Assessment of liquidators’ remuneration, with help from a band of experts

The decision of Justice Besanko of the Federal Court in Lock, in the matter of Cedenco JV (No 2) [2019] FCA 93 mainly concerns the remuneration of liquidators.

In a broader context, the case involves the conduct of liquidations in Australia and overseas, and the work performed and remuneration claimed, and the inadequacies of the liquidators’ accounting for their claims, going back to 2010, and the reliance by the court on numerous insolvency practitioner experts for ASIC and its main expert CPIP – the competent and prudent insolvency practitioner – as to the proper conduct of a liquidator.

The proceedings came about because the practitioners, Lock and Sheahan (the plaintiffs), did not comply with the requirements in the Corporations Act as to the provision of adequate information about their remuneration to the creditors.

ASIC intervened under s 1330 of the Act and

‘played a major role in the proceeding. It cross-examined witnesses, adduced evidence and made detailed submissions’.

Its expert witness was Mr Peter Gothard of Ferrier Hodgson, who offered his views by reference to a standard described by him as that of a competent and prudent insolvency practitioner (CPIP), an acronym which the Judge adopted.

The history

The plaintiffs were appointed as insolvency administrators to various companies in 2010. By December 2010, unsecured creditors in some companies had been paid 100 cents in the dollar and by January 2011, the unsecured creditors of another company had been paid 90 cents in the dollar, with the balance of their debts and post-liquidation interest paid by April 2012. All creditors were paid in full by 2014.

The plaintiffs applied to the Federal Court for relief under s 1322 because they realised that their remuneration had not been properly approved.  ASIC intervened, as did, for a time, a US bankruptcy trustee.

As the Judge explained, the liquidators did not need to conduct any business in the course of their administration of the companies. Other than tax refunds, they were not required to realise any assets. The funds received and distributed were paid over to them by the companies’ receivers and managers.

Notwithstanding this, the plaintiffs drew remuneration for professional fees as administrators and liquidators of the companies in a sum exceeding $5.7m, exclusive of GST. That remuneration did not include additional remuneration by way of recoupment of internal disbursements. In addition, some $5.2m was incurred in legal fees.

The judgment bears closer reading as to the work performed by the plaintiffs, that accounted for their remuneration, including overseas, in the US and New Zealand, than is given here.

Some points extracted are these.

ASIC tendered affidavits of 10 insolvency practitioners as to their hourly rates

These included practitioners from BDO, BRI Ferrier, Meertens, and KordaMentha.

Justice Besanko said that the ‘plaintiffs’ hourly rates ($700) were high on any view of the matter’, in particular given they operated ‘primarily from Adelaide where generally rent and wages are lower than they are on the eastern seaboard’.

The major justification for rates was the risk of not recovering fees; this was ‘entirely absent in the case of these administrations and liquidations. The plaintiffs knew from an early stage that there would be a surplus of assets and not long after that, there was a substantial pool of funds from which they would be paid’.

There were some complex issues that arose, but as against that, the plaintiffs had the benefit, on a regular basis, of expert legal advice, for which over $5.2m was charged.

On the face of it, their hourly charges were not within a band of reasonable remuneration for these administrations and liquidations. … ‘A process will need to be put in place to recalculate the figures and I will hear from the parties as to how that is to be done’.

Travel time

The experts’ affidavits also went to the question of whether they generally charged for travel time involved in conducting their administrations.

The Judge said that according to ASIC,

the number of hours involved in travel was ‘nearly 1,300 hours or, based on a 40 hour week, 32.5 weeks’,

which led to the plaintiffs conceding that some of their claims for remuneration for travel time may have been in error.

Remuneration reports

No remuneration was allowed for the preparations of remuneration reports because they did not comply with the Act.

Proportionality

ASIC submitted that after its specific objections have been considered and an amount determined, the Court should give consideration to whether the resulting amount is proportionate “overall as a check and balance”.

‘Whether there is room for such an approach after the analysis already conducted is a matter that ASIC, if so advised, can raise after the amount has been determined’.

The outcome

The plaintiffs’ application under s 1322(4)(a) of the Corporations Act was therefore refused. In deciding that, the Judge did not find any evidence of dishonesty of the plaintiffs.

That left the question of their application to the Court for their remuneration to be determined. Orders were made for how that was to be done, with a return date of 27 February 2019.

Comment

Cross-border regulation

This matter originally came to my attention in relation to the cross-border insolvency regulation issue raised by the decision of the New Zealand High Court in 2012. Heath J found that the plaintiffs had engaged in misconduct, in their capacity as foreign representatives under the cross-border insolvency laws.  But as they were Australian practitioners, he thought that issue best be left to the Australian Federal Court to deal with.

That was in 2012.  As I queried in a paper given in 2016, who oversights and regulates Australian liquidators and trustees when they are operating overseas? and, conversely, what authority does an Australian court have over foreign representatives pursing assets here? See Cross-border regulation of insolvency practitioners [2018] INSLB.

Justice Besanko refers to Heath J’s 2012 judgment and finding but not in relation to any regulatory or conduct concern.  The finding of misconduct did not seem to cause any response from ASIC.

That question remains open.

Time and cost

The other broad issue in this decision is that or fairness and proportionality.  While the plaintiffs were not able to explain or substantiate many aspects of their remuneration, and it seems they could have applied earlier, it is difficult for all concerned when the matter goes back over 8 years or so.  Having applied in 2015, the matter is only determined in 2019, and with more to be done.

ASIC

And while their remuneration and its proportionality were in issue, the amount of time and costs incurred by ASIC must have been considerable – including in enlisting 10 insolvency practitioners’ evidence – but necessarily in accord with its statutory and financial responsibilities.

Comment welcome.

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