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 purport to provide an answer on the most appropriate form of insolvency practitioner remuneration or the disbursements he or she incurs, but seeks to observe some of the current trends and provide some thoughts on the way forward for the profession.
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), 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 he incurs in each insolvency administration. While the Court’s remain open to time-based billing as a reasonable model even in smaller liquidations, in the writer’s respectful submission a greater focus on these issues can 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 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)  NSWSC 106). Judges such as his Honour Justice Brereton in the NSW Supreme Court have 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.
In the matter of Sakr Nominees Pty Ltd  NSWSC 709 is a recent case in which the Court of Appeal has limited the scope of his Honour Justice Brereton’s comments, and emphasised that the factors in section 473(10) of the Corporations Act 2001 (Cth) (Act) 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 of ad valorem remuneration. The liquidator also submitted that His Honour had erred in finding that a different approach is warranted in smaller liquidations.
ASIC appeared at the appeal and submitted that an ad valorem calculation basis was to be preferred. ARITA appeared at the appeal as amicus curiae and submitted that percentage based remuneration based on monetary outcomes do 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 also expressly rejected the view that the assessment of remuneration in smaller liquidations should be approached differently, and found that the factors in section 473(10) of the Act apply in the Courts assessment of remuneration in all liquidations.
The Court of Appeal also found that the trial judge had erred in his consideration of proportionality. Whilst the value of the property realised was a relevant factor, he erred on his sole focus on this issue and not giving 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 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 ad valorem approach will not be adopted in a particular set of circumstances.
Remuneration vs Expenses
It is established law 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. The is no requirement for (in particular) legal expenses to be “determined” by the court unless expressly challenged as part of the liquidator’s accounts being audited (s539) or as part of an investigation into the liquidator’s books or an inquiry into the liquidator’s conduct (s536).
Notwithstanding that principle, Courts have often expressed a view regarding the reasonableness of the incurring of a disbursement and it is clear that insolvency practitioners are obliged to peruse disbursement invoices in some detail to make an assessment for themselves whether they are properly incurred. Indeed, his Honour Justice Brereton 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  FCAFC 137, by comparing the work done to the difficulty or importance of the task in the context it needs to be performed. Her Honour Justice McLure 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.”
It is a positive development for insolvency practitioners that their remuneration will not be assessed solely by reference to a percentage of the value of the property recovered, and the court will look at 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, the regulator has expressed a view in relation to the appropriate form of remuneration (at least in smaller insolvencies) and creditors will assuredly remain active in assessing and approving remuneration, it is the writer’s view that all practitioners should take a proactive approach to increasing public confidence in the industry as a whole. This is not simply a consideration in smaller administrations, but in fact is even more apt in larger corporate collapses – no longer should the public be expected to accept that litigation running for many years results in no return to the creditors of an insolvent entity.
In adopting such an approach, 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.
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This article does not constitute legal advice or a legal opinion on any matter discussed and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and practice in this area. If you require any advice or information, please speak to practicing lawyer in your jurisdiction. No individual who is a member, partner, shareholder or consultant of, in or to any constituent part of Interstellar Group Pte. Ltd. accepts or assumes responsibility, or has any liability, to any person in respect of this article.