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The future of the well-worn path of "reasonable and proportionate" - remuneration and expenses of insolvency practitioners

It is of little surprise that judicial consideration of the remuneration of liquidators remains a topic close to the hearts of all those in the insolvency industry, particularly at a time when the market is more competitive than ever. That the remuneration as well as costs and expenses must be “reasonable” is well established but provides little comfort given the varying approaches taken (and indeed, what is reasonable will depend on the unique circumstances of each administration). This article does not attempt to provide an answer on the most appropriate form of remuneration or the disbursements an insolvency practitioner incurs, but seeks to observe some of the current trends and provide some thoughts on the way forward for the profession.

Courts have been and will remain vigilant in ensuring that the insolvency practitioner’s remuneration is “reasonable”, and that disbursement invoices should not simply be accepted but scrutinised closely. Legal advisors should share in their clients need to be vigilant as to the reasonableness of fees and expenses, and we will write shortly about the role value-based pricing can play in this sharing of risk.

It is over 13 years since the obiter comments of Finkelstein J in Korda, in the matter of Stockford Limited (subject to Deed of Company Arrangement) [2004] FCA 1682, but his comments remain as apt today as they were then, notwithstanding the changes in the regulatory landscape that have occurred (including the introduction of a statutory maximum default remuneration). His Honour stated:

"An insolvency practitioner stands in a fiduciary relationship with the creditors. He must act with the same care as a prudent businessman would act in his own affairs at his own cost and risk. A prudent businessman will run litigation as a last resort and when he embarks upon litigation he will keep it under close scrutiny. A prudent businessman will shop around to ensure that he obtains the services of good lawyers (solicitors and counsel) at the best possible rate. Personal relationships should not obscure the practitioner’s duty. The sole selection criteria should be the benefit to him as a litigant".

There will continue to be strong focus on the value and proportionality of liquidator’s own fees as well as the disbursements incurred in each insolvency administration. While the courts remain open to time-based billing as a reasonable model even in smaller liquidations, alternative approaches to achieving value and proportionality can only help to increase public and commercial confidence in the insolvency and restructuring industry.

Recent Guidance on Remuneration

While judicial approaches to remuneration remain far from consistent, there had been – until recently – a strong trend towards ensuring proportionality by limiting recoverable remuneration to a percentage of the realisations in an insolvency administration (see cases such as Re Independent Contractor Services (Aust) Pty Limited ACN 119 186 971 (in liquidation) (No 2) [2016] NSWSC 106). For example, Brereton J in the NSW Supreme Court stated that a liquidator would not necessarily be allowed remuneration at their firm’s standard hourly rates, particularly in smaller liquidations, where questions of proportionality, value and risk loomed large. 

While the trend remains significant, the NSW Court of Appeal has limited the scope of Brereton J’s approach. In the matter of Sakr Nominees Pty Ltd [2016] NSWSC 709 the Court emphasised that the factors in section 473(10) of the Corporations Act 2001 (Cth) (Act) (as it then was, now being section 60-12 of the Insolvency Practice (Corporations) Schedule (Practice Schedule)) are paramount in the Court’s assessment of whether the remuneration sought is reasonable. The liquidator was the appellant in Sakr and argued that the first instance judge had misapplied considerations of proportionality, including the consideration of ‘value’ of a liquidator’s work and had instead applied arbitrary rates in proportion to the amount recovered. The liquidator also argued that Brereton J had erred in finding that a different approach is warranted in smaller liquidations.

ASIC appeared at the appeal and submitted that remuneration should be calculated in proportion to the amount recovered. ARITA appeared at the appeal and argued that percentage-based remuneration based on monetary outcomes does not provide proportionality in the true sense of reward for reasonably necessary work properly performed. ARITA also submitted that the quantum of recoveries may not directly correlate to the quality of the practitioner’s work, and that a number of factors can influence the amount of work that is reasonable and appropriate, including the complexity of the administration and the attitudes of creditors.

The Court of Appeal found that Brereton J had erred in his consideration of proportionality, expressly rejected the view that the assessment of remuneration in smaller liquidations should be approached differently, and found that the factors in the then-section 473(10) of the Act (now section 60-12 of the Practice Schedule) apply in the Courts assessment of remuneration in all liquidations. Whilst the value of the property realised was a relevant factor, the Court found that Brereton J erred by focussing solely on this issue and failing to give consideration to the work actually done and whether it was proportionate to the difficulty and complexity of the tasks performed. Even though the work performed does not increase the funds available for distribution, that does not mean the liquidator is not entitled to be remunerated for it, subject to an assessment of whether the work was reasonably carried out and for a reasonable charge.

As mentioned earlier, the above approach is comforting to insolvency practitioners as a more considered approach given the current state of the insolvency market and the relatively expensive compliance and regulatory framework in which they operate. However, it cannot be said with any confidence that the position will remain as it currently stands, nor indeed that an approach fixing remuneration as a proportion of the amount recovered will not be adopted in a particular set of circumstances. Importantly, the Court did not entirely reject the proportionate approach – just emphasised that it is only one factor (for a complete list of the factors a Court must have regard to in making a remuneration determination, see section 60-12).

Remuneration vs Expenses

It is well established that the expenses paid by an insolvency practitioner do not form part of his or her remuneration, but are a separate category and will not typically be subject to judicial scrutiny in an application for approval of remuneration. There is no requirement for legal expenses (in particular)  to be “determined” by the court unless expressly challenged as part of the liquidator’s accounts being audited (sections 70-5 and 70-6 of the Practice Schedule, formerly section 539 of the Act) or as part of an investigation into the liquidator’s books or an inquiry into the liquidator’s conduct (Division 45 and 90 of the Practice Schedule, formerly section 536 of the Act).

Notwithstanding that accepted approach, Courts have often expressed a view regarding the reasonableness of incurring a disbursement and it is clear that insolvency practitioners are obliged to make an assessment for themselves whether disbursements are properly incurred. Indeed, Brereton J indicated in re Sakr (at first instance) that:“a liquidator may seek a direction that he would be justified in paying certain disbursements in order to obtain prior protection in respect of such a disbursement. I will treat the liquidator's application in respect of disbursements in this case on that basis.”

The proportionality of expenses was considered in Rowena Nominees Pty Ltd (in liquidation) v Adams (2008) 65 ACSR 521 and endorsed in Templeton v ASIC [2015] FCAFC 137, by comparing the work done to the difficulty or importance of the task. McLure J stated:“Using an example from the law, the time spent by an appropriately qualified and experienced practitioner in drafting a statement of claim should be proportionate to the amount in issue.”

While the current position is that legal costs are considered separately to an insolvency practitioners remuneration, and therefore there is no requirement to obtain creditor or court approval for them, creditors can and do challenge the incurring of legal fees. A successful challenge to legal fees will usually result in a difficult conversation between the lawyer and insolvency practitioner, however this can be avoided by engaging in a comprehensive assessment of the value and proportionality of legal fees at the outset of the administration and each claim within that administration. As mentioned earlier, we will shortly publish an article that details the benefit of a value-based approach to litigation that seeks to provide a proportionate fee proposal at the earliest possible stage.

Conclusion

It is a positive development for insolvency practitioners that remuneration will not be assessed solely by reference to a percentage of the value of the property recovered, and that the court will look to a range of factors in determining whether approval should be granted and for what amount.

However, in circumstances where courts are increasingly incorporating principles of proportionality, where ASIC has expressed a view in relation to the appropriate form of remuneration (at least in smaller insolvencies) and where creditors will assuredly remain active in assessing and approving remuneration, it is clear that all practitioners should take a proactive approach to ensuring remuneration and disbursements are reasonable and proportionate in order to increase public confidence in the industry as a whole. This is not simply a consideration in smaller administrations, in fact it is even more apt in larger corporate collapses.  It is essential that the value of the services being rendered is assessed and that assessment occurs at the outset of each aspect of the administration.

Without a proactive approach, the industry can surely expect greater regulatory oversight, and more intervention from the courts and regulator.

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