What work was involved in this liquidation and why did it take the time and resources claimed?

A liquidator’s remuneration claim of over $350,000 for conducting the winding up a country dental practice involving 24 of his staff spending over 940 hours of time is being queried by the NSW Supreme Court. While the Court acknowledged that the liquidator was entitled to a large amount of remuneration, he needed to give more explanation of his fees and how they were incurred.

This 2 June decision – Hunter Valley Dental Surgery Pty Ltd (in liq) [2017] NSWSC 691 – represents a renewed scrutiny on how insolvency practitioners explain their remuneration claims, following shortly after a similar focus in Sakr Nominees of 29 May [2017] NSWSC 668.

When a court is determining a liquidator’s remuneration, statutory remuneration factors are applied under s 473(10) of the Corporations Act, including as to proportionality.

These factors are carried over as s 60-20 Corporations Schedule, commencing on 1 September 2017. They will also apply in bankruptcy, under s 90-21 Bankruptcy Schedule.

However approval of remuneration may be given by creditors with or without regard to those factors.

The winding up

In the winding up and then termination of a country dental practice, from November 2015 to May 2017, the liquidators’ remuneration was over $350,000 involving 24 staff spending over 940 hours of time. While the Court acknowledged that the liquidator was probably entitled to a large amount, given the particular facts of the winding up, including the trading on of the dental practice, he had not adequately explained this.

Working on the matter were four partners of the liquidator, a principal, three “managers 1”, an assistant manager, three “senior analysts 1”, seven juniors, two treasury staff, an accountant, an “analyst 2”, three further senior analysts and two personal assistants. The substantial work on the liquidation was done by the liquidator (140 hours), the manager 1 (365 hours), the assistant manager (152 hours), and the analyst 2 (208 hours). Evidence that the liquidator reviewed the staff time sheets and made reductions provided little assistance to the Court.

And as the Court said, how a liquidator’s claim meets the 473(10) remuneration factors requires more than a bare reference to the amount of time costs recorded in broad categories such as “assets”, “creditors”, “employees” etc, and more than tendering the liquidator’s work in progress records, without any real explanation of the necessity of the work or why it took the time spent.

Examples of what the Court said was required were for the liquidator to explain what needed to be done in respect of the company’s assets and the matters to be investigated, why that work was most efficiently done by staff members of the seniority involved, and why that work was particularly time-consuming. The evidence may not need to be lengthy but it needs to cover the fundamental questions that the Court must address under s 473(10).

The hearing has been adjourned to allow that further evidence to be provided.

Comments

  • This focus on team billing in professional firms mirrors the concerns expressed by Justice Rares about law firm practices in Armstrong Scalisi Holdings Pty Ltd v Piscopo (Trustee), in the matter of Collins [2017] FCA 423. There appears to be a more hierarchical structure of insolvency firms, with several layers of staff, than in law firms, or at least a practice of staff at all levels charging their time. This was the subject of adverse comment in the 2010 Senate report.
  • The issue is about substantiation not necessarily quantum.  A reality is that insolvency practice can be labour-intensive and complex. Courts and others have to understand what is involved. That is one merit of time based billing but the time descriptor recorded should generally be able to justify why the task was being performed. Any mechanistic application of a remuneration template can miss the point of what the law requires. Reasons are needed.
  • The decision represents an uncommon instance of corporate insolvency courts questioning the remuneration of liquidators on termination applications.  As bankruptcy trustees know, approval of their remuneration on an annulment or setting aside of a sequestration order can be problematic: see Pattison v Hadjimouratis (2006) 155 FCR 226; compare Wu v Li (No 2) [2017] FCA 501.
  • While the courts take account of whether ASIC has anything to say, the reality is that ASIC was not given the task of determining liquidator’s remuneration under the new insolvency laws, in contrast to AFSA, in respect of trustees’ remuneration. Hence ASIC’s views one way or the other may not be so relevant.
  • The Court considered that the liquidator did not assume undue risk simply because there was uncertainty whether there would be assets to cover his remuneration.  This is “commonly the case in a court-ordered winding up where a company has limited assets or those assets are secured”.  That may not be the case now that the official liquidator status is removed and liquidators can take court appointments on more commercial bases, refusing appointments to companies with limited or no assets.
  • The liquidator could have exercised his casting vote in favour of his own remuneration.  That would have been permissible although in the circumstances unwise.  Now, under the new law – s 75-105 Corporations Schedule and s 75-115 Bankruptcy Schedule – a practitioner’s exercise of the casting vote in favour of their remuneration is unlawful.    
  • The new law provides no other option for determining a liquidator’s remuneration in a case like this than going to court. In contrast, in bankruptcy, the Inspector-General is given that determining role.  In exercising the remuneration factors, the Inspector-General will need to have regard to the extensive relevant case law in corporate insolvency law: see Insolvency practitioner remuneration under the new law and post Sakr Nominees (2017) 18 (3&4) INSLB 62, Murray, LexisNexis.   
  • Over $20,528 in time was spent on the remuneration application itself. Feedback from practitioners indicates a wide range of effort in producing substantiation of remuneration, with time spent apparently depending on the sophistication of relevant software.
  • This matter did not deal with the legal fees of the liquidator.  These properly might have been disclosed, including those further legal fees now required attending to the further evidence required, and the further hearing: see Insolvency lawyers’ fees under the new law, Murray, Wolters Kluwer, 2 June 2017.

 

 

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