A guide to judicial directions for insolvency practitioners

By Mark Petrucco and Jeremy Roby

Section 90-15(1) of the Insolvency Practice Schedule (Corporations) (Cth) (IPSC) provides that the court may make such orders as it thinks fit in relation to the external administration of a company. It’s well recognised the broad power under that section extends to the making of judicial directions on the application of insolvency practitioners under section 90-20(1)(d) of the IPSC.

When to seek a judicial direction

When an insolvency practitioner needs advice on the proper course of action to take in an external administration, they can ask the court for a judicial direction. ^[1] The advice may be sought about legal issues of substance or procedure, the practitioner’s powers or questions about propriety or reasonableness.^[2]

However, the court generally won’t give a judicial direction regarding business or commercial decisions unless there’s a particular legal issue raised or an attack on the propriety or reasonableness of a decision that the insolvency practitioner proposes to make^[3] or, the prospect of such an attack^[4] including from parties like ASIC, creditors, shareholders or directors.

Why seek a judicial direction

Insolvency practitioners would seek a judicial direction not only to get the court’s guidance on a specific issue but also to protect themselves from claims they’ve acted unreasonably, inappropriately or in breach of duty by undertaking (or not undertaking) certain conduct. This protection comes when they act in accordance with the judicial direction and they make full and fair disclosure of all relevant facts to the court on the application. ^[5] Practically, this means presenting evidence on the application explaining why the judicial direction should not be given.

The application

When an insolvency practitioner asks the court for guidance, they typically provide an affidavit. The affidavit outlines the relevant background facts to the external administration, explains the decision  the practitioner plans to make and lists the reasons for and against the proposed decision. Sometimes, the affidavit contains confidential and privileged information like a legal opinion from counsel. In such cases, the practitioner can seek confidentiality orders to maintain confidentiality in the information.

Example of a successful judicial direction application

In In the matter of Union Standard International Group Pty Ltd (in liquidation) [2023] FCA 1054, the Federal Court gave a judicial direction that the liquidators were justified in using trust money to continue proceedings against the insolvent company’s CEO and former auditor. The direction was sought because the company had substantial trust creditor claims and any recoveries were likely to be very small when compared with the total value of creditor claims.

Conclusion

In recent years, we’ve observed an increase in the number of judicial direction applications. This increase is partly because ASIC, creditors and other stakeholders are paying closer attention to the conduct of insolvency practitioners. ASIC, in particular, has been more inclined to commence legal proceedings against insolvency practitioners alleging wrongful conduct. Insolvency practitioners need to remember they can seek judicial directions to protect themselves if they’re making decisions that could be questioned or criticised.