It (might be) alive! – ASIC v Diploma (No 5): Integrity of insolvency practitioners - Insolvency/Bankruptcy

This TGIF examines the determination of an application by liquidators of the Diploma Group of companies to be appointed as administrators of Diploma company and put a DOCA proposal to creditors.

BACKGROUND

On 6 September 2017, Federal Court of Australia appointed liquidators to Diploma Group Limited (Diploma) and other companies within the Diploma Group (Group Companies). Prior to that appointment, the liquidators had been appointed as Diploma's administrators and then provisional liquidators.

A party related to shareholders of Diploma, Cockburn Central West Pty Ltd (Cockburn Central) advised the liquidators that it wished to put a further proposal for a Deed of Company Arrangement to Diploma's creditors as an alternative to liquidation.

While the liquidators have the power to appoint other practitioners as administrators of Diploma, they required leave to take the role themselves. This decision addressed that application, which ASIC actively opposed.

ISSUES

The key question in this case was whether it was appropriate for the court to grant leave for the liquidators to appoint themselves as administrators of Diploma.

This involved consideration of, if leave was granted, would a conflict arise because :

a secured creditor had offered to fund the application for leave to act as administrators, convene a meeting of creditors, prepare a report and administer the DOCA; and
the tension inherent in the proposed dual role given that as administrators to Diploma, they would be required to approve or reject proofs of debt lodged by other group companies of which they are liquidators.

DECISION

The Court gave leave for the liquidators to act as administrators. In doing so, it gave significant weight to the in-depth working knowledge of Diploma's affairs that they had gained as previous administrators and liquidators of Diploma, the wide-range of tasks they had performed in these roles, and the 'double handling' avoided by their appointment.

The conflict question

The Court agreed with the liquidators' submission that they would not be in a position of conflict if they were appointed as administrators.

It did not have any issue with the cost of the application, creditors' meeting and conduct of the DOCA being funded. Indeed the Court noted that this was commonly the case, and gave weight to the fact that it would be disclosed to the creditors before any creditors' meeting.

The Court was also not perturbed by the liquidators acting as "surgeon" of Diploma while acting as "undertaker" of some of its creditors. In coming to that position, the Court was satisfied that the liquidators would exercise their own professional judgment depending on the circumstances as they arise.

A better return?

The decision is also interesting because the proposal would not necessarily lead to a better return for unsecured creditors. It relied on conditions being met, and the satisfaction of those conditions was far from certain.

The liquidators strongly advocated to the Court that it was appropriate for creditors to have the opportunity to vote on the proposal, because although it was not certain, it had the potential to provide a better return to unsecured creditors. The Court accepted that it is consistent with the purpose of Part 5.3A of the Corporations Act to give creditors the opportunity to vote on the proposal, even if it was not certain to be better for them and the liquidators recommended against it.

COMMENT

This decision is another example of the Court showing confidence in the integrity of insolvency practitioners, and their ability to discharge their duties, while also emphasising that creditor choice is a vital part of the Australian insolvency regime.

It also confirms the appropriateness of DOCA proponents offering to fund the DOCA process.

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