Michael.1
Insolvency and related law and policy, and more

Michael Murray is an Australian author and commentator on corporate and personal insolvency law and related issues, in Australia and internationally. He has a strong law and policy background, is independent of any connections, and his views are his own. He gives no legal advice. 

A regulator’s report on insolvency practitioner remuneration

Australia’s bankruptcy trustees receive an average of $4,800 in administering each estate, with 63% of estates paying no remuneration at all – the government has this work done for free.

These figures come from a report of the bankruptcy regulator – Registered Trustee Remuneration in the Personal Insolvency System – Best practice report 2020 – which has a focus on giving standard but useful guidance on claiming remuneration in cases where that is possible.

As with many such reviews and analyses,[1] the focus of AFSA’s report is on remuneration claimed by the practitioner, not on the work done.

That distinction is important because much work done by an insolvency practitioner may not be remunerated, fully, or in part, or at all, given the reality that their remuneration is generally paid from the remaining assets or money of the insolvent, if any.

The report should be read in the context that bankrupt estates administered by personal insolvency practitioners pay, on average, 2.08c/$ in dividends (the Official Trustee averages 0.89c/$).

Some examples

Examples show how this can arise.

Where funds are available

In the administration of an estate, although work totalling 50 hours work was done, 7 hours did not fall within the ‘necessary and properly performed’ category justifying its claiming as remuneration. That gap will occur in any firm, on a review of the bill before a claim is made that may reveal misdirected or unnecessary work, excessive work by junior staff in training, or mistakes. There may also be work done on professional code requirements not recognised by the law. And there may be legitimate challenges to the 43 hours.

Where only part funds are available

The 50 hours necessary and properly performed work may have been done but the reality is, expected or otherwise, remaining funds are such that only 40 hours can be recouped. Necessarily, no dividend is paid.

Where no funds are available

It can often be the case, that necessary and proper work – say 30 hours – was done but for which no remaining assets for its recoupment is available.

Unfunded work

In that respect, AFSA does not ask the 200 trustees to report on the amount of their unfunded work.

However, it does report that for 2018-2019, in 63% of bankruptcies administered by trustees no remuneration was paid at all.

Putting that another way, in 63% of bankruptcies, trustees worked for free.

That puts much of this report in perspective, in particular because the law, and AFSA, acknowledge that trustees can and must make up for that unfunded work through higher charge out rates.[2]

Having creditors fund much of the insolvency system on the basis of ‘swings and roundabouts’[3] in fees paid to IPs is hardly proper government financial management. That systemic issue in insolvency has been quantified at over $40m annually in unremunerated work.[4]

Estates with assets – asset recoveries, remuneration and dividends

In relation to the small number of estates that have enough assets to pay the average 2.08c dividend, the report says that in 2018–19, of the $230.35m distributed by registered trustees, 32.2% was paid in dividends to creditors while 40% was paid in practitioner remuneration.

The remaining 27.8% was for trading payments, costs in administering estates, bank fees and charges, and government realisation charges and interest charges.

Another[5] set of AFSA figures for all estates, whether paying dividends or not, shows that ‘trustee fees’ comprise around 25% of all realisations of around $305m.

These percentages have, if anything, marginally improved in recent years.

All this puts in context other general comments made in the report focusing only on those moneyed estates, for example that trustees must ‘ensure’ remuneration is ‘proportional to the circumstances and complexity of the matter’ and the amount of any cost incurred should be compared with ‘the value and complexity of the administration.’

As statements of aspirational principle, these are reasonable. But the reality can often be different.

The law

Courts have pointed this out, that

‘a trustee has no choice but to carry out certain statutory duties and that, in a small bankruptcy, the trustee’s costs might appear disproportionately large’;

that

“the number and size of claims and the number and value of assets is an important, but not the only, element … there are many ways in which costs may be incurred which are not related, principally or even at all, to the assets and liabilities of the estate”.[6]

and that an IP’s duties

‘are not confined to the realisation and distribution of assets. There are statutory duties which must be performed, such as communicating with creditors and reporting on the events leading to the insolvency … The [IP] may need to investigate the existence of possible assets or the merits of possible claims, which may in the event not lead to assets available for distribution, although in all cases the [IP] will be expected to exercise commercial judgment in pursuing such matters. Dealing with particular claims of creditors may be time-consuming, and there may be other activities, such as the disclaimer of onerous leases and other property, which do not increase the assets for distribution’.[7]

The Official Trustee has similar proportionality issues issue in attending to its numerous assetless consumer bankruptcies. In fact, it would be useful if the Official Trustee were to benchmark itself by way of disclosing the time spent by its staff on the various tasks in the many bankruptcies which it administers.

Public interest roles of trustees

Overall, the report should also be read in light of the reality that many of the duties of trustees are in the public interest and it is the creditors who pay for those being performed, not the government.

That issue has been raised – that while private insolvency functions may be performed by the private sector and paid out of funds otherwise available for creditors, public functions should be performed by public officials and paid for out of public funds, or at least if performed by private sector, then funded by the government.[8]

That obviously does not occur. Government funding for trustees under section 305 of the Bankruptcy Act totalled a derisory $71,000 in 2017-2018 in the context of $305m in realisations.

The purpose of the report

The report says that

‘if creditors were more engaged in setting and negotiating levels of remuneration, this may result in increased returns to creditors and more dividends paid.’

That is perhaps a rather cruel invitation given that if a trustee’s remuneration of $50,000 were to be challenged and reduced to $40,000 [at some extra cost], the improvement on 2c in the dollar would be, as the Judges say, ‘derisory’.

A serious report like this from a regulator drives policy and law changes. We might have expected some more substantiation beyond reliance upon broad statements such as ‘creditors consider’ remuneration to be ‘high’, that some estates ‘felt overly handled’ and that ‘perceptions’ are ‘indicative of’ ‘general sentiments’.

None of these would stand in any litigation or academic analysis of the issue.

Also, the report did not survey trustees; it was taken back in 2016–17,[9] before, it seems, the major reforms of 2017; while 95% of bankruptcy trustees are also liquidators, and the same harmonised law applies to each, the report did not engage ASIC; and despite AFSA’s international connections, no overseas comparisons are offered.

From a practice perspective, the report will assist but it also usefully raises more questions to be answered.

 

[1] For example, The Costs and Benefits of Regulating the Market for Corporate Insolvency Practitioner Remuneration, (2016) 25 Int’l Insolvency Rev. 56, Jennifer Dickfos.

[2] IGPD 14 – Proper performance of duties of a bankruptcy trustee

[3] Re Greater West Insurance Brokers Pty Limited [2001] NSWSC 825

[4] Explanatory Memorandum to the Insolvency Law Reform Bill 2015

[5] ASIC’s announced aim to produce and publish the same results has never eventuated.

[6] Keay’s Insolvency Ch 2, 10th ed referring to Simion v Brown [2007] EWHC 511 (Ch), Brook v Reed [2011] EWCA Civ 331; and Boensch v Pascoe [2007] FCA 1777.

[7] Brook v Reed

[8] New Zealand Law Commission, Insolvency Law Reform, Study Paper 11, 2001.

[9] The delay in issuing the report is not explained but seems to be that it went through a long process of consultation on AFSA’s ‘sandpit’.

 

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