Commonwealth of Australia v Irving

[1996] FCA 221

CATCHWORDS

CORPORATIONS - application to remove administrator on grounds of actual or perceived bias - administrator having a personal and professional association with former director of company - whether administrator could be seen to be independent - questions of judgment and degree will arise in any case in which personal associations are suggested to give rise to perceptions of possible bias - mere professional acquaintanceship does not create actual bias or a reasonable perception of bias - substantial involvement with a company prior to its administration will disqualify a person from appointment as that company's administrator - necessity for administrator to take professional advice from independent advisers.

Re National Safety Council of Australia Victorian Division    (1989) 15 ACLR 355
Re Chevron Furnishers Pty Ltd (receiver and manager apptd)    (in liq); Queensland Amalgamated Industries Pty Ltd & Others v Harris & Anor (1993) 12 ACSR 565
Re West Australian Gem Explorers Pty Ltd (1994) 13 ACSR 104
Network Exchange Pty Ltd v MIG International Communications   Pty Ltd (1994) 13 ACSR 544
Advance Housing Pty Ltd (in liq) v Newcastle Classic      Developments Pty Ltd - as trustee for The Albans   Unit Trust (1994) 14 ACSR 230
Pongrass Group Operations Pty Ltd v Lowerpinems Pty Ltd (1994)     15 ACSR 341
In the matter of:  Stadbuck Pty Limited (unreported,      Sheppard J, Federal Court, 18 May 1993)
Molit (No 55) Pty Ltd v Lam Soon Australia Pty Ltd   (administrator appointed) (unreported, Branson J, Federal Court, 16 February 1996)

No SG 3024 of 1996

COMMONWEALTH OF AUSTRALIA v JOHN IRVING and NPC MANUFACTURING PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT)
(RECEIVER/MANAGER APPOINTED) (ADMINISTRATOR APPOINTED)
ACN 007 793 491

Branson J
Adelaide
3 April 1996

IN THE FEDERAL COURT OF AUSTRALIA )
  )
SOUTH AUSTRALIA DISTRICT REGISTRY )    No SG 3024 of 1996
  )
GENERAL DIVISION                 )

BETWEEN:

COMMONWEALTH OF AUSTRALIA

Applicant

- and -

JOHN IRVING

First Respondent

- and -

NPC MANUFACTURING PTY LTD   (SUBJECT TO DEED OF COMPANY
  ARRANGEMENT) (RECEIVER/
  MANAGER APPOINTED)
  (ADMINISTRATOR APPOINTED)
  ACN 007 793 491

Second Respondent

REASONS FOR DECISION

CORAM:    Branson J
PLACE:    Adelaide
DATE:     3 April 1996

By an application dated 22 February 1996 the Commonwealth of Australia made a number of claims in this matter.  One such claim came on for argument before me on 26 February 1996.  It was expressed in the application as follows:-

"Pursuant to sections 447A, 447B(2), 447E, 449B and 1321(c) of the Corporations Law, that Anthony Milton Sims/Robert Anthony Ferguson be appointed administrator of the Second Respondent and that John Irving resign or be removed forthwith."

At the completion of argument I indicated to counsel my view that it would not be appropriate for the first respondent to continue as administrator of the second respondent.  I was advised that, in the light of that expression of view, the first respondent wished to be given the opportunity to resign as administrator of the second respondent.  I regarded it as appropriate to give him that opportunity.  He subsequently did resign and was replaced by Anthony Milton Sims.

These are my reasons for expressing the view that it would not be appropriate for the first respondent to continue as administrator of the second respondent.

BACKGROUND

The first respondent ("Mr Irving") is a partner of the firm of chartered accountants, Arthur Andersen. He was appointed administrator of the second respondent pursuant to Part 5.3A of the Corporations Law on 14 February 1996. At that time the second respondent had only one director, Neville Roberts ("Mr Roberts").  On 4 February 1996 Christopher John Townsend ("Mr Townsend") and Peter Ralph Shergold ("Mr Shergold") had resigned as directors of the second respondent.

Mr Irving and Mr Townsend have known one another for 16 years. Mr Townsend is a legal practitioner, currently working as a full time consultant with the legal firm Cowell Clarke, the solicitors representing Mr Irving on this application.  Mr Townsend has been a legal adviser, but not the only legal
adviser, to Mr Irving in his practice as a chartered accountant over those 16 years.  Approximately 3 years ago Mr Townsend invited Mr Irving to become actively involved in a fundraising body known as the "Variety Club of Australia".  Mr Irving agreed.  Over the last three years Mr Irving, Mr Townsend and two other persons have made up a crew in the South Australian "Variety Club Car Bash" event.  This annual event raises considerable amounts of money for children's charities.  Not inconsiderable publicity attaches to these annual events and to the crews which take part in them.

On 13 January 1996 Mr Irving was consulted by two of the directors of the second respondent, Mr Roberts and Mr Townsend, concerning the second respondent's financial affairs.  He was retained by the second respondent to consider its financial position in the light of a joint venture proposal under consideration by the second respondent and a public company based in Perth, Joyce Australia Limited.  Mr Irving travelled to Perth with Mr Roberts and was involved in negotiations between the second respondent and Joyce Australia Limited.  He subsequently reported on such negotiations to the other directors of the second respondent, Mr Townsend and Mr Shergold.  Negotiations with Joyce Australia Limited apparently proceeded no further.

Following his trip to Perth with Mr Roberts, Mr Irving was invited by Mr Roberts and Mr Townsend to pursue the possibility of another identified party injecting capital into the second respondent in exchange for equity in the company.  He apparently did so.

In giving advice to the directors of the second respondent, Mr Irving had ongoing discussions with the major secured creditor of the second respondent, Bank SA.  Mr Irving's role in pursuing the possibility of another party injecting capital into the second respondent, with its associated requirement for discussions with Bank SA, continued until 13 February 1996 when Bank SA appointed a receiver and manager of the second respondent.  The next day Mr Irving was appointed administrator of the second respondent.

The financial arrangements between Mr Irving and the second respondent, or its directors, with respect to the work undertaken by him for the second respondent between 13 January 1996 and 14 February 1996 are not disclosed by the evidence.  It appears, however, that neither Mr Irving nor his firm has claimed as a creditor in the administration of the second respondent.

Prior to the holding of the first meeting of creditors of the second respondent Mr Irving became aware that a creditor of the second respondent, Waterbed Associates (SA) Pty Ltd ("Waterbed"), was likely to seek his removal as administrator of the second respondent, as was a second creditor, Estate Timber Pty Ltd. Waterbed had earlier served a statutory demand pursuant to s459E of the Corporations Law upon the second respondent. The second respondent had applied to the Supreme Court of South Australia for an order setting aside the statutory demand relying upon an asserted counterclaim against Waterbed. The firm of Cowell Clarke has at all times acted on behalf of the second respondent in respect of that application.

Mr Irving, as administrator of the second respondent, called a first meeting of creditors of the second respondent for 20 February 1996.  Mr Jonathan Clarke ("Mr Clarke"), a principal of the legal firm Cowell Clarke, attended at that meeting as the solicitor for the administrator.  He provided legal advice to Mr Irving during the course of the meeting.

As at 20 February 1996 the application to set aside the statutory demand served by Waterbed on the second respondent had not been heard.  Mr Irving gave affidavit evidence before me that one of his reasons for retaining Mr Clarke to advise him during the first creditors' meeting was Mr Clarke's knowledge of the claim by Waterbed which had been disputed by the second respondent.

The firm of Cowell Clarke had prior to 20 February 1996 lodged a proof of debt in the administration of the second respondent in the sum of $4,158.

It is appropriate to mention that a significant factor leading to the determination by Waterbed to seek at the first meeting of creditors, the removal of Mr Irving as administrator of the second respondent was affidavit evidence filed in the Supreme Court of South Australia upon the application of the second respondent to set aside the statutory demand served on it by Waterbed.  On such application Garry John Engelhardt ("Mr Engelhardt"), the Production Manager of the second respondent, swore that he was "instructed to refer this claim [against Waterbed] to NPC's accounting  consultants, Arthur Andersen, for compilation."  He further swore that "... there are as yet unqualified losses to NPC because of Waterbed's breaches of contract on account of ... loss of sales nationally which I am instructed to refer to Arthur Andersen for quantification."  Mr Irving's affidavit evidence before me is that he has made enquiries and can say that the firm Arthur Andersen was never retained by the second respondent for the purposes referred to in Mr Engelhardt's affidavit.  I accept that evidence.  It may be a matter of limited weight, but I note that Mr Irving apparently does not deny the accuracy of Mr Engelhardt's description of the firm Arthur Andersen as "NPC's accounting consultants".

It is agreed that at the meeting of creditors of the second respondent held on 20 February 1996, Mr Irving advised those present that he was a personal friend of Mr Townsend and had known him for 16 years.  It is further agreed that one of the duties of the administrator of the second respondent will be to consider the conduct of directors and former directors of the second respondent, including Mr Townsend, to determine whether or not any action should be taken against them or any of them.

Mr Irving gave consideration to his involvement with Mr Townsend and Mr Roberts prior to accepting appointment as the administrator of the second respondent.   Mr Irving's affidavit evidence in this regard is as follows:-

"32.Immediately prior to my appointment as voluntary administrator of NPC I discussed my appointment with Mr Roberts and Mr Townsend.  I advised them that once appointed I was independent and had to be entirely objective in reporting to creditors and doing what I considered to be the best interests of the creditors of NPC as a whole.  In particular I considered my relationship with Mr Townsend and informed him that I had satisfied myself that notwithstanding our relationship I had no difficulty in accepting the appointment.  I also said to him, which he accepted, that in carrying out my duties as a voluntary administrator I would do so "without fear or favour".  I am presently carrying out my duties and will continue to carry out my duties as Administrator (or should my appointment change to that of Liquidator) in that way."

It is important to record that no party or intervener suggested that Mr Irving had conducted himself as administrator of the second respondent in other than a proper way.  I am satisfied that Mr Irving did act with complete propriety.

Mr Irving's affidavit evidence also includes the following paragraph:-

"33.In relation to any future matters which will require legal advice, whether it be with respect to my report as to affairs, the conduct of the second meeting of creditors or any other matters should a Deed of Company Arrangement be accepted by the creditors, or if a resolution is passed for liquidation and I am appointed liquidator, if there is any conflict or potential for conflict given that Mr Townsend is a consultant to the legal firm of Cowell Clarke, I will instruct independent solicitors to give me advice."

I accept that the above paragraph accurately reflected Mr Irving's intention whilst administrator of the second respondent.

THE AUTHORITIES

It was accepted in this case that the principles which govern issues of actual or potential conflicts of interest, and actual or perceived bias, with respect to liquidators apply equally to administrators appointed under Part 5.3A of the Corporations Law. There was no real dispute as to what these principles are: the contest was as to their application in the circumstances of this case.

The Full Court of the Supreme Court of Victoria was required to consider the issue of independence of a liquidator in Re National Safety Council of Australia Victorian Division (1989) 15 ACLR 355. In that case two unsecured creditors of a company opposed the appointment of a particular liquidator on the ground, amongst others, that the liquidator would be required to investigate the question whether the company might have an action against the firm of which the particular liquidator was a partner. At 360 the Court stated as follows:-

"The principle to be applied is clear and was indeed quoted by the learned judge from McPherson on Company Liquidations, 3rd ed, p209 where it is said "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".  The authorities to which we were referred amply support that statement of principle and it is unnecessary to refer to them.

It seems clear that Mr Humphris cannot be seen to be independent because he is a partner in Ernst & Whinney whose relationship with the Company between 23 December 1988 and 17 March 1989 may require to be investigated by the liquidator.  In the present circumstances that is sufficient.  ...  The liquidator should not be put in a position where his independence might be open to challenge."

The Court of Appeal of the Supreme Court of Queensland in Re Chevron Furnishers Pty Ltd (receiver and manager apptd) (in liq); Queensland Amalgamated Industries Pty Ltd & Others v Harris & Anor (1993) 12 ACSR 565 considered the National Safety Council Case and other authorities and at 570 concluded:-

"The principle established by those cases is undoubted.  The liquidator must have no prior or other involvement either with the company in liquidation, its directors and major shareholders, or one of its creditors so that he could not fairly and impartially carry out his duties as liquidator requiring him, in broad terms, to act in the best interests of the general body of creditors."

In the particular circumstances of that case, which are quite different from those which I am required to consider, the Court agreed with the Chamber Judge in that case that "no reasonable person aware of all the circumstances would apprehend bias on the part of the liquidators ...".  (at 571)

In Re West Australian Gem Explorers Pty Ltd (1994) 13 ACSR 104 at 106 Burchett J stated:-

"So far as the question of bias is concerned, it goes without saying, that an officer of the court, appointed to act as provisional liquidator of a company, should be above suspicion.  There must not be any bias, and there must not be any appearance of bias.  Where there are circumstances which might predispose a person to favour particular interests, those circumstances must be taken into account, and the possibility of unconscious partiality should not be overlooked.  As Sheppard J said in Re Stadbuck Pty Ltd (18 May 1993, unreported):

Unquestionably there is a risk that an accountant may, however subconsciously, tend to favour those who have originally consulted him and may, the more readily, fall in with arrangements already made prior to the filing of an application for winding up.  ...  (T)he appearances need to be considered."

The principles applicable where a conflict of interest in a liquidator is alleged have also been considered by Hayne J in Network Exchange Pty Ltd v MIG International Communications Pty Ltd (1994) 13 ACSR 544, Santow J in Advance Housing Pty Ltd (in liq) v Newcastle Classic Developments Pty Ltd - as trustee for The Albans Unit Trust (1994) 14 ACSR 230, and Sackville J in Pongrass Group Operations Pty Ltd v Lowerpinems Pty Ltd (1994) 15 ACSR 341.

CAN MR IRVING BE SEEN TO BE INDEPENDENT?

Questions of judgment and degree will, no doubt, arise in any case in which personal associations are suggested to give rise to perceptions of possible bias.  Intimate relationships of long standing will be at one end of the scale and professional connections of a passing nature will, perhaps, be at the other.

It is not, in my view, the law that mere professional acquaintanceship creates actual bias or a reasonable perception of bias.  However, the circumstances of this case go beyond mere professional acquaintanceship.  Mr Irving has in his professional practice over many years looked to Mr Townsend for legal advice.  It is implicit in this that he regards Mr Townsend's professional advice and judgment as sound.  In my view, a reasonable person might well apprehend that, if required to investigate Mr Townsend's conduct as a past director of the second respondent, Mr Irving might tend, consciously or unconsciously, to favour Mr Townsend, and accord to any submissions made by him in regard to any such investigation undue respect.  This apprehension, in my view, could only be heightened by Mr Irving and Mr Townsend's publicised close association in relation to the "Variety Club Car Bash", and Mr Irving's frank and proper acknowledgment at the meeting of creditors of his personal friendship with Mr Townsend.

In my view the relationship between Mr Irving and Mr Townsend was shown to be such that a fair minded person informed of the facts could reasonably entertain a doubt as to Mr Irving's capacity to be independent in circumstances in which he was required to investigate Mr Townsend's past conduct.  It was on this basis that I expressed the view, referred to above, that it would not be appropriate for Mr Irving to continue as administrator of the second respondent.

OTHER ISSUES

I consider it appropriate to deal with certain other issues raised in argument in this case.

Complaint was made of Mr Irving's involvement with the second respondent prior to the commencement of the administration.

It is not, in my view, the law that a person appointed as an administrator of a company under Part 5.3A of the Corporations Law may not have had any prior contact with the company or its directors or officers. It is now common place for a company to seek professional advice respecting actual or apprehended insolvency and for the advice received to be to appoint an administrator pursuant to Part 5.3A of the Corporations Law. Not infrequently, and, in my view, not improperly, the proponent of the advice to appoint an administrator then accepts appointment as that administrator. There would, I consider, be an air of commercial unreality about any suggestion that this course of events is necessarily improper. When Sheppard J in the matter of:  Stadbuck Pty Limited (unreported, Sheppard J, Federal Court, 18 May 1993) spoke of an accountant, perhaps subconsciously, tending to favour those who had originally consulted him or her I understand him to have been referring to a consultation or consultations on matters of ongoing business relevance.

However, the authorities make it plain that substantial involvement with a company prior to its administration will disqualify a person from appointment as that company's administrator.  Such involvement will be seen to detract from the ability of the person to act fairly and impartially during the course of an administration.  In Molit (No 55) Pty Ltd v Lam Soon Australia Pty Ltd (administrator appointed) (unreported, Branson J, Federal Court, 16 February 1996) in speaking of the role of an administrator I said:-

"In such role he or she is, in my view, obliged to consider not only means to maximise the chances of the company, or as much as possible of its business, continuing in existence (s435A), but also issues of fairness between the company and its creditors, and between the company's creditors inter se."

It is necessary that a person appointed as an administrator can be seen to be independent of the company and of each of its creditors so that his or her ability to perform the above role is not open to question.

In view of the conclusion which I reached with respect to the relationship between Mr Irving and Mr Townsend it is not necessary for me to reach a final conclusion on whether, in the circumstances of this case, Mr Irving's prior involvement with the second respondent was such as to undermine his independence as its administrator.  I content myself with saying that involvement of the kind which he undertook is of a kind capable of giving rise to questions of possible lack of independence.
As to Mr Clarke's involvement in the first meeting of creditors of the second respondent, it is sufficient in the circumstances for me to observe that, for an administrator to maintain his or her independence, it is necessary for him or her to take professional advice from independent advisers.  There were, no doubt, practical advantages and cost benefits to be obtained from Mr Irving's retainer of Mr Clarke to advise him during the first meeting of creditors of the second respondent.  However, in the circumstances that first, Mr Clarke's firm had proved as a creditor in the administration of the second respondent, secondly, that Mr Townsend worked full time for Mr Clarke's firm, and thirdly, that Mr Clarke's firm was acting for the second respondent in litigation relevant to the administration in which a creditor of the second respondent was the opposing party, Mr Clarke did not, in my view, bring to the meeting that appearance of independence which is appropriate in a legal adviser to an administrator.

All necessary formal orders in this matter have already been entered.

I certify that this and the preceding       pages are a true copy of the Reasons for Decision of the Honourable Justice Branson.

Associate:

Dated:

Counsel for the Applicant        :    Ms S Maharaj

with her
  Mr R J Chrzaszcz

Solicitors for the Applicant     :    Australian Government Solicitor

Counsel for the First and Second  :    Mr J R Sulan QC
     Respondents  with him
  Mr J C Clarke

Solicitors for the First and     :    Cowell Clarke
     Second Respondents

Counsel for the interveners,     :    Mr A Marshall
     A E Baker & Co,
     Estate Timbers Pty Ltd and
     J Blackwood & Son Ltd

Solicitors for the interveners,   :    Marshalls
     A E Baker & Co,
     Estate Timbers Pty Ltd and
     J Blackwood & Son Ltd

Counsel for the intervener,      :    Mr P A Britten-Jones
     Waterbed Associates (SA)
     Pty Ltd

Solicitors for the intervener,    :    Barratt Lindquist
     Waterbed Associates (SA)
     Pty Ltd

Hearing Date  :    26 February 1996