The principle of fairness in insolvency appointments

Three case studies show when you have to be unfair to be fair.

Many aspects of insolvency require difficult decisions. At the heart of these decisions is essentially the principle that an insolvency practitioner must remain impartial, independent, and act without fear or favour towards the outcome. At times this puts the insolvency practitioner at odds with what many might perceive as the principle of “fairness”. My experience has taught me, when a party claims that something is not fair, what they mean is it’s unfair to them—with little regard for the fairness to others. In an insolvency context, this could refer to when an insolvency practitioner is required to take an action against a party for the benefit of all creditors. The party being pursued will often, if not always, note how it is unfair is to be targeted or that if they were required to comply with a demand, the outcome would be unfair (to them).

Below are a couple of recent examples that highlight the challenges of perceived fairness to one party where the fairness to all must take priority.

Preferences claim in a liquidation

I was appointed liquidator to a company through a voluntary winding up. Our investigations found a payment for $100,000 made shortly prior to our appointment that required further investigation. We discovered it was paid to an individual who previously made an unsecured loan to the company and this transaction was to repay that loan. The payment was therefore “preferential” (in preference to other creditors, unsecured or otherwise) and we issued a demand to recover the amount. Subsequently the company director asked us why we were pursuing his mother-in-law for $100,000, explaining it wasn’t “fair” to ask for the money back as she had loaned the money to the company and was elderly. While we understand the context and situation, unfortunately, legislation doesn’t define this as a valid defence to a preference claim and we had no choice but to press on with the claim. We recovered the $100,000 paid for the benefit of all company creditors; but unfortunately, the mother-in-law also spent money on engaging solicitors who struggled to find a way for her to keep it when the circumstances so obviously pointed to it being a preferential payment to a related party. Perceived fairness to the mother-in-law? No. Fair to all company’s creditors? Yes.

Bankrupt estate & the family’s home

We were appointed bankruptcy trustees of an individual who held a property jointly with his spouse. Equity in the property was approximately $500,000 that resulted in an estimated half share in the property of $250,000. Unfortunately, the co-owner is limited to either collectively selling the property and recovering their half share or purchasing the half share interest from the bankruptcy trustee (subject to their agreement). However, the co-owner understandably wanted to keep their home particularly as their kids lived there. But the co-owner wasn’t in a position to get the funds to buy the bankrupt party out of the mortgage. Ultimately, we had to push on with the matter as, despite the difficult circumstances in respect to the co-owner, as bankruptcy trustees are required to recover assets for the benefit of all creditors. The property was eventually sold and the surplus proceeds split equally between the co-owner and the bankrupt estate. Perceived fairness to the co-owner? No. Fair all to the bankrupt estate’s creditors? Yes.

Co-operative liquidation & dealing with stock as receiver

I was appointed liquidator to a grain storage facility that operated as a co-operative[1]. The facility held grain belonging to the co-operative’s members and non-members. The complicating factor was there was no proper visibility about who owned what grain, whether all the grain supposed to be there was actually there, and what grade of grain was actually there. The only solution was gaining a court order to be the receiver over the grain. What ultimately transpired as part of the outturn process was that we ended up with quantities and grades of grain not matching the co-operative’s records. That is, we couldn’t identify any party that may have a claim to particular types of grain. We sought another court order to deal with this grain as if there was no other owner effectively resulting in the grain proceeds being payable to the co-operative. The matter was disputed in court and the principle of “fairness” was raised by the disputing party as it was claimed it would be unfair if the co-operative ended up with the grain proceeds. Interestingly, this issue of “fairness” was raised despite the disputing party’s submissions that referenced the Hazelton Air Charter case which specifically said, “The matter must be determined by reference to principles of law and equity, rather than by reference to notions of commerciality and fairness”. The court ultimately determined that the quantity of grain that could not be allocated using the co-operative’s records should be recoverable by the co-operative. Perceived fairness to the grain owners? No. Fair to the co-operative’s creditors? Yes.

While at all times an insolvency practitioner acts with empathy and considers wider factors in dealing with difficult claims, the issue of perceived “fairness” is often at odds with what has to happen given the insolvency practitioner’s role in delivering outcomes in an impartial and independent manner without fear or favour. As a result, when it comes to insolvency, the concept of fairness is likely to stay firmly in the eye of the beholder.

At Worrells, we’re sensitive to people’s situations when they’re in a position of owing money and to those people who are owed money. We want to find not only commercial outcomes but the middle ground where and when possible, but we can never breach our duties as insolvency practitioners. It’s this integrity that builds our reputation as being a brand that can be trusted. Tough situations often mean honest conversations and we'll never shy away from the straight talk that insolvency law demands.

[1] Note: Co-operative legislation varies by state/territory.