In making a winding up order against Forum Finance, Justice Michael Lee made this comment about the hourly fees of the proposed liquidators:
“24 … The prevailing rate for partners of insolvency firms doing this work has reached a stage (one might be forgiven to think somewhat remarkably) where a practitioner can charge $847 (inclusive of GST) in the case of McGrathNicol and $797.50 (inclusive of GST) in the case of KordaMentha”.
Although a little delphic, Justice Lee seemed to be commenting on the high rates of both.
Fees of liquidators and bankruptcy trustees come under some scrutiny, although, oddly, less so the nature of the work by which they claim those fees.
Our comments on that work come in the context of an ongoing study of ours into the public and private elements of insolvency practice in Australia, with a focus on what we say has, over time, led to a maladjustment of the respective responsibilities of the state and of the private insolvency profession. In our view, the state has avoided its proper role in insolvency administration and this carries a tangible cost to creditors and to the insolvency profession.
Our study has at least two elements for inquiry. One is the limited asset position of most external administrations, leading to the profession being underfunded and dividends for creditors being minimal at best and in most cases nil. In the absence of a public liquidator in Australia, those liquidations either fall to be attended to by the private profession at some level of loss, or, as the government has suggested, they might not be attended to at all. Insofar as they are administered, creditors in large estates pay for them by virtue of, it is assumed, the profession’s higher charge out rates.
The second area of inquiry is the extent to which the private profession is required to pursue work in the public interest, by way of investigations into misconduct and reporting to ASIC. Again, in the absence of a public role, that work is carried out by private professionals and is ultimately funded by creditors directly or through higher rates.
The expectation that the private profession conduct liquidations for no or reduced fees, and conduct investigative and reporting work typically conducted by the state, goes back 150 years or more, and has become embedded in the law, and in regulatory expectations. Even in personal insolvency, where there is a government Official Trustee, investigations and reporting is required, and unfunded estates of private trustees are said to exceed 30%; as AFSA acknowledges, trustee’s fees are set higher to cover that loss.
In contrast, both England and New Zealand have government liquidator and trustee roles where the state assumes what we say are at least significant elements of its proper role. That largely accords with what the Hon Paul Heath QC has explained should properly apply in insolvency “that private functions should be performed by the private sector and paid out of funds otherwise available for distribution among creditors, while public functions should be performed by public officials and paid for out of public funds …”.
How certain we can be of these issues is necessarily limited given the paucity of data about insolvency and the profession, either because there is such a limited government role, or despite the private sector having a significant role. That uncertainty extends to how insolvency firms set their rates, in an environment of inherently limited assets. We have not mentioned other factors impacting fees – the personal liability imposed by law, the extensive control invested in the role and consequent responsibility, and the highly regulated work.
If there are concerns about the relative size of hourly rates against the level of assets in most insolvency matters, one may query what level is appropriate? Must insolvency practitioners work for minimal rates simply because the debtors are insolvent? Why should insolvency practitioners take an end-of-life discount compared to other highly trained specialists who’ve assisted the debtor prior to insolvency, including lawyers, bankers, accountants and other advisors? An industry whose practice is premised on 30% or more files going unpaid is demonstrative of a market failure, which in our view requires a rebalancing of the public and private work undertaken by the insolvency profession.
We make no comment about the fee levels remarked upon by Justice Lee, or the firms named. Our comment is broader, about the amount of work done by insolvency practitioners for which they may not be paid, and the work they do on behalf of the state, the cost of which must inevitably impact the fee rates charged.
 Insolvency Law Reform: The Role of the State, (1999) NZ L Rev 569.