Liquidators’ remuneration – aren’t you all missing the point?

A proper funding model for the insolvency profession is needed, partly to end the interminable debate about the cost of administering the regime, focused as it is on trite concepts and regulatory and judicial meanderings. What do we want the regime to offer, for how much, and from what sources?

The ‘professions’ nowadays are said to operate more as businesses with whatever qualities that a profession might have being overtaken or compromised by the commercial needs of the professional firm to profit and survive.[1]

Most professions rely on revenue by way of a fee for service model where the market, imperfect in some cases, sets the rates. The business model relies on a reasonably stable and certain process of charging fees, even if that might evolve with competition and client demands.

The insolvency profession …

Insolvency practice is peculiar in that its professionals offer elements of a public service – administering a regime acknowledged as fundamental to any modern economy and social system – but with the corporate regime privately funded, at least in Australia, from the assets remaining in insolvent companies. To a large extent the service the profession provides is fully funded that way, with over 80% of liquidations producing no dividend payments to creditors. What moneys there are, if any, are subsumed by the liquidator’s fees and other expenses.

… and the business of insolvency

Like any business, insolvency needs to have a reasonably settled basis of funding its services, in its case, from those remaining assets of insolvent companies. In common with other professions, insolvency has over time become a business involving the costs of premises, information technology, internal processes and governance, marketing and training, all in support of the professional and support staff who do the work and whose level of responsibility, risk, education and experience calls for high rewards.

The business of insolvency has come to base its revenue stream on time charged remuneration, one that is commonly adopted in other professions and trades. It is not unusual nor inherently unsatisfactory nor unfair. Lawyers, architects and plumbers rely upon it, even if to allow the calculation of a fixed sum quote, subject to conditions. Time based charging is typically used most where the expected work required and time to be taken is uncertain.

Advantages of time based costing

Some of its advantages include:

• transparency in showing the work done – how long a report took to prepare and by whom;
• a demonstration to the client of what work was actually involved in attending to their instructions – legal clients may not appreciate the work involved in preparing a two page advice, or a three page affidavit; similarly creditors need to appreciate the tasks of a liquidator in piecing together ill-kept financial reports and transactions;
• a further demonstration in showing what public interest work is done, not necessarily in creditors’ financial interests, by way of investigations into breaches of the law and their referral to the regulator
• a management tool for the firm which allows it to assess its internal efficiency, and allows for adjustments as necessary – extra time spent by a principal or staff member unfamiliar with the law or industry may need reduction.

In the end result too, there is a marketing element in how the time spent is billed – however much the matter cost, some adjustment may be made in favour of the client, or the insolvent estate, in recognition of the ultimate outcome achieved.

The client then has to make the decision to pay, or the creditors to approve.

Insolvency peculiarities

Insolvency has no clients as such. In its public element, the work is done for the regulators or for the public interest, or in support of the role as officer of the court, or where the liquidator considers that work done was so time consuming because of tiresome regulatory requirements, that the creditors should properly not have to pay. Yet it is the creditors who are to assess the value of that public interest component of the fee.  Their understanding of the refined responsibilities of a liquidator is necessary, though, it may be said, this a lot to expect. They want their dividend return, minimal though that may be, at the least cost.

Beyond the creditors scrutinising the liquidator’s bill, there are other practitioners, the professional bodies, the regulators and the courts, and the media and commentators, all staring at the ‘goldfish liquidator in the bowl’.

While time based remuneration has provided the standard for insolvency along with many other professions, and trades, insolvency has come under particular criticism for using it, with alternative approaches being demanded. It is as if insolvency alone were expected to provide a better and fairer way than time charging for services, when others, with more flexibility to do so, have not.

Criticisms of time based remuneration

In any event, many of the particular criticisms of time based remuneration are without proper basis. It is said that:

• time based remuneration rewards inefficiency.  That assumes, most cynically, that any professional would charge their time regardless of their or their staff’s reasonable efficiency, without regard to their fiduciary duties, and to basic principles of proportionality. If that assumption must be made, it might be made generally of the whole of our business and government population, and more. Our commercial and personal worlds rely on some degree of integrity and trust, which cannot lightly be assumed not to apply.
• percentage based remuneration properly rewards outcomes.  That may be true to an extent, but, as with estate agents, it can give a large reward for minimal effort.  The difficulty in insolvency is that the tasks of a liquidator are clouded by the many public interest considerations, and by the risks assumed, required by law. Insolvency has not yet been privatised to the extent that the creditors’ commercial interests are the only consideration; a trend of some current concern in the practice of law. If that were the case, the duty of a liquidator would be more akin to that of a receiver or a recovery agent.
• creditors are ignorant of the insolvency process and cannot assess work done. If that is genuinely said, a response might be that many people who become creditors have an unsatisfactory level of expertise in business. The fundamentals of being a company director or a sole trader require an understanding of the consequences of business failure.  Those in business need to know their obligations under the laws of tax, worker health and safety, and consumer protection, in many respects more complex and demanding than the laws of insolvency. Put simply, a purchaser of goods who owes the supplier money can’t pay, a liquidator has taken over, and whatever can be got back will be refunded, if the supplier has relevant records to prove its claim. As for the liquidator’s fees, if the supplier does not know about professional fees – no doubt they have accountants and lawyers, and other service providers – and their power to query and decide on payment, their business acumen must be questioned.
• there is an inherent tension because the liquidator’s fees are paid from moneys otherwise due to creditors.  Again, it would be a surreal expectation for a person in business to think that it does not cost money to recover money.  If the supplier is owed $100,000, it may have to pay a lawyer or a debt collector to recover it, perhaps spending $20-30,000 to do so. Likewise, the decision of the lawyer, on instructions from their client, to spend the client’s fees to recover the money owed is one bound by rules of ethics, commerciality and court obligations.  The client can instruct to proceed regardless of cost, within limits, and many do, government agencies being examples. This scenario is little different from a liquidator saying to the creditors “I can spend the $20,000 we have to try to recover the $100,000 owed the company, but be aware that our legal advice is that we may not succeed. What is your view?”.

The point

The main point made in this article is that in Australia’s privatised corporate insolvency scene, with no government liquidator, dysfunctional though it may be, the profession has found a way to provide a service, and make a profit, largely based on time based charging, constrained as it is by extensive accountability and oversight.

Any major change in that arrangement should  involve both an economic and also a legal assessment of why the change is necessary and what benefit it would bring.  It is a matter for expert assessment.

In recent court decisions, Justice Brereton of the NSW Supreme Court has decided, in particular matters, that percentage based remuneration should be adopted, while not discounting time based completely: see for example, Re Sakr Nominees, [2016] NSWSC 709, the subject of leave to appeal.

While this is an available option under the law, if it is a purported statement of a change of approach – and many are seeing it as such[2] – it is ill considered, being a purported major economic adjustment to an established business model made, in appropriately, by a judge. Judicial decisions on remuneration are made, necessarily, ex post, and how or whether that approach in Brereton J’s decisions binds liquidators or creditors approving remuneration up front is unclear.  It may well be that percentage based remuneration is a valid approach that would go to address the interminable debates and criticisms of practitioner remuneration. If it were to be judicially mandated, or legislatively, the insolvency profession would need to make its economic calculations to ensure their businesses remains viable.

In the same way, AFSA is required to make its annual costs recovery calculations, including its adjustments to its percentage based remuneration and realisations charges, for the work done by it and the Official Trustee in Bankruptcy. AFSA’s determination of how that is achieved is the subject of close financial analysis. Similarly, any re-calculation of the basis of corporate insolvency remuneration should also be the subject of a like process, based on a range of legal and economic factors – for example, the total assets actually available from insolvent companies, what reasonable cost should apply to their recovery, and realisation, and how the costs should be spread.[3]

But an important threshold issue is to decide what we expect of a liquidator – a role merely as a commercial recovery agent, or an investigator of wrongdoing, or a protector of the insolvent, or a facilitator of business recovery, or all, and more.

That is too large an issue for explanation and debate here[4] but until those work expectations are made clear and acknowledged, by government, the regulators and the community, the bases of charging of that work become a secondary issue, one that might be based on time, or percentage, or some other way, but one done carefully by those experienced in such analyses. The law has little to offer at that calculation stage, and its current ill-advised attempts by way of court decisions to change the underlying economic basis of the business of the insolvency profession should be seen in that light.

Postscript

In Sakr Nominees, the NSW Court of Appeal has decided that leave to appeal be decided as a separate issue, first; perhaps indicating that some scrutiny will be given to whether leave be given at all.  The matter is back in court on 5 September 2016.

Justice Brereton does not refer to the relevant Full Federal Court decision in Templeton v ASIC [2015] FCAFC 137. A re-hearing of that remuneration claim, as directed by the Full Court, was dealt with on 9 June 2016, by Davies J, and her decision remains reserved.  It may well be relevant in any appeal in Sakr. 

In the meantime, other decisions will be made by trial judges in the Federal and Supreme Courts. There is an obligation on those judges not to depart from decisions of intermediate appellate courts in other jurisdictions on the interpretation of Commonwealth legislation or uniform national law, or common law, unless they are convinced that the interpretation is plainly wrong: ASC v Marlborough Gold Mines Ltd [1993] HCA 15. It is a given that the trial judge has to also acknowledge and assess any conflicting appellate authority.  Apart from issues about the need for consistency and clarity of the law, and the need to maintain respect and compliance with it, there is an adverse economic impact on business and the community generally in needing to accommodate differing legal interpretations between jurisdictions, and between individual judges.

Michael Murray

[1] There is no necessary exclusion of ‘trades’, many industry bodies in building trades – plumbers, electricians, painters – requiring on-going training and compliance with codes of conduct.

[2] It remains a single judge’s series of decisions.

[3] Sadly however, unlike personal insolvency, the extraction of such information from the privatised corporate insolvency regime would be difficult.

[4] See Keay’s Insolvency, 9^th ed, 2016, Murray & Harris, Ch 21.