Obviously with an eye on the ‘controversy’ over how to assess liquidator’s remuneration, at least in NSW, Justice Robb of that Supreme Court has given a judgment that seeks to explain the place that using a percentage of asset realizations has in determining a liquidator’s remuneration. At the same time the Judge raised another issue, said to be unresolved, about when remuneration is “fixed” by a resolution of creditors.
Justice Robb clearly wanted to put the issue of commission based remuneration in perspective, as if to address concerns that a percentage was the sole criterion used to assess remuneration. As he explained, a percentage of asset realizations is one factor only in a range of others – the law has not “evolved to the point where the determination involves the selection of a percentage, divorced from all of the other relevant circumstances of the winding up”.
To demonstrate this, Justice Robb reviewed recent cases – NSW Supreme Court only, and only those of Brereton J – where the amount of the liquidator’s remuneration was influenced by its proportion to the value of the assets realised by the liquidator, but where other factors were also taken into account.
| Decision |
Outcome |
| AAA Financial Intelligence Ltd (in liq) (No 2) [2014] NSWSC 106 |
20% of the value of the assets realized, being remuneration of $36,000 |
| Re Hellion Protection Pty Ltd (in liq) [2014] NSWSC 1299 |
10% for the first $50,000 realised, and 5% for subsequent receipts. |
| Re Gramarkerr Pty Ltd (No 2) [2014] NSWSC 1405 |
10% on the first $100,000 realised, and 5% on the balance of the total of $495,000.
|
| Re Sakr Nominees Pty Ltd [2016] NSWSC 709; subject to an appeal |
2.5% on realisations of $3.72 million, and 3% on distributions of $3.3 million, resulting in 10% on the first $100,000 realised, and then 5% thereafter. But an additional $20,000 was allowed due to the liquidator’s difficulty in identifying contributories. |
| Independent Contractor Services Pty Ltd (no 2) [2016] NSWSC 106 |
2% on realisations (reflecting very limited work done by the liquidator) plus 15% on distributions, with an uplift (having regard to the totality of the work undertaken and the time spent) to give remuneration of $30,000, which was approximately 14% of gross realisations. |
As Robb J explained, in nearly all of those cases the Court started with a claim made by the liquidator for a particular amount, based upon time expended and a fixed scale of fees. That then provided a rational and objective starting point for the liquidator’s claim.
The Court then looked at the other factors under ss 473(10) or 504(2) of the Corporations Act and considered in each case specific factors relevant to the work done.
Then, having regard to the assets realised and distributed by the liquidator, the Court called in aid percentages that appeared reasonable in the particular case
“to assist the Court in judging how to achieve proportionality between the liquidator’s remuneration and the value to creditors of the work done”.
As Justice Robb explained, in appropriate cases, more likely where the value of the assets realised is low, or where the remuneration claimed is a substantial proportion or exceeds the value of the assets realized, the Court will adopt a percentage using other cases as a guide in assessing the appropriate remuneration for the liquidator in the particular case.
Ultimately, liquidators must approach the task of formulating and justifying their claims for remuneration on the basis that they have the burden of proving that the claim is reasonable. That is, if the matter proceeds to court. David Lewis Clout in his capacity as Liquidator of Mainz Developments Pty Ltd (in liquidation) [2016] NSWSC 1146.
Comment
Comment on the legal significance of this explanation for practitioners’ remuneration is left to the usual commentators. My comments on some broad issues are these.
The stated need to “achieve proportionality between the liquidator’s remuneration and the value to creditors of the work done” seems to approach liquidators’ remuneration as if the role of a liquidator were that of a commercial agent simply selling up or recovering property. That is, unless “value to creditors” encompasses the fact that an administration of the insolvent company has been conducted and the legal and public interest has been satisfied.
If the role of a liquidator is that of a commercial agent, courts should properly have no role in the setting of their remuneration. If the role involves more, as it does, the law should allow more focused criteria than those that now apply.
Overseas case law usefully goes into these issues. See Proportionality and public interest investigations on the ARITA website which explains, for one, a New Zealand decision where liquidators administered a large corporate collapse involving extensive fraud and complex dealings. Losses to creditors exceeded NZ$40 million. Remuneration of NZ$330,000 was approved although nothing had come of the liquidators’ investigations. The Court said that this was not a matter for criticism, or reduction in their remuneration. There was a ‘strong public policy requirement that there be a proper investigation of the affairs of the company’ and the enquiries and investigations of the liquidators were commensurate with that.
Monetary proportionality of outcome should be one aim, better expressed as commerciality, but the proper administration of many an insolvent company often brings in other overriding factors.
Although courts are required to consider various criteria under the Act in determining if remuneration is reasonable, creditors are not. The law gives creditors primacy in how they determine the amount allowed. From a liquidator’s viewpoint, the creditors must first be asked to consider and approve the remuneration, with necessary explanation and disclosure. It is a matter of the public interest that the courts not be burdened with tasks that should properly be the matter of private settlement and agreement. The saving by a liquidator in spending what can be disproportionate time and money in going to court is also a factor.
If a court application is necessary, the Federal Court may be a better option for practitioners. While it and the Supreme Courts have common jurisdiction in corporate insolvency law, the Federal Court may have a broader perspective in interpreting a national law. Although we would like to think that Australian courts interpreting a national law would sensibly take a common view, this is often not the case: ASC v Marlborough Gold Mines Ltd [1993] HCA 15. The Federal Court will also have more regard to principles of the determination of remuneration of bankruptcy trustees, where comparable issues arise.
Practitioners need not exclude the Supreme Courts, that in Victoria often provides useful analysis of the assessment of remuneration in accordance with the statutory factors: see for example Re AsiaPAC Communications Group [2015] VSC 413. That confirms one benefit of time based remuneration, that it reveals what work is actually involved in an insolvency administration. In Gunns Plantations [2015] VSC 102, the Victorian Supreme Court accepted that to the lay person the remuneration charged by the liquidators – $8 million at that stage – seemed ‘extraordinary’. However the liquidators were conducting “a most complex insolvency administration, certainly well above the run of the mill”, involving many millions of dollars, and on close analysis, their remuneration was “reasonable and proportionate to the services undertaken”.
An appreciation of the complex features of insolvency litigation brought by a liquidator needs to be understood and debated. In the context of UK reforms to aspects of reforms to insolvency litigation, chapter 3 of this 2014 report from Professor Peter Walton explains the issues well.
In the end result, the insolvency profession is one that must operate as a business with some settled bases upon which it claims its income. While desirably we need to confirm or clarify what is expected of it and its practitioners any changes to the financial business model of its practitioners need to be properly made.
And another issue
A further issue arose before Justice Robb. Creditors had already resolved to approve the liquidator’s remuneration based upon time spent at hourly rates. Robb J said there is an “unresolved question” whether the remuneration of the liquidator is in fact fixed or determined by such a creditors’ resolution, not based on a strict formula but rather one leaving it “up to the liquidator to determine the number of hours worked, by which workers, the suitability of those workers for the work done, and the hourly rate applicable”.
Again, a response on this is left for the lawyers acting for practitioners, but while Robb J did refer to a Federal Court decision – Re Stockford Ltd [2004] FCA 1682 – where Finkelstein J had raised the same concerns, he did not refer to the subsequent 2006 “test case” decision in Gidley, in the matter of Aliance Motor Body Pty Limited [2006] FCA 102, where Gyles J addressed those concerns and concluded that remuneration might be fixed, prospectively, by creditors in effect allowing the liquidator to claim for future work properly done on the basis of stated hourly rates. The creditors’ resolutions were
“capable of objective application. All of the necessary elements can be objectively identified. The person doing the work, that person’s category and the period spent are all the elements required. The sum can be calculated or ascertained definitely” [31].
See also Paul’s Retail Pty Ltd v Morgan [2009] NSWSC 1222, and, in bankruptcy, Wenkart v Pantzer [2008] FCA 478. See also this comment on the ARITA website.
The relevance of a monetary “cap” on remuneration required by the creditors was also raised by Robb J.
As a postscript, the Insolvency Law Reform Act 2016, due to commence on 1 March 2017, will bring in a new regime for the “determination” of practitioner’s remuneration: Division 60. A determination may be made by way of specifying an amount of remuneration, or by specifying “a method for working out an amount”: s 60-10(3). If remuneration is determined by the creditors on a time-cost basis, the creditors must impose a monetary “cap”: s 60-10(4).
Any comment is welcome.
Liquidators’ remuneration further explained …
Obviously with an eye on the ‘controversy’ over how to assess liquidator’s remuneration, at least in NSW, Justice Robb of that Supreme Court has given a judgment that seeks to explain the place that using a percentage of asset realizations has in determining a liquidator’s remuneration. At the same time the Judge raised another issue, said to be unresolved, about when remuneration is “fixed” by a resolution of creditors.
Justice Robb clearly wanted to put the issue of commission based remuneration in perspective, as if to address concerns that a percentage was the sole criterion used to assess remuneration. As he explained, a percentage of asset realizations is one factor only in a range of others – the law has not “evolved to the point where the determination involves the selection of a percentage, divorced from all of the other relevant circumstances of the winding up”.
To demonstrate this, Justice Robb reviewed recent cases – NSW Supreme Court only, and only those of Brereton J – where the amount of the liquidator’s remuneration was influenced by its proportion to the value of the assets realised by the liquidator, but where other factors were also taken into account.
As Robb J explained, in nearly all of those cases the Court started with a claim made by the liquidator for a particular amount, based upon time expended and a fixed scale of fees. That then provided a rational and objective starting point for the liquidator’s claim.
The Court then looked at the other factors under ss 473(10) or 504(2) of the Corporations Act and considered in each case specific factors relevant to the work done.
Then, having regard to the assets realised and distributed by the liquidator, the Court called in aid percentages that appeared reasonable in the particular case
“to assist the Court in judging how to achieve proportionality between the liquidator’s remuneration and the value to creditors of the work done”.
As Justice Robb explained, in appropriate cases, more likely where the value of the assets realised is low, or where the remuneration claimed is a substantial proportion or exceeds the value of the assets realized, the Court will adopt a percentage using other cases as a guide in assessing the appropriate remuneration for the liquidator in the particular case.
Ultimately, liquidators must approach the task of formulating and justifying their claims for remuneration on the basis that they have the burden of proving that the claim is reasonable. That is, if the matter proceeds to court. David Lewis Clout in his capacity as Liquidator of Mainz Developments Pty Ltd (in liquidation) [2016] NSWSC 1146.
Comment
Comment on the legal significance of this explanation for practitioners’ remuneration is left to the usual commentators. My comments on some broad issues are these.
The stated need to “achieve proportionality between the liquidator’s remuneration and the value to creditors of the work done” seems to approach liquidators’ remuneration as if the role of a liquidator were that of a commercial agent simply selling up or recovering property. That is, unless “value to creditors” encompasses the fact that an administration of the insolvent company has been conducted and the legal and public interest has been satisfied.
If the role of a liquidator is that of a commercial agent, courts should properly have no role in the setting of their remuneration. If the role involves more, as it does, the law should allow more focused criteria than those that now apply.
Overseas case law usefully goes into these issues. See Proportionality and public interest investigations on the ARITA website which explains, for one, a New Zealand decision where liquidators administered a large corporate collapse involving extensive fraud and complex dealings. Losses to creditors exceeded NZ$40 million. Remuneration of NZ$330,000 was approved although nothing had come of the liquidators’ investigations. The Court said that this was not a matter for criticism, or reduction in their remuneration. There was a ‘strong public policy requirement that there be a proper investigation of the affairs of the company’ and the enquiries and investigations of the liquidators were commensurate with that.
Monetary proportionality of outcome should be one aim, better expressed as commerciality, but the proper administration of many an insolvent company often brings in other overriding factors.
Although courts are required to consider various criteria under the Act in determining if remuneration is reasonable, creditors are not. The law gives creditors primacy in how they determine the amount allowed. From a liquidator’s viewpoint, the creditors must first be asked to consider and approve the remuneration, with necessary explanation and disclosure. It is a matter of the public interest that the courts not be burdened with tasks that should properly be the matter of private settlement and agreement. The saving by a liquidator in spending what can be disproportionate time and money in going to court is also a factor.
If a court application is necessary, the Federal Court may be a better option for practitioners. While it and the Supreme Courts have common jurisdiction in corporate insolvency law, the Federal Court may have a broader perspective in interpreting a national law. Although we would like to think that Australian courts interpreting a national law would sensibly take a common view, this is often not the case: ASC v Marlborough Gold Mines Ltd [1993] HCA 15. The Federal Court will also have more regard to principles of the determination of remuneration of bankruptcy trustees, where comparable issues arise.
Practitioners need not exclude the Supreme Courts, that in Victoria often provides useful analysis of the assessment of remuneration in accordance with the statutory factors: see for example Re AsiaPAC Communications Group [2015] VSC 413. That confirms one benefit of time based remuneration, that it reveals what work is actually involved in an insolvency administration. In Gunns Plantations [2015] VSC 102, the Victorian Supreme Court accepted that to the lay person the remuneration charged by the liquidators – $8 million at that stage – seemed ‘extraordinary’. However the liquidators were conducting “a most complex insolvency administration, certainly well above the run of the mill”, involving many millions of dollars, and on close analysis, their remuneration was “reasonable and proportionate to the services undertaken”.
An appreciation of the complex features of insolvency litigation brought by a liquidator needs to be understood and debated. In the context of UK reforms to aspects of reforms to insolvency litigation, chapter 3 of this 2014 report from Professor Peter Walton explains the issues well.
In the end result, the insolvency profession is one that must operate as a business with some settled bases upon which it claims its income. While desirably we need to confirm or clarify what is expected of it and its practitioners any changes to the financial business model of its practitioners need to be properly made.
And another issue
A further issue arose before Justice Robb. Creditors had already resolved to approve the liquidator’s remuneration based upon time spent at hourly rates. Robb J said there is an “unresolved question” whether the remuneration of the liquidator is in fact fixed or determined by such a creditors’ resolution, not based on a strict formula but rather one leaving it “up to the liquidator to determine the number of hours worked, by which workers, the suitability of those workers for the work done, and the hourly rate applicable”.
Again, a response on this is left for the lawyers acting for practitioners, but while Robb J did refer to a Federal Court decision – Re Stockford Ltd [2004] FCA 1682 – where Finkelstein J had raised the same concerns, he did not refer to the subsequent 2006 “test case” decision in Gidley, in the matter of Aliance Motor Body Pty Limited [2006] FCA 102, where Gyles J addressed those concerns and concluded that remuneration might be fixed, prospectively, by creditors in effect allowing the liquidator to claim for future work properly done on the basis of stated hourly rates. The creditors’ resolutions were
“capable of objective application. All of the necessary elements can be objectively identified. The person doing the work, that person’s category and the period spent are all the elements required. The sum can be calculated or ascertained definitely” [31].
See also Paul’s Retail Pty Ltd v Morgan [2009] NSWSC 1222, and, in bankruptcy, Wenkart v Pantzer [2008] FCA 478. See also this comment on the ARITA website.
The relevance of a monetary “cap” on remuneration required by the creditors was also raised by Robb J.
As a postscript, the Insolvency Law Reform Act 2016, due to commence on 1 March 2017, will bring in a new regime for the “determination” of practitioner’s remuneration: Division 60. A determination may be made by way of specifying an amount of remuneration, or by specifying “a method for working out an amount”: s 60-10(3). If remuneration is determined by the creditors on a time-cost basis, the creditors must impose a monetary “cap”: s 60-10(4).
Any comment is welcome.
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