Ferrier, the only other firm I have been told is interested in taking on the administrations? For a practical reason I cannot consider the appointment BRI Ferrier. The reason is that their proponent, Willmott Growers Group, has not provided me with any details about the firm and its capacity to undertake the administrations. It would be wrong to appoint a firm about whom I know so little.
85 On the other hand, I do have information about Messrs Crosbie and Carson and their firm, PPB. They have considerable experience in the insolvency industry having worked on a number of large and complex external administrations, some with liabilities of over $200 million. Mr Carson's experience includes involvement with the Timbercorp managed investment schemes. As well, PPB has the necessary resources to conduct large administrations. It has 30 partners and approximately 300 employees specialising in corporate insolvency. It has offices in Melbourne, Sydney, Perth, Brisbane and Adelaide.
86 What should I make of the fact that they are the banks' nominee? The context in which the issue arises is this: In an insolvency the interests of secured creditors will not always be coincident with the interests of other creditors. Usually this will be for the reason that a better outcome will be produced for a secured creditor if it can get rid of interests over assets that other creditors may claim. More especially is this so with managed investment schemes. The investors (here the growers) have an interest in scheme assets that are acquired with pooled money. The banks will likely seek to minimise the growers' interests in order for them, as secured creditors, to maximise their own return.
87 Accordingly, it will be necessary for the administrators to tread a very careful course between the two groups. The argument put by the Willmott Action Group amounts to an assertion that the administrators will not adequately look after, or will not be seen to be adequately looking after, the interests of the growers. I am not prepared to accept this submission. Insofar as it is based on the possibility of Messrs Carson & Crosbie acting partially, I do not accept it. They are both gentlemen of good standing and would not run the risk of ruining their reputation by acting inappropriately.
88 Insofar as the objection is that Messrs Carson & Crosbie will not be seen to be independent, and there is a group of growers who do not regard them as independent, I have satisfied myself that, when looked at objectively, such a view is misplaced. First, the Willmott Growers Group believes Messrs Carson & Crosbie will do a good job. Second, the work they have undertaken for the CBA in connection with the Willmott Forests group should not, in light of the current practical approach to these appointments, be seen to be disqualifying. Third, I will require Messrs Carson & Crosbie to appoint independent lawyers (ie lawyers that are completely independent of the banks) and that should strengthen the appearance of their (the administrators') independence.
89 In Smarter Way (Aust) Pty Ltd v D'Aloi (as admin of) Smarter Way (Aust) Pty Ltd (2000) 35 ACSR 595 Byrne J spoke about the undesirability of an administrator engaging solicitors who act for a secured creditor (at [26]). He said that such a course was undesirable. I would go one step further than did Byrne J. Not only should an administrator not appoint solicitors retained by the secured creditor, they should not appoint solicitors who are on the secured creditor's panel of solicitors. I think that solicitors on a secured creditor's panel are just as likely to be perceived as loyal to the secured creditor as is the solicitor who happens to be retained by the secured creditor.
90 I readily appreciate that panel solicitors will see this approach as a challenge to their independence. No doubt panel solicitors will, if asked, say they will just as faithfully act against the interests of the client to whose panel they have been appointed as would any other solicitor. For my own part, I do not accept this to be so clearly the case. Just ask the managing partner of the firm that is about to bring proceedings against one of its large clients. Even if the action is allowed to go ahead (which in most instances would be problematic because permission would normally be required from the client) one would expect the liaison partner to speak to the client to smooth over any cracks in the relationship.
91 Anyway, I am not so much concerned with the actual independence of the firm but with the legitimate concerns of creditors. The creditors will quite properly want their administrator's lawyers to be truly independent of any party with whom the administrator has a legal dispute. Test the matter this way: Assume a poll is conducted and creditors are asked whether their administrator should appoint as his/her lawyer in an action against a bank (eg to challenge the validity of the bank's security) a firm that regularly acts for the bank. I would be surprised if even a small number would vote in favour of the proposal.
92 Although satisfied about the proposed administrators' independence, I was not inclined to appoint them without further information. In particular I wanted to know: (a) On what basis would Messrs Carson and Crosbie charge fees and expenses for the work they perform. I specifically requested details regarding the rates proposed to be charged, an estimate of the number of persons who would be involved in the administration, a justification of the proposed fees and expenses by reference to those charged by other insolvency practitioners undertaking similar work, the type of work Messrs Carson and Crosbie and their staff were likely to perform and how long it would take to perform that work; (b) What insurance cover was held by Messrs Carson and Crosbie and the employees of PPB who might work on the administration; (c) On what basis Messrs Carson and Crosbie would select and retain solicitors to assist them in connection with the administration; and (d) Whether Messrs Carson and Crosbie would give an undertaking that they would not, without leave of the court, retain as the solicitors of any Willmott company a firm on the CBA's or St George's panel of solicitors. The importance of the two latter points will become clear in a moment.
93 My associate wrote to the banks' solicitors requesting that information. The response they provided was as follows: (a) The fees would be calculated on a time based method using hourly rates determined by the level of expertise of staff involved. The rates proposed to be charged were outlined and justified as being in line with rates charged by Ferrier Hodgson in respect of the Great Southern administration in June 2010 and Korda Mentha in respect of the Timbercorp administration in the financial year 2009. Messrs Carson and Crosbie outlined the core team of the administration, their position and experience and the type of work the proposed administrators and staff were likely to perform. Messrs Carson and Crosbie stated that it was difficult to predict with any certainty the length of time required to perform the tasks; (b) PPB holds insurance covering all partners and staff in the amount of $50 million; (c) Messrs Carson and Crosbie would select and retain solicitors based on their depth of expertise (particularly in relation to forestry managed investment schemes), experience in having acted in large-scale administrations, the depth of their teams, whether the solicitors had interstate offices in Willmott plantation regions, the costs charged by the firms and independence/lack of conflict; (d) Messrs Carson and Crosbie would provide the undertaking.
94 It is worthwhile noting that the fees Messrs Carson & Crosbie propose to charge are reasonable. I say this following consultation with one of the Court's Registrars who is familiar with rates charged by insolvency practitioners. The Registrar informed me that the proposed fees are "middle of the range". Interestingly, the proposed fees are less than those which PPB has charged in other insolvencies (according to information I found in reports to creditors freely available on the internet).
95 While the rate of fees is reasonable, I propose for the fees to be determined by the Court. Ordinarily, an administrator's remuneration is fixed by the creditors' committee or the creditors. The court only steps in if agreement cannot be reached at that level. In this case I will, pursuant to s 447A, vary the operation of s 449E so that the administrators' remuneration, unless otherwise ordered, will be set by the court. If it transpires that the court's role is unnecessary and it is best to leave the determination of the fees to, say, a creditor's committee, appropriate orders can be made.
96 I know that when fees are fixed by the court there will be delay in the administrators receiving payment. First they will be required to prepare the necessary material to justify their claim. Then time will be taken up while their claims are assessed. To deal with this problem I have, in other administrations, made orders allowing the insolvency practitioner to take, say 80% of his/her fees out of the company's assets, on an undertaking that, if the assessment results in the insolvency practitioner being entitled to less than what has been taken, the difference will be returned. Such an arrangement could be put in place for these administrations, if the administrators wish.