and is “indicative of broader systemic factors within the insolvency system itself …”.
The recent PJC Report on corporate insolvency recommended that  the proposed comprehensive review of insolvency law consider the remuneration of insolvency practitioners, describing remuneration as
“a perfect example of the many competing interests that arise in a liquidation.”
The review should include the extent to which public interest work carried out by liquidators for no or limited remuneration is sustainable, and the impact of this on all stakeholders in external administrations. Remuneration of trustees would also come with that inquiry.
While the recommendation conflates two or more issues – the public interest work (investigations and reporting) required of IPs, the charging of that work against assets and funds otherwise available for creditors, and the charging of unfunded work through charge out rates or other mechanisms – remuneration of an IP, properly and fairly assessed, is an important way of determining the tasks required and performed in an estate and the time spent. It is “indicative of broader systemic factors within the insolvency system itself …” and is central to any insolvency law reform inquiry. These factors have existed and been acknowledged in insolvency for decades and no doubt have become embedded into the business model of insolvency firms, including by way of calculation of charge out rates.
The Report notes disagreement with what has been described as “cross-subsidisation”, one accounting submission saying that the
“notion that liquidators charge higher fees to businesses with sufficient assets as a gross misrepresentation …”.
The term “cross-subsidisation” was used in the Explanatory Memorandum to the ILRB 2015, explaining that where practitioners are not remunerated in full, or at all, because no assets remain,
“this may lead to overcharging for services where there will be money available, as a recoupment action. … The unrecovered costs borne by practitioners in assetless administrations, or administrations with insufficient assets to meet remuneration and disbursements incurred, may be seen as being borne by other administrations through the charging of these risk premiums”.
It quoted an estimate that insolvency practitioners personally fund disbursements of $1.4 million and remuneration of $47.3 million annually in what was then their Official Liquidator role, and that concerns existed about the effects of this cross-subsidisation.
These Ex Memo 2015 comments were made in the context of the government seeking to alleviate cross-subsidisation by way of doing away with the official liquidator designation, and the obligation imposed on an IP to take all court appointed matters, even if assetless. The Ex Memo said that liquidators were not expected to work for free and they need not take appointments unless provided with some security of payment. It also acknowledged that this may well lead to an increase in unadministered de-registered companies.
The reaction against the claim that a component of charge-out rates reflected the unfunded work of liquidators is misplaced. The accounting submission referred to earlier preferred to put it that liquidators
“must consider a contingency for unfunded work, just as other service providers price in bad debts when providing services. This is simply pricing services at a rate that sustains a viable business, not cross-subsidisation”.
That is semantics but if that is a more palatable way of putting it, so be it.
In any event, AFSA acknowledges that trustee charge out rates may be higher because of unfunded work, referring to case law as to a “well accepted incident of the risk inherent in the performance of the trustees’ duties in assetless estates.” It is implied in the swings and roundabouts concept in the former official liquidator role in corporate insolvency.
Beyond charge out rates
The law in fact permits remuneration approaches beyond charge out rates. Case law broadly supports the pursuit of litigation by IPs even if it serves to recoup the IP’s unpaid remuneration. How many such litigation claims are genuinely for the financial benefit of creditors, or are for the IP, their lawyers and funders is a relevant question, raised by the PJC Report. That is not to be critical of such outcomes but an understanding of their extent is necessary to assess the efficiency of many of the statutory recovery rights of IPs, and how and from what sources the insolvency system should be funded.
How each firm handles the amount of write-off in insolvency work is a matter for it. The law has intervened in the past against any common pricing by IPs – it should be a commercial decision for each firm. Apart from tweaking of charge out rates to ensure profitability, insolvency work of its nature no doubt prompts some productivity efficiencies in its administration. Avoiding assetless work, or limiting the tasks performed when one is under or unfunded, or by cutting corners that might not otherwise be cut, or limiting risk, are other options.
A comprehensive review
Any comprehensive review (rec 1) will need to assess the problem, if one be accepted, and a solution. One past inquiry did not accept that all creditors should fund the system through cross-subsidisation; rather, government subsidies for work done by IPs on assetless matters were said to be the preferred approach. The proposed review would need to go beyond these sorts of issues into much “broader systemic factors” both in law and in business and accounting, and well beyond the typical regulatory debates about IP remuneration.
The insolvency system has the appearance of a financially struggling or even insolvent enterprise. It needs a financial assessment as to whether there is in fact
“not enough money remaining in insolvent estates to properly fund the costs of administrations, let alone pay dividends to creditors”.
Analysis of the numbers and types of insolvents requiring attention, the average value of their remaining assets and of creditor claims, the IP tasks required, or that should be required, and the costs, and, if relevant, the amount of dividends expected, is needed.
These go to further PJC recommendations as to data collection and analysis (recommendations 4 and 5, and 10): see What does our insolvency system produce? – Murrays Legal. A systems analysis of the insolvency process is then required (rec 6), with a focus on efficiency and effectiveness, and productivity, both guided by an up-front decision as to what the regime is meant to achieve (rec 2, 3).
These are all interconnected and remuneration claims, representing work done, are central.
 PJC Report, [8.64].
 Rethinking Insolvency Practitioner remuneration, M Murray, 2022
 “… a trustee cannot expect to recover all their costs and remuneration in every bankruptcy and that the scale of fees set by a trustee for themselves and their staff reflect this risk”. Proper performance of duties of a bankruptcy trustee, Inspector-General Practice Direction 14.
 See also Vaucluse Hospital Pty Ltd v Phillips & Anor  FMCA 44
 TPC, Study of the Professions, Accountancy, July 1992, pp 74-84.
 TPC, Study of the Professions, Accountancy, July 1992, p 85.
 Rebuilding the structure of the Australian insolvency system, Murray & Harris