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[2008] WASC 201
General information, not legal advice.
Supreme Court of WA
2008-09-16
Original judgment source is linked above.
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
CITATION : RE MONARCH GOLD MINING CO LTD; EX PARTE HUGHES [2008] WASC 201
MATTER : Monarch Gold Mining Co Ltd ACN 100 038 266 (Receivers and Managers appointed) (Administrators appointed)
BRYAN KEVIN HUGHES and CHRISTOPHER JOHN MUNDAY as voluntary administrators of MONARCH GOLD MINING CO LTD ACN 100 038 266 (Receivers and Managers appointed) (Administrators appointed) and the companies listed in schedule 'A'
Corporations law - Application by administrators for direction as to independence - Whether direction to be made with respect to Insolvency Practitioners of Australia Guidelines
1 MASTER SANDERSON: By originating process filed 30 July 2008, the plaintiffs relevantly sought the following orders:
2 When the matter was called on, on 19 August 2008, I made the orders sought by the plaintiffs. Although the matter was dealt with ex parte, there being no objection from anyone including the Australian Securities and Investments Commission (ASIC) to the making of these orders, I indicated that due to the general interest in this matter, I would publish reasons for making the orders. These are those reasons.
3 The Monarch Group essentially comprises Monarch Gold Mining Co Ltd as a holding company with four operating subsidiary companies namely, Davyhurst Gold Pty Ltd, Minjar Gold Pty Ltd, Mount Magnet Gold Pty Ltd and Mount Ida Gold Operations Pty Ltd. The other companies of the Monarch Group are Monarch Nickel Pty Ltd, Monarch Gold Pty Ltd, Siberia Gold Operations Pty Ltd, Siberia Mining Corporation Ltd, Mount Ida Gold Pty Ltd, Pilbara Metals Pty Ltd and Ida Gold Operations Pty Ltd (hereafter all of these companies will be referred to collectively as the 'Companies').
4 On 10 July 2008, Bryan Kevin Hughes and Christopher John Munday, partners of the accounting firm Pitcher Partners WA, were appointed administrators of each of the Companies. That appointment was made under s 436A(1) of the Corporations Act 2001 (Cth). On 11 July 2008, the administrators forwarded notices to creditors of the Monarch Group for the calling of meetings pursuant to s 436E of the Corporations Act. Attached to each of the notices was a Declaration of Independence, Relevant Relationships and Indemnities (DIRRI) as required under s 436DA of the Corporations Act. A copy of that DIRRI forms part of annexure BKH1 to the affidavit of Mr Hughes sworn 29 July 2008 and filed in support of this application.
5 On 21 July 2008, the administrators tabled a replacement DIRRI at each of the s 436E meetings of creditors of the Monarch Group. A copy of the replacement DIRRI appears as annexure BKH4 to Mr Hughes' affidavit. In par 10 of his affidavit, Mr Hughes swears that the contents of the replacement DIRRI are true and correct.
6 The plaintiffs, by their originating process, sought orders confirming that each of the tabled DIRRI complies with s 436DA of the Act and cl 6 of the Insolvency Practitioners of Australia Guidelines. They also sought a direction that the administrators may continue in office as voluntary administrators of each of the Companies. The application was made pursuant to an undertaking given by the administrators to various meetings of creditors on 21 July 2008. This undertaking was given in response to letters from Territory Resources Ltd and ASIC raising concerns about the independence of the administrators. These letters appear as annexures BKH6 and BKH7 to Mr Hughes' affidavit.
7 The plaintiffs served copies of the originating process and the supporting affidavit of Mr Hughes, together with notice of the hearing, on Territory Resources and ASIC. The plaintiffs also forwarded a circular to creditors giving notice of the hearing and made further mention of the application in the s 439A report which was forwarded to creditors on 15 August 2008. No creditor, including Territory Resources, gave notice of intention to appear, nor did they appear at the application. Prior to the hearing ASIC advised that they would not appear at the application and they raised no objection to the orders being made: see affidavit of Cameron Belyea sworn 11 August 2008 and annexure CMB1.
8 Under s 447A(1) of the Act, the court is given a general discretion to make orders 'as it thinks appropriate' as to how pt 5.3A of the Act is to operate in relation to a particular company. Part 5.3A is titled 'Administration of a Company's Affairs with a View to Executing a Deed of Company Arrangement'. Clearly, the powers given to the court and its supervisory jurisdiction are very wide. The example given by s 447A(2) looks at a situation where the court orders that an administration be brought to an end. But there is no warrant for reading the general powers provided by s 447A to be limited in such a way that the court is only empowered to bring an administration to an end. The nature of the following provisions in div 13 makes that clear.
9 Section 447D is a rather more specific provision which deals directly with applications by an administrator. It is in the following terms:
(1) The administrator of a company under administration, or of a deed of company arrangement, may apply to the Court for directions about a matter arising in connection with the performance or exercise of any of the administrator's functions and powers.
(2) ...
10 The scope of the orders that might be made pursuant to this section was considered by Goldberg J in Re Ansett Australia Ltd (No 3) [2002] FCA 90; (2002) 115 FCR 409. His Honour said:
There must be something more than the making of a business or commercial decision before a court will give directions in relation to, or approving of, the decision. It may be a legal issue of substance or procedure, it may be an issue of power, propriety or reasonableness, but some issue of this nature is required to be raised [65].
11 In short, there must be 'an issue calling for the exercise of legal judgment'. For instance, in Re Ansett Australia Ltd (No 3), the Federal Court was asked for a direction by the administrators as to whether they might continue to operate an airline business. This question called for a decision on the commercial merits as distinct from the legality of the proposed action. The court disclaims any special competence in making commercial decisions. The court therefore declined to make an order. So although the words of the section appear to give the court an unlimited discretion, those broad terms must give way to practical reality.
12 The evidence filed in support of the application and the submissions made by counsel made it plain that the administrators were aware of their duty when seeking directions to inform the court of all relevant matters. I am satisfied that has been done.
13 I was also satisfied that the orders sought did not relate to business or commercial decisions, but were matters of legal substance. The question was whether, in all the circumstances, the administrators had discharged their duties under the Act. The only point upon which I had any concerns was the power of the court to make the declaration sought in par 3 that the DIRRI was tabled in accordance with cl 6 of the Code of Practice for Insolvency Practitioners. I will come back to that issue at the conclusion of these reasons.
14 The primary tasks of a voluntary administrator are set out in pt 5.3A of the Act. In summary, they are:
(a) to investigate the company's business, property, affairs and financial circumstances: s 438A(a);
(b) to form an opinion as to matters specified in s 438A(a) (what would be in the interests of the company's creditors);
(c) to make any necessary reports to ASIC: s 438D; and
(d) to report to creditors as to the company's business, property, affairs and financial circumstances and, at the same time, state the administrator's opinion as to what is in the interests of the company's creditors (giving reasons in their report and setting out such information as is required to enable creditors to make an informed decision about those matters): s 439A(4).
15 In Bovis Lend Lease Pty Ltd v Wily [2003] NSWSC 467; (2003) 45 ACSR 612, Austin J set out three separate duties of independence, impartiality and avoidance of conflict which apply to administrators. (His Honour was actually dealing in that case with the duties of a liquidator rather than an administrator. However, he makes it plain that the same principles will apply equally to administrators - see [133]). Summarised, these duties are:
(a) administrators must be, and be perceived to be, independent of the company, its directors and shareholders, and individual creditors;
(b) administrators must act, and be perceived to act, impartially in discharge of the duties and responsibilities of their office; and
(c) administrators must ensure they do not place themselves in a position where there is, or might be, a conflict between their duty to creditors and their personal interest.
16 There are cases in which it has been said that a liquidator (and by implication an administrator) must have had no prior involvement with the company. Re Chevron Furnishers Pty Ltd (in liq) (No 2) [1995] 1 Qd R 125 is an example of such a case. In my view, that blanket ban goes too far. A prior association by itself will not transgress the rule requiring independence and impartiality. That was the conclusion reached by Austin J in the Bovis decision [134]. However, substantial involvement with a company prior to administration will, generally speaking, disqualify a person from appointment as administrator: see Re Central Springs Works Australia Pty Ltd; Tubemakers of Australia Ltd v McLellan [2000] VSC 145; (2000) 34 ACSR 169. It is all a matter of degree.
17 This was a point taken up by Santow J in Advance Housing Pty Ltd (in liq) v Newcastle Classic Developments Pty Ltd (1994) 14 ACSR 230. His Honour said:
... 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's part in the circumstances, by reason of prior association with the company or those associated with it, including creditors, or indeed any other circumstance.
In reality, creditors are frequently well served by an appointment of a liquidator who has some familiarity with the affairs of the company provided that the reasons that led to that familiarity do not give rise to such an apprehension or reflect an actual or perceived conflict ... (234).
18 The test then of independence is a conflict based test - negatived if the evidence establishes 'a real and not merely a theoretical possibility of conflict': see National Australia Bank Ltd v Wily [2002] NSWSC 573 [22].
19 The court is not required to assess whether the administrators will act independently, but only to assess whether there is a reasonable apprehension based on existing or past events that the administrators will not act independently. The authorities show that a mere theoretical possibility of conflict is not sufficient. Independence must be assessed by reference to such things as whether the appointee administrators have, prior to their appointment:
(a) performed professional services of a sufficiently material nature on behalf of a principal creditor of the company to suggest that there is a reasonable apprehension they will not act independently;
(b) provided professional services of such a degree of magnitude to the company over a long period and of such a nature as to put in doubt their capacity to independently discharge their office;
(d) acted with clear evidence of bias in the conduct prior to the application being made;
(e) a close personal relationship with interested parties;
(f) a close relationship with a creditor such that there was a clear tendency to prefer the interests of that creditor.
20 These principles emerge from a number of cases including Domino Hire Pty Ltd v Pioneer Park Pty Ltd (in liq) [2003] NSWSC 496; (2003) 21 ACLC 1330; Re Ross Wood & Sons Pty Ltd (in liq) (1997) 23 ACSR 291; Re Biposo Pty Ltd (1995) 13 ACLC 1271 and BL & GY International Co Ltd v Hypec Electronics Pty Ltd (in liq) [2004] NSWSC 1119.
21 I was satisfied that the affidavit evidence does not disclose any matter substantiating any of the six criteria that I have set out above. However, the evidence does show that Mr Hughes had, prior to his appointment, provided professional services to the Monarch Group. It also discloses that he had a personal relationship with a director of the group. For reasons which I will detail below, I am not satisfied that either of these two matters is sufficient to justify refusing the orders sought by the plaintiffs.
22 It is important to bear in mind that what is being sought in this application is directions. What is not being sought is a declaration under s 447C that the administrators have been validly appointed. It is clear that their appointment is valid and no one has suggested anything to the contrary. Nor is this an application to remove the administrators. It is also not clear what the administrators would have done if the directions sought had not been made. They may well have continued in office and continued to discharge their duties. But that would have left a cloud hanging over the administration. In my view, it is both understandable and preferable that any issues relating to the appropriateness of administrators acting be resolved at the earliest possible point in the administration.
23 At this point it is appropriate to mention three points which, in my view, strongly favoured the orders sought being made. First, a significant amount of work has already been completed by the administrators. If fresh administrators were appointed, it would take them some time to become familiar with the Companies' affairs. That necessarily affects the assets available to the creditors. Given the whole point of administration is to maximise returns to creditors and in the rare case to shareholders, expenditure of funds duplicating work already undertaken is to be avoided if at all possible.
24 Secondly, the creditors are fully aware of any conflict of interest but have nevertheless continued to support the appointment. No one opposed this application. ASIC is satisfied any conflicts of interest have been addressed.
25 Thirdly, the creditors can, at the s 439A meeting, either appoint alternative deed administrators or liquidators. Doubtless they would take that step if at some stage in the future it becomes clear the administrators are not properly discharging the functions of their office.
26 It is appropriate at this point to deal with the two matters that might be said to give rise to a conflict of interest. In pars 18 to 35 and par 37(a) of his affidavit, Mr Hughes describes two short engagements for the Companies prior to the appointment of himself and Mr Munday as administrators. The work concerned, first, an engagement in February 2008 of Mr Hughes by Monarch Gold Mining Ltd to attend three meetings of management and the board and, second, a pre-appointment engagement by the company starting on 25 June 2008 (some two weeks prior to the appointment of the administrators).
27 The evidence discloses that the earlier engagement only occupied three meetings for which Pitcher Partners WA rendered a fee of approximately $9,000. Mr Hughes did not provide any advice about the financial solvency of the company at the time. What he did was explain to the board of Monarch that the solvency of Monarch depended on the board assessing whether its advisers, including its managing director and technical advisers, were satisfied that gold production projections were achievable.
28 A limited prior involvement of an administrator with directors is a recognised exception to the rule that prior relationships affect independence: see National Australia Bank Ltd v Market Holdings Pty Ltd (in liq) [2001] NSWSC 253; (2001) 37 ACSR 629 [194] (Young J). It was submitted by the plaintiffs, and I accept, that Mr Hughes' limited engagement to review essentially a process of delivery of reliable information by management to the board of Monarch Gold Mining Ltd neither constitutes the provision of financial advice by Mr Hughes, nor founds a relevant ground of real or perceived lack of independence. Nor does it conflict with Mr Hughes acting as a joint administrator.
29 As to the second engagement, providing preliminary insolvency advice will not disqualify an insolvency practitioner from acting as an administrator: see Commonwealth v Irving (1996) 65 FCR 291, 296. Indeed, given that it is for the board to decide whether an administrator should be appointed, not to take some preliminary advice may be seen as a breach of directors' duties. Having taken that advice, it is logical that the person giving the advice, having familiarised himself with the affairs of the company, should be appointed administrator. That is effectively what happened here. Mr Hughes' engagement could be regarded as a 'pre-appointment' engagement, as that phrase is used in the Irving decision. Nor would such an engagement conflict with cl 6.8.1(b) of the IPA Guidelines.
30 The other matter raised is a personal relationship between Mr Michael Kiernan, chairman of directors of the Companies, and Mr Hughes. Mr Kiernan was a director of the Croesus Group of Companies. Mr Hughes and a Mr Vince Smith (a former partner of Pitcher Partners WA) were appointed administrators of the Croesus Group in June 2006. The chairman of board of directors of the Croesus Group was Mr Kiernan. The Croesus administration led to the sale of a number of assets in 2006 to parties unassociated with Mr Kiernan - save that Monarch did buy Davyhurst from Croesus. Mr Hughes says this sale had been negotiated prior to his appointment and he just effected settlement. A number of subsidiary companies in the Croesus Group were liquidated because they were not able to be re-capitalised. Mr Hughes remains liquidator of those companies.
31 From early 2007, one of the tax partners of Pitcher Partners WA agreed to act for Mr Kiernan in his personal capacity for private entities unassociated with the Companies. Mr Hughes has not been personally involved or undertaken any of that work. Neither has Mr Munday. Prior to accepting the appointments to the Companies, Mr Hughes asked his partner for a summary of work she had undertaken for Mr Kiernan and his associated entities relating to the Companies. The work undertaken for those entities was included in the original DIRRI and further expanded in the replacement DIRRI.
32 It is also relevant to note that Mr Munday, who was appointed jointly with Mr Hughes, has had no prior association with Mr Kiernan and has provided no services to the Companies - save for the pre-appointment engagement between 25 June 2008 and 10 July 2008. Mr Munday is a registered liquidator and he is primarily responsible for undertaking investigations, dealing with creditors, supervising preparation of the s 439A report and overseeing operational matters concerning the administrations. All this is drawn from Mr Munday's affidavit sworn 15 August 2008.
33 In all the circumstances, then, I was satisfied that the directions sought ought be made. I am not satisfied that there is anything in the evidence or in the nature of the prior relationship between Mr Hughes and Mr Kiernan which could lead in any way to a conclusion that he was unsuitable to act as an administrator.
34 Earlier in these reasons, I expressed some reservations about making the order sought in par 3 of the originating process - that is, directing that the DIRRI was tabled in accordance with cl 6 of the Code of Practice for Insolvency Practitioners. The code itself says that its primary purpose is to set standards of conduct for insolvency professionals. It is also intended to provide a reference for 'stakeholders' against which they can gauge the conduct of IPA members. Clause 6 has, as its overall statement of principle, the following:
When accepting or retaining an appointment the practitioner MUST at all times during the administration be, and be seen to be, independent.
35 The clause then goes on in a number of subclauses to set out in some detail what an insolvency practitioner must do in certain circumstances to comply with this directive. By way of example, cl 6.5 deals with 'trivial relationships'. It says:
Trivial relationships are not a bar to acceptance or retention of an appointment. A practitioner is not required to list trivial relationships in the DIRRI.
However there is no simple definition of what is trivial. Useful indicators would be that the relationship may be considered inconsequential, remote or coincidental.
36 The subclause then goes on to give examples of trivial relationships. It refers to a chance meeting at a social event through a mutual acquaintance or membership of the same club or school committee. It goes on to say:
The boundaries of what is trivial would be reached once there has been a pattern of interaction that was more personal or continual.
37 A code of conduct such as this has no legal status. That is to say, a failure to comply with the terms of the code would not render a practitioner liable for prosecution under the Corporations Act or any other statute. It may lead to disciplinary proceedings by the Insolvency Practitioners Association but that is a different issue. Nor does a failure to comply with the provisions of the code mean that there has been a failure to comply with what is required in the DIRRI.
38 But the importance of codes such as this is not to be underestimated. Administrators and insolvency practitioners generally are said to act under the supervision of the court. That is right; but the court's ability to supervise an insolvency practitioner is, in a very real and practical sense, limited. In this day and age, insolvency practice is highly specialised and administrations or liquidations are frequently extremely complex. While it is doubtless comforting to stakeholders that courts have a supervisory role, comfort can also be drawn from the fact that ASIC play a role and that insolvency practitioners are adhering to a detailed code of conduct. This case provides a good example of the importance of the role of ASIC and the importance of the code of conduct.
39 ASIC entered into discussions with the administrators as to the adequacy of the DIRRI. It was their representations which led to the revised DIRRI being tabled. The correspondence makes it plain that the administrators felt that the original DIRRI was satisfactory. But they made amendments to accommodate the concerns of ASIC. That was an entirely proper course to adopt. It also provides a good example of a regulator discharging its functions in a careful, reasoned and appropriate manner.
40 It is also important that the administrators paid close attention to their obligations under the code of practice. It shows that the code is something more than a public relations exercise designed to assuage the concerns of those involved with insolvency practitioners. That being so, it seems to me that it is appropriate to make the directions sought. It emphasises the importance to be attached to adherence to the code. It must necessarily add to the status of the code and assure the public generally that the courts regard adherence to its terms as a matter of utmost importance.
41 For these reasons, I made the orders sought by the plaintiffs.
(2002) 115 FCR 409
(1996) 65 FCR 291