Are changes afoot in the insolvency space?
In July 2023, the Australian Parliamentary Joint Committee on Corporations and Financial Services (the Joint Committee) unveiled a pivotal report aimed at revitalising corporate insolvency in Australia. The report, bearing the influence of high-profile members including Chair Deborah O’Neill MP and Deputy Chair Alex Hawke MP, aspires to bolster the effectiveness of the country’s insolvency laws.
Recommendations for Reform
The most notable recommendation from The Joint Committee calls for the government to promptly initiate an extensive and impartial review of Australia’s insolvency law. It also recommended “that the government progress several other near-term actions as identified in the executive summary”.
Another crucial recommendation targets the gender imbalance among registered liquidators, while Recommendation 14 highlights the pressing need for a thorough review of the current independence requirements for insolvency practitioners. In this update, we discuss the issue of independence and conflicts of interest for insolvency practitioners while summarizing a recent case in which we acted for the bankruptcy trustees.
A Verdict on Independence
In a recent decision handed down on 1 June 2023 by Judge Taglieri in the Federal Circuit and Family Court of Australia, the spotlight was on independence and conflicts of interest (Roberts v Carrafa (trustee) In the matter of Roberts (bankrupt) [2023] FedCFamC2G 463 (Roberts). In this case, the Court dismissed a bankrupt’s application seeking a declaration of conflict of interest or perceived conflict of interest against the new bankruptcy trustees for the estate.
The facts and the decision are briefly summarised as follows:-
- On 8 December 2021, Gess Rambaldi and Innis Cull were appointed as trustees in bankruptcy of Mason Roberts’ estate (the bankrupt’s husband), following a Creditors Petition filed by CC Investments.
- Veronica Roberts, the bankrupt, filed for voluntary bankruptcy on 27 May 2022. Michael Carrafa and Fabian Kane Micheletto of SV Partners (the First Respondent) were appointed as trustees.
- Two days later, summary judgement was entered in favour of CC Investments Pty Ltd (CC) against the bankrupt and her husband.
- Veronica Roberts put forward a Deed of Composition shortly before the 2 November 2022 creditors meeting. The Deed of Composition was not put to the creditors nor filed with the Australian Financial Security Authority (AFSA). Mrs Roberts did not pay the composition surety and the composition was lodged at a time when transfer of the estate to the new trustees was imminent.
- On 2 November 2022, a resolution was passed at a creditors meeting that Mr Cull and Mr Rambaldi replace Mr Carrafa and Mr Micheletto as trustees of Veronica Roberts’ bankrupt estate.
- Mrs Roberts contested the appointment of Mr Cull and Mr Rambaldi, alleging a conflict of interest since they were also acting as her husband’s bankruptcy trustees. She applied for orders in the Federal Circuit and Family Court of Australia setting aside their appointment.
- Her application was supported by an affidavit from an individual associated with a creditor of her bankruptcy, who raised concerns about his meeting with Mr Cull. Mr Cull denied anything was improper about the meeting and provided a transcript of the meeting which effectively refuted these allegations.
- Mr Cull also filed evidence that supported his and Mr Rambaldi’s decision that there would be no conflict of interest in acting for the bankrupt estates of a husband and wife. Indeed, it is common for this to occur.
- Judge Taglieri carefully considered the material and the authorities, and found that Mr Cull was “properly cognisant of his legal duties and responsibilities as trustee” (Roberts at [26]) stating he conducted a proper enquiry which a trustee is obliged to do.
- Judge Taglieri also found the Applicants misapplied established principles and a reasonable fair-minded observer would not objectively perceive a conflict of interest (Roberts at [50]).
Key Takeaways
The Roberts judgement provides essential guidance for defending insolvency practitioners against an alleged conflict of interest or a perceived conflict of interest. The case highlighted the importance of the Declaration of Independence, Relevant Relationships and Indemnities Relationships (DIRRI) which Mr Cull and Mr Rambaldi sent to Veronica Roberts’ creditors prior to the 2 November 2022 creditors meeting where the . DIRRI’s are commonly used in corporate administration and are required under section 436DA of the Corporations Act 2001 (Cth). Insolvency Practitioner Rule 75-265 sets out similar requirements where the administrator of a company is being removed.
In Roberts, the DIRRI clearly disclosed that Mr Cull and Mr Rambaldi were already trustees of Mr Roberts’ bankrupt estate. It was this alleged conflict of interest that Veronica Roberts complained about even though it was plainly disclosed to her creditors who ultimately approved of Mr Cull and Mr Rambaldi being appointed as her trustees at the creditors meeting on 2 November 2022.
There will unfortunately be instances where a husband and wife end up in bankruptcy where they are both involved or associated with a trading business that fails. The decision in Roberts makes it clear that this does not in and of itself pose a conflict of interest for the trustees, but they should disclose their roles to the creditors as soon as reasonably practicable.
Conclusion
KCL Law acted for Mr Cull and Mr Rambaldi in Roberts and a link to the decision can be found here while a link to the Parliamentary Joint Committee’s full report can be found here.
More Information
For more information or advice regarding the independence of insolvency practitioners or assistance in dealing with a personal or corporate insolvency, please contact:
David Weinberger, Principal Lawyer and Head of Litigation and Dispute Resolution at KCL Law on (03) 8600 8872 or via email at dweinberger@kcllaw.com.au.
Note: This update is a guide only and is not intended to constitute legal advice.