The State of Law: The Bold and the Beautiful

In Korda, in the matter of Ten Network Holdings Ltd (Administrators Appointed) (Receivers and Managers Appointed) [2017] FCA 914, O’Callaghan J of the Supreme Court of Victoria was asked to consider an application by the voluntary administrators of Ten Network Holdings Ltd (Channel 10) to confirm their appointment as voluntary administrators.

Click here to view a complete copy of O’Callaghan J’s reasons.

The decision is an important one for insolvency practitioners as it provides guidance about the Court’s approach to issues of conflict and sets out (at least insofar as the Supreme Court of Victoria is concerned) the reliance Courts place on the ARITA Code of Professional Practice, 3rd edition (Code).

Background

In accordance with section 436DA of the Corporations Act 2001 (Cth) (the Act), following their appointment, voluntary administrators must make a declaration of independence, relevant relationships and indemnities (DIRRI).

The purpose of the DIRRI is to assist creditors and other stakeholders to understand any:

1. relevant relationships that the voluntary administrators have in relation to the appointment, and
2. indemnities or upfront payments that have been provided to the administrators,

so that creditors and other stakeholders can form a view about the propriety of the administrators acting as administrators of the company in external administration. 

In making their DIRRI prospective administrators must consider each relevant relationship (a term which is not defined in the Act) and form the opinion that none of the relationships disclosed in the DIRRI result in a conflict of interest or duty or affect their independence.

The DIRRI

The administrators' DIRRI in relation to the Channel 10 appointment disclosed (among other things) that the administrators:

1. were retained by Channel 10’s legal advisors as a potential plan B administrator;¹
2. in their role as plan B administrators had attended more than 50 meetings with Channel 10 senior executives over a five month period; and
3. had rendered fees in excess of $1M for their work performed in this role prior to their appointment.

The issue

The issue for consideration before O’Callaghan J was whether or not the matters disclosed in the DIRRI meant that the administrators could not continue to act as administrators of Channel 10.

The Australian Securities and Investments Commission appeared at the hearing as “Amicus Curiae” (which is the term given to a person who is not a party to a proceeding, but who appears in the proceeding to assist the Court in considering the application).

The outcome

Having regard to the matters identified in their DIRRI, O’Callaghan J considered that the administrators should continue in their role as administrators of Channel 10. 

O’Callaghan J did however, form the view that by reason of the administrators’ role in the lead up to their appointment it was appropriate that orders were made that an insolvency practitioner be appointed to:

1. prepare a limited scope report to be provided to Channel 10’s creditors in respect of any recoveries that may be available for creditors in respect of whether there are any claims against arising from the conduct of the directors, officers, advisors (including Channel 10’s lawyers and the administrators as prospective administrators) of Channel 10 prior to the administrators' appointment; and
2. supervise the administrators to ensure that the administrators are acting consistently with their statutory duties and fiduciary obligations.

O’Callaghan J stated at [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.

Application of the Code

In reaching his decision, O’Callaghan J had reference to the terms of the Code.  While O’Callaghan J found that the Code was a useful document in:

1. assisting practitioners, including with respect to questions of whether, in accepting or retaining an appointment as an administrator, the practitioner is, and is seen to be, independent; and
2. providing guidance on standards of practice and professional conduct expected of ARITA members,

His Honour ultimately found that the Code has “no legal status” and at [96] stated that:

questions relating to the appearance of impartiality must be determined according to law. It is not the Court’s function in a case such as this to either apply or interpret the code.

Lavan comment

In finding that the administrators should remain in their role, O’Callaghan J adopted a practical approach that balanced the benefits that would be lost as a result of replacing the administrators against the nature of the issues that arose by reason of the administrators’ pre-appointment role.

Practitioners should be mindful that these circumstances may be somewhat unique when having regard to the size and complexity of the administration of Channel 10 compared with other smaller administrations.

In addition, practitioners (especially those who are members of ARITA) should note that while the Courts consider that the Code is a useful form of guidance, in considering questions of impartiality and independence, those questions will be resolved having regard to the state of the law and not the requirements of the ARITA Code.