Code of Professional Conduct – ░░░ INSOLVENCY INTERFACE

It’s not the Court’s function to apply or interpret ARITA’s code – Judge

Corporate Insolvency, court decisions, Insolvency Law, Insolvency practices Comments Off

Aug 132017

In a recent judgment in the Federal Court the judge, the Honourable David John O’Callaghan, discusses the part that ARITA’s code of professional conduct plays in determining questions concerning the independence and impartiality of an external administrator’s conduct.

What His Honour said – extracts:

There is no doubt that the code is a useful document in assisting practitioners; …. it is “a useful guide to the common practice in such matters, and to the profession’s own view of proper professional standards”; …. it is “… permissible for the Court to take [it] into account, to that extent, in applying the law concerning independence and impartiality to the insolvency practitioner’s conduct in the case before it”; …. On the other hand, the code “has no legal status”; …. Any question 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.

For more, see his complete comments below.

The Hon David John O’Callaghan

Judgment published 11 August 2017 … In Korda, in the matter of Ten Network Holdings Ltd (Administrators Appointed) (Receivers and Managers Appointed) [2017] FCA 914

….

The code of professional practice

92. I should also say something briefly about the Code of Professional Practice of The Australian Restructuring Insolvency and Turnaround Association (ARITA) (the code), because the administrators sought to rely on the code as providing an independent basis upon which they might be permitted to continue to act as administrators. In particular, submissions were made on behalf of the administrators about those parts of the code which define “exceptions” to the “rule” that, relevantly, practitioners must not take an appointment if they have had a professional relationship with the insolvent company during the previous two years: see section 6.8 of the third edition of the code.

93. There is no doubt that the code is a useful document in 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: see chapter 6 of the third edition of the code. The code is intended to provide guidance on standards of practice and professional conduct expected of ARITA members.

94. In Bovis Lend Lease Pty Ltd v Wily [2003] NSWSC 467; 45 ACSR 612, Austin J described (at [163]) the Code of Professional Conduct published by the Insolvency Practitioners Association of Australia (as ARITA was previously known) as “a useful guide to the common practice in such matters, and to the profession’s own view of proper professional standards”. Accordingly, his Honour held that “[i]t is permissible for the Court to take [it] into account, to that extent, in applying the law concerning independence and impartiality to the insolvency practitioner’s conduct in the case before it”: see Bovis Lend Lease Pty Ltd v Wily [2003] NSWSC 467; 45 ACSR 612 at [163]; comparing National Roads and Motorists’ Association Ltd v Geeson [2001] NSWSC 832; 39 ACSR 401 at 403 and Permanent Trustee Australia Ltd v Boulton & Lynjoe Pty Ltd (1994) 33 NSWLR 735 at 738.

95. On the other hand, the code “has no legal status”, as Sanderson M stated in Monarch Gold Mining Co Ltd; Ex parte Hughes [2008] WASC 201. Relevantly, Sanderson M observed in that case, “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 … 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”: see Re Monarch Gold Mining Co Ltd; Ex parte Hughes [2008] WASC 201 at [37].

96. Any question 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.

Court disregards Code of Professional Conduct for Insolvency Practitioners

Case Reports, Corporate Insolvency, court decisions, Insolvency Law, law reports, Practitioners Association (ARITA), Practitioners Association (IPAA) Comments Off

Jul 212014

In a recent decision concerning liquidators of the Walton Construction group, Justice Robertson of the Full Court of the Australian Federal Court has determined that it would be inappropriate and against the law to take into account the insolvency practitioners’ Code of Professional Conduct.

In Australian Securities and Investments Commission v Franklin (liquidator), in the matter of Walton Constructions Pty Ltd [2014] FCAFC 85 (judgment 18 July 2014), His Honour said:

“I should add that I do not regard the Insolvency Practitioners Association of Australia’s guide entitled Code of Professional Practice for Insolvency Practitioners, on which ASIC relied, as extrinsic material appropriate or permitted to be taken into account in construing ss 60 and 436DA of the Corporations Act. To my mind, the general law would not permit that guide to be taken into account in construing those provisions and that guide is outside the scope of s 15AB of the Acts Interpretation Act 1901 (Cth). For example, the relevant parts of that guide were not reproduced or referred to in the explanatory memorandum to the Corporations Amendment (Insolvency) Bill 2007 (Cth). ” (Judgment paragraph 38.)

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Conflict of interest

At the heart of the main decision in this case is the issue of conflict of interest and duty. I will analyse this part of the decision in a separate post. But here I want to discuss issues concerning compliance with and enforcement of the association’s Code of Professional Conduct.

An interesting predicament for ARITA

Justice Robertson’s comments are likely to cause something of a predicament for the association of insolvency practitioners, the Australian Restructuring Insolvency and Turnaround Association (ARITA). Naturally its Code of Professional Conduct (the Code) is binding on its members. So, it will probably review and amend this particular rule to bring it into line with the comments by Justice Robertson. Otherwise it would be imposing a requirement that the law does not acknowledge.

But, theoretically, it is not essential that ARITA bring its rules into line. If it thinks it necessary to have ethical rules that impose on its members duties greater than those imposed by the insolvency laws, it is entitled to do so. And it is entitled to take disciplinary action against members who breach such rules. Any member who doesn’t want to be bound by these extra duties can choose to resign from the association.

However it appears that enforcement of those rules by ARITA would be problematic. At the moment ARITA appears to enforce its rules only after a law enforcement agency (e.g. the Australian Securities and Investments Commission and the Companies Auditors and Liquidators Disciplinary Board) has made an unfavourable decision.

Apart from ARITA’s Code containing guidance as to what is meant by sections 60 and 436DA of the Corporations Act, ARITA has rules that impose greater duties and obligations than those imposed by the law. In constructing these extra duties and rules ARITA hopes that the courts will recognise them as a proper standard for judging the behaviour of insolvency practitioners and, by doing so, raise the standard of practice in the profession.

Until the comments by Justice Robertson in the Walton Constructions appeal case, it was widely believed that the statements and rules in ARITA’s Code applied not only to members of the association but effectively applied to all liquidators, because the courts would look to the Code when assessing whether the behaviour of a liquidator complied with his or her duties.

ARITA could suffer financially if this belief, based as it is on previous judgments by the courts, has been thrown into doubt by Justice Robertson. ARITA says that around 83% of all registered insolvency practitioners in Australia are ARITA members. But if its Code continues to impose standards that are more onerous than those imposed by the Corporations Act, and if the courts don’t continue to support its Code, more practitioners may choose not to join ARITA.

Comment by ARITA

Writing on behalf of the authors of the Code – the Australian Restructuring Insolvency & Turnaround Association (ARITA) – Michael Murray, Legal Director of ARITA, says:

“Interestingly, Justice Robertson said that he did not regard the ARITA Code of Professional Practice for Insolvency Practitioners, on which ASIC relied, as extrinsic material appropriate or permitted to be taken into account in construing ss 60 and 436DA of the Corporations Act. This was the case as a matter of law under the Acts Interpretation Act 1901 (Cth). As a matter of interpretation of the sections that comment is no doubt correct. But it continues to be the case that the Code is relied upon by the courts in assessing standards of practitioners’ conduct: Dean-Willcocks v Companies Auditors and Liquidators Disciplinary Board [2006] FCA 1438.”

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