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Independence of external administrators

If a company is insolvent or in financial difficulty, it can be put into external administration. The three most common forms of external administration are voluntary administration, liquidation and receivership. It is important for creditors to assess whether the external administrator is independent. If you are a creditor and you want to replace an external administrator check out our page on Replacing an External Admnistrator.
What it means to be independent

For an external administrator to be independent, they must not be biased towards any person or group, not have a close personal or business relationship with any person involved in the insolvency and not be in a position where their own personal or private interests conflict with their duties in the insolvency.

It is important that the external administrator is, at all times, both independent, and accepted as being independent, by those people interested in the affairs of the insolvent company. An external administrator may not be accepted as being independent if there is a real chance that circumstances exist that may threaten the person’s independence in the future.
Who may be appointed

A person appointed as an external administrator of an insolvent company must be a registered liquidator. They must also be an official liquidator if the appointment as liquidator is made by the court. At the time of agreeing to take the appointment, the person must both be, and be accepted as being, independent. If the person knows at the time there is the real prospect of a threat to independence arising in the future, the person should not take the appointment (even if they tell creditors about the threat) without the court’s approval.
Relationships that prevent appointment

A person must not be appointed as an external administrator of an insolvent company if they have any of the following relationships with the insolvent company:

* either the person or a company where the person is a substantial shareholder owes more than $5000 to the insolvent company or a related company;
* the person is owed more than $5000 by the insolvent company or a related company;
* the person is a director, secretary, senior manager or employee of the insolvent company;
* the person is an auditor of the insolvent company.

Even if none of these relationships exists, the person must not take on the appointment if, in the circumstances, there is a real risk they cannot be independent and be accepted as being independent by those interested in the affairs of the insolvent company.
Disclosing relationships

If a liquidator is appointed by the court, they act as an officer of the court and they should tell the court before they are appointed of any circumstances they are aware of that might cause doubts about their independence.

A person who is consenting to be appointed as voluntary administrator or liquidator in a creditors’ voluntary liquidation must send to creditors, with the notice of the first meeting of creditors, a declaration about any relationships they may have. The declaration must set out whether the person, their partners in a firm or their company or an associated company has, or has had in the past 2 years, a relationship with either:

* the insolvent company;
* an associate of that company;
* a former liquidator or former provisional liquidator of that company; or
* a secured creditor with security over the whole or substantially the whole of the company’s property, and state the person’s reasons for believing that none of the relationships result in the person having a conflict in accepting the appointment.

If the voluntary administrator or liquidator later realises that the original declaration is out-of-date or contains an error, they must distribute a replacement declaration.

The declarations must be given to creditors to allow them to consider the person’s independence and make an informed decision about whether they want to replace the person with someone of the creditors’ choice.