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Michael Murray’s on-going commentary on issues in corporate and personal insolvency law and related policy and law reform, in Australia and internationally. Given the scope of insolvency, this extends to business, consumer and professional conduct, and ethics, governance and regulation, criminal, tax, environmental and administrative law, and the courts and government.

 

the Sakr Nominees appeal and well beyond …

Whatever is said in the pending NSW Court of Appeal decision in Sakr Nominees, it is timely to propose that, just as the government is assessing how to fund ASIC’s insolvency role, a similar but broader assessment is needed in relation to the funding of the insolvency system itself, from an economic perspective.

Any developed country needs an insolvency regime – how should its regulation and administration be funded?

The process of determining remuneration by the court is generally based on Venetian Nominees style of accounting, with important elements factored in about doing what is proper and necessary, as judged at the time, allocating staff at an appropriate level, giving due consideration to both the rights of creditors and the public interest in accounting and reporting. 

That decision in 1998 arrived at a time when practitioners’ claims for remuneration were typically presented to creditors in one line, with no detail of the work done, indicating a certain culture and attitude in the profession at that time.  I myself wrote to the then IPA journal highlighting the Venetian Nominees principles, but nothing appeared to have occurred.  It was the 2007 changes in the law that eventually imposed some responsibility and accountability on practitioners.  

At the same time, practitioners should be properly remunerated. The law gives high priority to practitioners’ remuneration, in all jurisdictions here and overseas, for obvious reasons. The regime is one that is necessary for any developed economy and it must be properly funded.

Recent decisions in 2016

As a recent example, where the work done by a court appointed receiver was not ‘necessary and proper’ in many respects, it was reduced, on an informed broad brush basis, but with the court ultimately accepting time recording as the basis of remuneration.

Other court decisions following the Venetian Nominees approach display a discernible undercurrent of dismay at the NSW problem, and avoid it. 

The lawyers’ commentaries on how the judges assess, or should assess, the remuneration of liquidators has addressed percentage based remuneration, and time and outcome billing methods. The concept of “proportionality” in assessing the reasonableness of insolvency remuneration is also there. Added to this is the tension and inconsistency between state and federal courts. Then there is the difference in approaches between corporate insolvency and bankruptcy.

Proportionality

The proportionality between outcomes and money spent is a particular focus, though it is one to which liquidators, lawyers and barristers are subject in their daily work, apart from all other fields of working and personal life.

Judges have similar obligations, and difficulties in its control, given the unpredictability of litigation, and the need to accord procedural fairness. Did we need two days of cross-examination and thousands of pages of documents to assess that receiver’s remuneration at $75,000? Perhaps the ultimate in proportionality of effort is not to write reasons at all.

And proportionality in regulation is an important focus for both ASIC and AFSA.

Judicial inconsistency

Judges’ inconsistency of approach is perhaps a bigger issue surrounding the remuneration of corporate insolvency practitioners. The respective state and federal courts have been ignoring each other’s decisions such that no inconsistency can be said to even arise. When this happened before, the High Court intervened, in ASC v Marlborough Gold, which still stands for the point that state and federal courts should adopt consistent interpretation of national legislation.

NZ and England

And indeed they should have regard to principles on common issues in neighbouring courts.

These more subtle issues from NZ and England are covered in a series of cases reported in the ARITA journal, which point out that an insolvency practitioner is not an ordinary commercial litigant, and that performance of their statutory duties costs money: [2015] 27(4) A Insol J 53. The NZ High Court readily approved liquidators’ remuneration of over NZ$300,000 for extensive investigations into a major corporate collapse, even though no financial outcome was secured: Five Star Debenture Nominee Limited (in liq) v Five Star Finance Limited (in rec’) [2015] NZHC 142, at [10].

Particular issues

That is how remuneration focuses on particular issues in insolvency, given the public interest and reporting tasks, and the often unknown territory to which an independent liquidator has been appointed.  One example is that a liquidator may take voidable transaction recovery proceedings to recover his or her fees: Pegulan Floor Coverings v Carter [1997] SASC 6299.

The labour intensive nature of insolvency work is also a factor and the need to ensure that what is involved in our ‘one size fits all’ approach to winding up companies is fully understood. Rather than addressing this, the Insolvency Law Reform Act 2016 (ILRA) now adds more tasks and regulation.

In the end, one would like to say that remuneration claims come down to professional and ethical common sense, without any unfair hindsight assessment of what went on when the work was being done and decisions were being made.  

Do we need the courts?

While the courts are bound by the criteria set out in s 473(10) Corporations Act and related sections, the creditors are not and they can come to their own determinations. That is not to say that the practitioners should not abide by their fiduciary and other statutory responsibilities, and case law. 

Under the ILRA, the court is largely removed from the remuneration process in bankruptcy, and less so in corporate. 

And the courts have their responsibilities.  The Harmonisation of Rules Committee of the Council of Chief Justices of Australia and New Zealand invited comments on practitioners’ remuneration in December 2015. ARITA and many others responded in some detail. It appears, at least from the CCJ website, that “outputs, including proposed Court Rules” of the Committee are yet to be released.

Other perspectives

The discipline of behavioural economics should also be brought to bear in this area, addressing the peculiar feature of insolvency of there being no client, and with the practitioner’s duties owed to, and work done for, others (ASIC and AFSA), and in the public interest. But those creditors nevertheless are the ones assessing and approving that work and the remuneration claimed for it. Their motivations will not necessarily accord with the public interest, or reflect an understanding of the range of duties required of a practitioner.

As to behavioural influences, well recognised in the literature, time based billing itself is said to incentivize a practitioner to pursue investigations but not outcomes; commission based remuneration incentivizes good financial outcomes but with corners potentially cut, including on public interest issues. It is interesting to note that the government has offered bankruptcy trustees a generous commission in the ILRA.

Australia’s lack of a government liquidator results in unhealthy behaviour through practitioners recouping their unpaid work with higher costs imposed on paying administrations. That economically unsound approach in Australia’s law compares with European jurisdictions where the state often picks up any shortfall. The removal of the official liquidator status in 2017 in Australia may allow the recoupment of those costs from creditors, including the ATO and ASIC.

But a lessening in creditors pursuing what is a collective process in insolvency may have consequences, which, rather than unintended, are clearly to be seen.

The law, and lawyers, have their limits

All this analysis suggests that law – and its lawyers and judges – has its limits, and the thinking from elsewhere is needed to provide a sound legal structure for insolvency practitioners’ remuneration.   Given that an insolvency system is necessary, the overall question should be addressed by economics – how do we fund the regime, solely from the assets of the company, or does the state chip in, as in bankruptcy.  That large question is not one for practitioners to answer or explain.  

In the same way that the government is assessing how to fund ASIC, which provides regulatory oversight of the insolvency system, a similar but broader inquiry is needed in relation to the funding of the insolvency system itself.  

Some, perhaps in NSW, will wait and see

Concluding on the smaller issues, whether an appeal decision in Sakr resolves anything we wait to see. Other states may say there is nothing to resolve. In that respect, the NSW Court of Appeal, with the High Court just above, should pay regard to what us an important issue for the community perception of the courts – ASC v Marlborough Gold Mines and judicial consistency – take a broad view of what are reasonably consistent judicial approaches among the other courts.

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