Liquidators – spending money to justify spending money

Charging a second fee to justify charging an initial fee might seem odd but this can be the case when the law itself requires some formal approval process for the initial expenditure.

A recent court decision involved fees of over $7000+ being incurred to justify fees of around $34,000.

Insolvency practitioners (IPs) must have their fees approved either by creditors or the court, and some detail is required by the law to justify those fees.

The law allows the IP to claim the costs incurred in producing that justification, by way of a remuneration report. The costs of that report should be moderate, given that the entry and categorisation of time, with the aid of technology, should provide a ready report. That supports the need for a balance of proportionality between the costs of justification and the amount of fees sought to be justified.

Where court approval is needed, the costs will increase, inevitably because applying to court and putting on evidence and presenting a case costs money, and lawyers are invariably involved.

Hence, it is to be avoided, or at least relegated.

Re Custometal Engineering

In Custometal Engineering Pty Ltd (in liq),[1] liquidators sought approval of their remuneration[2] in the amount of $40,860 (exc GST), comprising remuneration for the work done ($33,872.50) and remuneration for getting the case ready to go to court ($6,987.50). Three affidavits were filed. On top of the latter, they sought their legal costs, to be paid out of company funds.

The Court approved the remuneration in those amounts, and costs.

The matter was filed on 14 September 2018 and judgment was delivered on 23 November 2018.

The legal costs and filing fee are not known.

Thus far, the liquidators have been shown to have spent $6,990+ on having $33,870 in remuneration approved, as approved by the Court.

Some might say that is not proportionate.

Bankruptcy

The law in bankruptcy is quite different.  Where a trustee is unable to obtain remuneration approval from creditors, the trustee can apply to the Inspector-General (IG) for approval.  While there are costs in doing so, these would not be as much as going to court.  Any challenge to the IG’s decision must go to court.[3]

Reform?

Insolvency practitioners’ remuneration is now governed by the same harmonised rules and principles.  It is a pity that corporate insolvency did not introduce reforms allowing, as a suggestion, the Inspector-General to also assess and approve liquidators’ remuneration. In that respect, AFSA offers extensive and useful guidance on remuneration and its processes, according to the new law under the Insolvency Law Reform Act 2016 (ILRA); in particular see IGPS 15 – Determination of a trustee’s remuneration by the Inspector-General in Bankruptcy.

One disadvantage of bankruptcy is that the reasons for decision of the IG are not published, save to the parties, hence any on-going remuneration guidance from AFSA is not available.  This is despite the fact that AFSA has announced that in 2018–2019, it will focus on trustee remuneration.

Nevertheless the parties involved are able to publish them, and any available reasons given by AFSA may be sent, redacted, to Murrays Legal, for publication.

Court rules

It should be noted, as ARITA may advise, at least in relation to corporate insolvency, that not all court rules have been updated to accord with the ILRA changes, despite the long lead time for that law to be introduced.[4] For that matter, nor has the 2014 ARITA Code of Professional Practice been updated, unless it be said that its remuneration guidance is general enough to still be applicable.  It is however still referred to in AFSA’s 2017 updated guidance for trustees.

It should also be noted, as to personal insolvency, that both the Federal Court and the Federal Circuit Court updated their rules to accord with the ILRA changes some time ago.

 

 

[1] Re Custometal Engineering Pty Ltd (in liq) [2018] VSC 726

[2] Under s 60-10(1)(c) of the Insolvency Practice Schedule (Corporations) (IPSC).

[3] AFSA suggests this may need to be taken under the ADJR Act 1977.

[4] The Victorian Supreme Court has done so.

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