The conflict of potential administrators becoming administrators — Ten Network Holdings

Summary

It is now commonplace for large, complex, and distressed companies to engage insolvency practitioners to assess the company and provide a contingency plan for possible future administration in the event that restructuring is unsuccessful. A common term for these practitioners is "potential administrators".

In a recent decision concerning the administration of Ten Network Holdings Ltd (Ten),¹ the Federal Court of Australia found apprehended bias on behalf of the administrators of Ten due to their previous involvement as potential administrators. The case demonstrates the conflicts that may arise if administrators are appointed as potential administrators prior to their eventual appointment as administrators. Importantly, this case makes it clear that when there is a real likelihood of apprehended bias, disclosure of the conflict is insufficient and additional steps to address the conflict may be required.

Case facts

On 14 June 2017, Mr Korda, Ms Nettleton, and Mr Villani of KordaMentha were appointed as the Administrators of Ten. Prior to this, KordaMentha was engaged as a potential administrator. Between 28 February 2017 and 13 June 2017, Mr Korda and colleagues attended approximately 50 meetings with Ten's management, directors, financiers, shareholder guarantors, and advisors. Mr Villani and Ms Nettleton were not involved in the potential administration work, nor did they meet with any of the board members or management of Ten prior to 14 June 2017.

The next day, KordaMentha sent a circular to about 346 creditors and 748 employees of Ten giving notice of the first meeting of creditors. This circular attached a declaration of independence, relevant relationships, and indemnities (DIRRI). ASIC wrote to the administrators querying the sufficiency of the DIRRI, especially with regard to potential concerns in relation to a perceived lack of independence. ASIC further alleged that Australian Restructuring Insolvency & Turnaround Association had raised queries regarding a potential perceived lack of independence.

There were three potential grounds of apprehended bias:

1. KordaMentha carried out almost $1 million of work as potential administrators.
2. The Administrators would have to essentially determine whether the fees paid to it as potential administrators were voidable preferences.
3. KordaMentha were appointed and paid for by Gilbert + Tobin, and also have a referral relationship with KordaMentha. At the same time, KordaMentha may have to investigate Gilbert + Tobin while conducting its investigative and reporting functions.

The decision

On 18 July 2017, the Federal Court of Australia made orders addressing these concerns. The orders were essentially:

• Ferrier Hodgson is appointed as an independent administrator to prepare a limited report on matters including:

(a) any claims arising from the conduct of the directors, officers, advisors (including Gilbert + Tobin), and KordaMentha as potential administrators; and
(b) whether the remuneration received by KordaMentha in respect of work undertaken by KordaMentha prior to the appointment of the First Plaintiffs are voidable preferences; and

• that Ferrier Hodgson is to supervise KordaMentha's conduct to ensure that it is acting consistently with statutory and fiduciary duties.

The Court agreed with a number of submissions made by ASIC, in particular:

1. a significant level of potential apprehended bias would have been removed had KordaMentha enunciated in the DIRRI the information that was made clear in Mr Korda's affidavit; and
2. Ten's course of conduct in appointing potential administrators was permissible, but companies contemplating appointing potential administrators should ensure that appropriate safeguards are in place so that there is no cause for a reasonable apprehension of bias.

In considering whether apprehended bias arises from potential administrators subsequently acting as administrators, a court will consider whether a 'fair minded observer', who is reasonably educated and fully apprised of the facts, would perceive bias. The Court found that the conflicts set out above did not require the removal of KordaMentha as administrators. Removal would be wholly disproportionate, especially given that the Court was able to make orders that adequately dealt with the issues.

Finally, the Court found that disclosure of potential conflicts did not 'cure' any reasonable apprehension of bias. This disclosure was insufficient to allow KordaMentha to bring an impartial mind to their investigative duties, especially in relation to payments to its own firm.

Key takeaways

This case provides guidance for the entire insolvency and restructuring profession, as well as to companies concerning the appropriate procedures for appointing potential administrators and administrators to potential administration work, and the appropriate conduct to take in the event that those procedures are breached:

1. It is important that when large, complex companies become distressed, they engage potential administrators at the earliest possible stage to prepare a contingency plan.
2. If practitioners act as potential administrators and wish to later be appointed as administrators, they should not provide advice to the board, directors, or management, or to creditors or other stakeholders in relation to the management, affairs, or obligations of the company, during the potential administration. Practitioners must ensure that the board and management understands that if the practitioner is subsequently appointed as an administrator, they may be required to investigate and take action against the company.
3. Practitioners must ensure transparency by completely disclosing potential conflicts in the DIRRI. However, disclosure alone is insufficient to cure a reasonable apprehension of bias. If an administrator is required to investigate itself or entities with which they have close relationships, this may require a second administrator to be appointed for this task.

¹ [2017] FCA 914