A report in a daily newspaper[1] has commented on the large fees earner by liquidators and administrators in attending to the collapse of some large enterprises, airlines included, in particular those subject to Part 5.3A administration. Without commenting on the particular companies referred to, some perspective always needs to be given to comments about insolvency practitioner fees.
The financial and business affairs of insolvent companies can be a mess, being a reason for the collapse, or involving deliberate attempts to hide unlawful conduct. Unravelling that can be difficult and may involve use of [expensive] legal demand processes and examinations, and court assistance, or challenges. Also, as the newspaper article reports, personal liability imposed on the administrator by the law adds a layer of cost.
The amount of remuneration, assuming validly claimed, is in effect a measure of the resources required in winding up or administering a corporate insolvency as required by the law.[2] Resources required go to an assessment of the operation of an insolvency regime – as to it effectiveness, as a measure of the extent to which the insolvency system achieves its intended objectives, and its efficiency, as to the extent to which the insolvency system achieves those objectives with the minimum use of resources.[3]
“the task of insolvency administration is inherently expensive”
Insolvency law does demand a high standard of investigation and reporting and asset recovery. As such, as former Justice Michael Kirby has written[4]
“the task of insolvency administration is inherently expensive. Principally this is so because of the intensive nature of the investigation of accounts (sometimes in a shambles and sometimes deliberately deceptive) that the insolvency practitioners must analyse and understand”.
He went on to say that there is an unwillingness of people to appreciate that securing a just outcome (in law) is inherently costly.
“It is unreasonable to demand that skilled professionals should perform their functions at low cost. …”
In the UK Maxwell collapse, the Judge was outraged by the fact that the fees of the receiver consumed almost all the funds available; but a review of the fees showed that they were in fact valid and necessary.[5][6]
Similarly, where NZ liquidators’ fees consumed all of the NZ$330,000 funds recovered in a Ponzi scheme, involving investor losses of NZ$43 million, the Judge accepted the validity of the liquidators’ work and their claim.
“The liquidators represented the only prospect of the creditors receiving any appreciable recovery. … That nothing came of those efforts is not in any way a matter for which the liquidators are to be criticized. Further, there was a strong public policy requirement that there be a proper investigation of the affairs of the company …”.[7]
Some of the work of liquidators is conducted on behalf of the state, and ASIC, for which creditors pay, and in particular because there is no government role in corporate insolvency equivalent to the official trustee in bankruptcy law. The decision in Hall v Poolman[8] is significant in the context of financial proportionality as to both the pursuit of litigation to recoup costs and to enforce the insolvency laws. The pursuit of insolvent trading, or attempting to recover purloined assets, is important in itself even if this may result in no recoveries by liquidators beyond recovery of their own remuneration and expenses and the funder’s fees.
Hence
“a trustee has no choice but to carry out certain statutory duties and […] in a small bankruptcy, the trustee’s costs might appear disproportionately large”[9] and there “are many ways in which costs may be incurred which are not related, principally or even at all, to the assets and liabilities of the estate”.[10]
Not all Judges are as accepting, Justice Michael Lee in one case commenting adversely about the high fees charged by large insolvency firms: Insolvency practitioner charge-out rates – the cost of carrying the State – Murrays Legal
SMEs
Also, most liquidations are not the ones referred to in the newspaper but are at the smaller end of the business market, SMEs comprising well over 90% of all businesses. Insolvencies in that sector often have limited or no remaining funds, and in the end no remaining moneys for creditors, and often the liquidator. Creditor or litigation funding may be available, but that may only serve to fund the liquidator and the funder. Cross subsidisation across estates with assets is understood to be common. Many insolvent companies are too poor to go broke and simply disappear through a default deregistration process. While ASIC can wind up ‘abandoned’ companies, it wound up only 9 in 2023-2024.
Fees are regulated
All liquidators’ fees are to be charged according to strict principles, and documented, and are subject to creditor approval. Challenges may be made to the court, or under an ASIC ‘reviewing liquidator’ process in corporate insolvency, which however ASIC used only once in 2022-2023. Inspector-General reviews of trustees’ remuneration appear to be infrequent. In personal insolvency, even with a government trustee, a significant proportion of estates administered by private trustees pay no remuneration.
Shadowy business environment
The work of liquidators and trustees is also complicated by the unreformed opaque commercial environment in which individuals and businesses are permitted by the government to operate – limited access to ASIC’s corporate database, including director IDs, the use of trusts, and other beneficial ownership structures, and undue accumulation of tax. Second tranche anti-money laundering laws due to have been enacted soon after the first tranche commenced in 2006 are only now, in 2024, being considered.
Data
The 2023 PJC Report on corporate insolvency has called for a comprehensive review of insolvency, including from a systems-based and economic efficiency and effectiveness perspective. It first calls for better data. While large claims for remuneration may be found to be valid in terms of the work done, they need to be assessed against the result achieved, accepting that financial outcomes are not necessarily the sole measure of success. But the threshold efficiency and effectiveness of a voidable transaction provision, and hence its validity, is best measured by the financial outcomes produced.
Only the private industry of practitioners and their lawyers have the data to show, in simple terms, the cost of voidable transaction claims [remuneration and legal fees] against the dividend return to creditors. The financial analysis talents of practitioners could readily provide this. Also, their representative bodies could survey their members and find out how much time is spent on matters for which there is no recompense, and then explain why, and how they recoup those losses.
A task was undertaken some years ago which revealed that liquidators personally funded disbursements of $1.4 million and remuneration of $47.3 million each year.[11] In personal insolvency, around 30% of estates in a given year provided no remuneration to trustees.[12]
The cost of litigation and the use of its proceeds, if any, was raised by the PJC in respect of preference claims, the proceeds of which were said to largely fund liquidators rather than creditors. The ATO would also have valuable data in respect of the cost of its tax recoveries.
Remuneration might therefore be seen more as an indicator of the work required to be done in insolvent estates, in pursuit of the accepted purposes, and thereby as a measure of the effectiveness and efficiency of the system, which the PJC has recommended be reviewed.
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[1] Australian, 28 October 2024, p 17
[2] Rethinking Insolvency Practitioner remuneration (2022) 22(3&4) INSLB 33, M Murray
[3] IMF Working Paper WP/19/27. The Use of Data in Assessing and Designing Insolvency Systems by Garrido et al, 2018
[4] Bankruptcy and Insolvency: Change, Policy and the Vital Role of Integrity and Probity (2010) 22(2) A Insol J 4, M Kirby.
[5] Mirror Group Newspapers v Maxwell & Others (No 2) (1997) Ch D 15 Jul 1997; [1998] 1 BCLC 638.
[6] Mirror Group Newspapers n Maxwell & Others [1999] BCC 685.
[7] Rethinking Insolvency Practitioner remuneration (2022) 22(3&4) INSLB 33, M Murray
[8] [2009] NSWCA 64. Discussed in Proceed with caution — NSW Court of Appeal overturns inquiry into liquidators’ conduct (2009) 9(8) INSLB 181, S Mullette.
[9] Simion v Brown [2007] EWHC 511 (Ch).
[10] Brook v Reed [2011] EWCA Civ 331; [2011] 3 All ER 743.
[11] See Explanatory Memorandum to the Insolvency Law Reform Bill 2015 at [9.53] referring to Phillips, A, An analysis of official liquidations in Australia, February 2013.
[12] A regulator’s report on insolvency practitioner remuneration – Murrays Legal
