The fees of insolvency lawyers – increased scrutiny under the new law

Liquidators and trustees in bankruptcy are more accustomed to seeing their own fees come under judicial scrutiny than the fees of their lawyers. Legal fees are ‘mere’ disbursements in insolvency law, requiring neither creditor nor court approval.

Justice Steven Rares’ recent judicial views about lawyers’ fees in Armstrong Scalisi Holdings v Piscopo [2017] FCA 423 , a bankruptcy matter, have therefore prompted some comments, extending beyond the question of the efficiency in division of work between barristers and lawyers on which his views were given.

His comments are also timely in light of the new insolvency laws commencing in September 2017, under the Insolvency Law Reform Act 2016 (ILRA) which will increase the level of scrutiny of lawyers’ fees – by the court, the creditors and by trustees and liquidators, while at the same time lessen the judicial scrutiny of fees of insolvency practitioners themselves. 

Insolvency practitioners as clients

Lawyers have a different sort of client when acting for IPs. While IPs are not expected to be model litigants, they are fiduciaries responsible for managing funds in the interests of creditors, but with broader public interest responsibilities as well. Lawyers acting for them, fiduciaries themselves, have to have regard to these features, and may need to advise on them, in particular as to the proportionality of expenditure against outcome in any litigious pursuit of recoveries.   

Under the new insolvency laws, lawyers’ fees will be subject to review not by lawyers, but by either the Inspector-General in Bankruptcy or by a ‘reviewing liquidator’, with little if any statutory criteria for their assessment offered. Justice Rares’ insights into lawyers’ litigation practices now add to existing case law principles.   

Bankruptcy

In reviewing a bankruptcy trustee’s remuneration, the Inspector-General may direct the trustee’s lawyer (a ‘third party’) to give an itemized bill of costs for work done for the trustee, in default of which the bill will not be paid. Assuming the lawyer’s bill is delivered, the Inspector-General may “disallow all or part of it”. 

Although not clear, the consequence of this appears to be that the lawyer’s fees cannot be paid out from the estate funds; but the trustee may nevertheless remain personally liable to pay the fees, subject to any separate cost assessment process.

Corporate insolvency

The corporate insolvency remuneration process remains different because ASIC is not given the remuneration powers of the Inspector-General. The Court therefore has to remain involved.

Section 90-24 of the Insolvency Practice Schedule allows creditors to appoint a reviewing liquidator to review any costs or expenses incurred by the liquidator; this would include legal fees. The review may go back only 12 months unless the liquidator agrees to extend this period.

The question to be determined there is there is (for some reason) different, from bankruptcy, as to whether “the cost or expense was properly incurred” by the liquidator. The reviewing liquidator may direct the lawyers to provide, not an itemised bill, but a statement in support of their claims. Again, the liquidator may remain personally liable to pay the lawyers’ fees, subject to any cost assessment process. 

Comment

The principles applicable to reviewing lawyers’ fees in the context of an IP client may be different from the usual review of fees on a costs assessment. Just as a lawyer acting for a model litigant must address more refined principles of conduct, so too must a lawyer acting for an IP. Some of those refined and more difficult issues include the pursuit of claims with no return for creditors, or with litigation funders and the IP’s remuneration the only beneficiaries; pursuing investigations that lead to nil recoveries; and the extent of public interest investigations expected of IPs. The rule in ex parte James, and the ‘ethical’ overlay of the ILRA, and the extent to which IPs still remain officers of the court in light of the ILRA, are other issues.

While the reality is that insolvency practice is often complex factually and legally, labour intensive in matters requiring to be proved, and has the potential to have a significant impact upon fundamental rights, what is often seen as a typical cavalcade approach of law firms must be tempered in the context of insolvency litigation. 

Disclosure of legal costs in insolvency cases is limited and it is perhaps unwise to comment on particular cases without knowing the issues involved. But we do know that on a point of law and as amicus curiae only, for a half day hearing, ARITA reportedly spent $150,000 in Sakr Nominees; that an order for repayment of a preference of $220,000 involved legal costs in a discounted amount of $430,000; and that the estimated costs of the lawyers in the matter before Rares J were $240,000. In another but related matter, ASIC’s claim against Mr Flugge and others consumed 33 hearing days resulting in a financial outcome of only $50,000.

Suggestions

Given the new insolvency law, and given the transparency that insolvency law needs in order to maintain its respect and integrity, an idea could be to impose a professional code stating the standards of conduct of IPs in engaging lawyers and in the conduct of litigation or pursuit of claims generally. 

Aspects of the model litigant guidelines of the Commonwealth might be considered. These already bind the Inspector-General, ASIC, FEG and other agencies involved in insolvency work, and their lawyers and counsel, including as to briefing of counsel and as to counsels’ fees.

The alternative is that the new law allowing lawyers’ fees to be more readily reviewed will develop from 1 September according to the views of the reviewing liquidators and the Inspector-General.

While the division of work between lawyers and barristers is relevant, the need for the “senior-junior” duo may also come under scrutiny.  And of course the Judges themselves have their own responsibilities.

 

A more extensive version of this article is being published.

 

 

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