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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.

 

Use of referees in insolvency litigation

Justice Michael Lee of the Federal Court of Australia has called for a more proactive response from liquidators and trustees and their lawyers in pursuing insolvency litigation with a view to limiting the costs involved. He suggests more use be made of referees as one way of achieving this.[1]

This is a part of a bigger picture focus on legal costs generally, and on the fees of insolvency practitioners.

Section 54A of the Federal Court of Australia Act 1976 allows a Judge to refer a matter to a nominated referee for investigation and report.

As a current example, Justice Lee referred the solvency of the Starcom Group to a referee, whose report was then adopted when the matter came back before Justice Stewart.[2] The liquidators in that case were bringing insolvent trading proceedings and the period in which the company was trading while insolvent, as determined by the referee, was obviously critical to that claim.

For the purpose of that matter Stewart J relied on these principles:

  • Section 54A conveys a discretion on the court to adopt, vary or reject a referee’s report.
  • To the extent that a party’s dissatisfaction with the report is a question of law, or the application of legal standards to established facts, that matter must be considered and determined afresh by the court.
  • Where a report shows a thorough, analytical and scientific approach to the assessment of the subject matter of the reference, the court would have a disposition towards acceptance of the report.
  • The court will not reconsider disputed questions of fact where there is factual material sufficient to entitle the referee to reach the conclusions they did, particularly where the disputed questions are in a technical area in which the referee enjoys appropriate expertise.

A registered liquidator was tasked as referee. His report was challenged in several respects, which Stewart J assessed and rejected in accordance with these principles. The referee’s finding as to what was a longer period of insolvency than acknowledged by the director was therefore adopted. The litigation could therefore proceed further with that issue having been determined.

Comment

While referees may be suitable in many cases, and should be considered in others, the reality will often be that in the small and medium enterprise litigation to which Justice Lee refers the savings may not be such that costs are significantly contained.

The Judge refers to a comment that parties

“simply cannot conduct the litigation of small and medium enterprise in the same manner in which larger scale litigation is conducted”.

But even in SME litigation, proof of the elements of insolvency and of the various other matters necessary for a recovery claim to succeed are needed often as much as for a larger matter. The more difficult issues in managing the proportionality of cost and time in a small claim may not be adequately met simply by the use of a referee. Nor does Starcom appear to be a typical SME insolvency; the work done by the referee appears to have been extensive and over several months.

Justice Lee has also ordered a referee to make a determination of legal costs in a long running and highly disputed bankruptcy matter; again this does not appear to be a small matter.[3]

Other options

Justice Lee quotes judicial comment that[4]

“the proposition that all litigants are entitled to have a judge … decide all issues of fact and law that arise out of any litigation, is unsustainable”.

That is no doubt true but a response to that is to give focus to the period before litigation is commenced, with a view to avoiding the litigation proceedings altogether, and their often inherent uncertainty. Parties before the Federal Court are required to engage in ‘genuine’ attempts at resolution, as to which an insolvency practitioner may well have a heightened responsibility beyond a normal commercial litigant.

There are also the new provisions allowing practitioners to sell their statutory claims, as another means of themselves avoiding litigation.

The legislature can also assist by way of introducing recovery processes to try to resolve claims early, for example, through statutory processes of demand, as in bankruptcy; or by way of reducing the range and extent of evidence required, for example by way of presumptions, or simplifying the statutory criteria.

Going further, while usually not matters of contest, the need throughout insolvency law for court sanction could be reviewed – as to extensions of time, or the entry into funding agreements, or to sell property.

As one example, the legislature has recently removed the need in bankruptcy to obtain court approval for claims on unclaimed moneys, though only after some decades of disharmony with the administrative process available to liquidators.

On the other hand, remuneration approvals by the court can still be required in corporate insolvency, and often are, despite the legislature adopting an administrative process in personal insolvency; including as to the assessment of legal costs.

The extent and complexity of drafting seems to be increasing – not only the evidence needed to support a preference claim but also or more so in relation to the evidence required, on both sides, under the new and proposed anti-phoenix laws, and other new laws.

Giving corporate insolvency jurisdiction to the Federal Circuit Court is another option.

Costs reform generally

The bigger picture is the focus on legal costs generally, and the need to consider radical departures from the traditional ways of time billing, an aspect of the “commercialisation” of law to which Justice Lee refers in his paper.

This has been the focus of attention more so in England than in Australia: see The Woolf and Jackson Reforms (2018) 7 CivLP 169, Roger Quick, of Quick on Costs. In comparison, Australian insolvency practitioner time billing is perhaps becoming institutionalised in response to criticism over time about practitioners’ fees.  Code guidance on IP remuneration is now extensive and prescriptive, aimed at meeting perceived creditor expectations, with the courts themselves reinforcing this trend in terms of their expectations of what is required in order to approve a liquidator’s remuneration: see for example Re Upmarket Services Australia Pty Ltd (in liq) [2019] VSC 523.

It is interesting to consider whether that conservative approach may flow through to the lawyers for IPs, who themselves may adopt or retain traditional billing processes consistent with their clients.

Referees?

None of this is to suggest that parties should not consider referees in appropriate proceedings as Justice Lee suggests, but as one of many matters to be considered by insolvency practitioners either before going to court at all, or once litigation has commenced.

Comment welcome.

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[1] Justice Lee gave the keynote speech at the Association of Independent Insolvency Practitioners Annual Conference in Canberra on 28 June 2019: Case management and insolvency: matching rhetoric and reality. 

 

[2] Weston in his capacity as liquidator of Starcom Group Pty Ltd (in liq) v Rajan [2019] FCA 1455

[3] Coshott v Prentice NSD 786/2015

 

[4] Super Pty Ltd v SJP Formwork (Aust) Pty Ltd (1992) 29 NSWLR 549 at 558.

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