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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.

 

Is the end result of Sakr Nominees continued “institutionalised time billing”?

While the insolvency profession might be satisfied with the final approval given to the liquidator’s remuneration, by Justice Ashley Black, in Sakr Nominees Pty Limited [2017] NSWSC 668, unthinking applications of the various judicial statements about proportionality can lead to unreasonable, and unfair, results. But an increased focus on legal fees, and other developments outside insolvency, put the decision into a lesser perspective. 

Some initial comments are made on the import of that decision, followed by a critique of the decision itself.

The implications of Sakr Nominees

Justice Black put much emphasis on the court’s need for complete and persuasive evidence to justify the remuneration claimed. While the remuneration needs to be justified, the legal and practitioner fees associated with getting that evidence together can be considerable. Insolvency practitioners should therefore try as much as possible to have their remuneration approved by creditors.  While that does not mean that creditors should not be given good information to allow them to make a decision, this is not nearly to the degree required by a judge, and it properly should not call for any legal input.  The new insolvency laws commencing 1 September 2017 will allow remuneration to be approved without a formal meeting, which should facilitate matters.

Under those new laws, the “remuneration factors” in s 473(10) of the Corporations Act, including the factors relevant to proportionality, are not only restated, but now apply in bankruptcy.

While the court has to remain involved in applying those factors in corporate insolvency (because ASIC has no role under the new law in determining remuneration), it is AFSA that will, quasi-judicially, be applying those remuneration factors in bankruptcy matters. Had the difficulty in Sakr of having no remaining creditors to approve the remuneration arisen in bankruptcy, the matter need not have gone to court at all: see Insolvency practitioner remuneration under the new law and post-Sakr Nominees (2017) 18 INSLB 62.

Also, while there remains a focus on insolvency practitioners’ fees, there is also a focus on how those practitioners use lawyers – solicitors and barristers – and on those lawyers’ conduct and charging practices for services provided: see Insolvency lawyers’ fees under the new law, Wolters Kluwer/CCH, 30 May 2017.

While time based charging may have its problems, time based recording of work required to attend to the various tasks in an insolvency is necessary. The time taken for practitioners to attend to statutory requirements in law that is often unreformed, unclear, and inconsistently interpreted by the courts and between the regulators, should be acknowledged, in particular in relation to any assessment of proportionality. Time taken on legal compliance is one aspect of assessing and improving the law’s efficiency.  Regulators and courts do the same, proportionality being an important aspect of legal enforcement.

In that respect, in December 2015, the Council of Chief Justices of Australia and New Zealand sought input on what was understood to be rules or guidance on insolvency practitioner remuneration. Nothing has been forthcoming.

While insolvency has some dysfunctional and peculiar factors applying that do not exist in the commercial world, the principles concerning the costing of professional services generally are fast changing and progressing. How this impacts on professional insolvency services is the subject of these comments by the eminent costs lawyer, Roger Quick, who expresses “surprise” at the state of remuneration thinking in insolvency [paraphrased, and some citations omitted].

  1. The first surprise is that there has not been more consideration of the UK 2014 practice direction Insolvency Proceedings. This states its objectives to be to ensure that the court fixes the remuneration of an appointee, as defined, on a remuneration application as fair, reasonable and commensurate with the nature and extent of the work properly undertaken by the appointee and to fix the remuneration by reference to a process which is consistent and predictable. These are instructive aims and the guidance given by the 2014 PD provides instructive guidance for Australian courts. Proportionality, for example, has found proper expression in this guidance.
  2. The second surprise is the failure to recognise that whilst Re Stockford Ltd [2004] FCA 1682 may have institutionalised time billing, concepts and techniques developed since 2004 such as judicial costs management and costs budgeting in litigation, and similar extrajudicial concepts and techniques such as legal project management (LPM), and alternative fee arrangements (AFAs), show how this institutionalisation can be checked and reversed.
  3. The third surprise is that given the development of these concepts and techniques since 2004, the identifiable remuneration models should be limited to percentage and updated hourly rates models”.

See Quick on Costs, Retainers.

The point is that insolvency law and practice cannot ignore these wider developments. 

Sakr – the decision of Black J

To recap, liquidators who chose, or whose lawyers chose, to have their remuneration approved in the NSW Supreme Court found that an undue focus on proportionality between costs and return was being given to the remuneration claimed by liquidators. This was out of kilter with other courts and with bankruptcy law and with overseas decisions.

The NSW Court of Appeal restored the legal position and remitted the Sakr remuneration back to trial for final determination; Justice Black heard the matter.

Some extracts and points from Justice Black’s judgement are these:

The company’s only assets were three adjacent properties, sold for $3,720,000 in 2013 with net proceeds being $1,650,650.  A surplus was the result and those funds were paid to shareholders, not without some issues along the way. The total fees were in the order of $260,000. Legal fees are not disclosed.

The liquidator’s initial affidavit did not adequately explain

“why the liquidation of a relatively small company which held three properties had resulted in claims for remuneration by Mr Sanderson in the order of $260,000 inclusive of GST.

Although that affidavit exhibited detailed work-in-progress schedules, arranged in chronological order, it is not the Court’s role to review such schedules to seek to deduce which tasks relate to which matters, and why they were appropriately undertaken, where that matter was not addressed by adequate evidence led by the liquidator who seeks approval of his remuneration”.

A further affidavit of 4 May 2017 addressed these issues in more detail.

Justice Black’s summary of the issues in proportionality is standard, although revelatory to some, but it is incomplete.

“Proportionality is an important matter in considering the question of whether remuneration is reasonable, and the “value” of a liquidator’s work can include the benefit of resolving the position of creditors and beneficiaries; the benefit to the community of not permitting assets to remain unproductively in the hands of a defunct company for a long period; and can include work that was required to be done, although it did not result in a return to creditors”.

He refers only to Australian corporate insolvency cases, to which he might have added a number of bankruptcy decisions and New Zealand and English authorities, and other pertinent examples.

Justice Black says that there has been a

“degree of concern as to time-based remuneration, over a considerable period, although it must be accepted that remuneration on that basis is now more common”.

Indeed, “institutionalised” as Quick suggests.

He refers to the fact that

“several recent decisions have emphasised the significance of the percentage that a liquidator’s remuneration bears to the level of asset realisations achieved, and applied percentages of recoveries where time-based calculations would have led to unreasonable results”. 

In my view, that assessment of an unreasonable result would have to be carefully made, in particular without undue hindsight review.

There will be many exceptions to all these statements of principle in particular cases, such that their unthinking or perverse application may in itself lead to unreasonable, and unfair, results.  

Photo: extract from the declaration of independence of the VeraSage Institute “the revolutionary think tank for professional-knowledge firms. … we study and teach burying the billable hour and archaic timesheets, pricing in advance, and treating professionals as knowledge workers instead of timekeepers”.
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