In brief - Insolvency practitioners need to prove that claims for remuneration are proportionate and reasonable
The Courts are increasingly focusing on considerations of proportionality when reviewing claims for remuneration and expenses.
In this article I will discuss how the concept of proportionality has been applied by Courts across Australia, including the recent appeal decision of the Federal Court of Australia which extensively considered and explained the correct application of the concept.
Stockford case highlights problems with time-based administrator's fees
Finkelstein J highlighted issues surrounding remuneration in his 2004 Judgment Korda, In the Matter of Stockford Limited (Subject to Deed of Company Arrangement)  FCA 1682. He discussed "some of the vexed issues that concern the fees of insolvency practitioners, particularly registered liquidators, receivers and administrators. There is wide-spread belief, not confined to Australia, that there is overcharging and that overcharging is rife" (at ).
His Honour noted the extensive criticism of time based costing but recognised "[t]he courts have endorsed this approach for so long… that it is now impossible to reverse the trend" (at ).
Some decisions over the past year highlight a continuing disquiet in the Courts with the practitioners simply expecting to recover their remuneration using time based costing and the increased importance of proportionality when assessing the reasonableness of that remuneration.
Finklestein J also stressed that an insolvency practitioner stands in a fiduciary relationship with creditors and highlighted the obligation for him or her to negotiate fees with both solicitors and counsel and to monitor the fees closely as they are incurred.
Several decisions have also questioned the legal fees incurred by the insolvency practitioners and, in Victoria and New South Wales, the Legal Profession Uniform Law Application Act 2014 (NSW) and the Legal Profession Uniform Law Application Act 2014 (VIC) (Legal Profession Act) now impose a requirement that a law practice must charge costs that are "proportionately and reasonably incurred" and "proportionate and reasonable in amount".
Liquidator's costs and expenses disproportionate: Viscariello v Macks
Kourakis CJ delivered judgment in December 2014 in Viscariello v Macks  SASC 189.
The liquidator had incurred costs in pursing the "romantic partner" of the director Viscariello. His Honour was concerned that the costs and expenses incurred by the liquidator were out of all proportion to the amount claimed and were diminishing the potential funds available to creditors. His Honour observed:
…In the absence of proportionality, a liquidation may generate litigation which is not in the company's interests but served instead the financial interests of the company's professional advisors. That is contrary to the interests of the company's creditors and the public more generally. (at )
His Honour also noted that it was significant that the lawyers for the liquidator were not acting on "spec" because they had expressed the view that the litigation did not have sufficient prospects of a successful recovery.
This decision is, however, an extreme example because his Honour proceeded to find that the liquidator had not acted bona fide in the interests of the company "…because his personal interests had become a substantial and actuating reason for maintaining proceedings that were so obviously not in the interests of the Companies. [sic]" (at ).
The liquidator was found to have breached the duties imposed on him by sections 180, 181 and 182 of the Corporations Act 2001 (Cth).
Solicitors' invoices lacked detail but paid by liquidators anyway
In AAA Financial Intelligence Limited  NSWSC 1270, Brereton J assessed the "reasonable and proper costs and expenses" which liquidators were entitled to claim from trust assets under their control.
His Honour was critical of the liquidators for paying invoices raised by their solicitors which he observed "provide no detail at all of the work done or the charge rates." (at )
His Honour made reference to the observations of Finklestein J in Stockford. He accepted that legal advice was required, but was only prepared to allow the liquidators to claim reimbursement from the trust funds of half the amount paid to the lawyers, as the lack of detail on the invoices meant that the Court could not scrutinise the invoices and form an assessment of their reasonableness.
Time reasonably spent and other factors considered in determining "reasonable remuneration"
His Honour then looked at the liquidators' remuneration and concluded that it is wrong to assess "reasonable remuneration" by reference only to time reasonably spent at standard rates. He observed that while time "…is a relevant consideration, it is only one of several, should not be regarded as the default position or the dominant factor, and is to be considered in the context of other factors, including the risk assumed, the value generated, and proportionality" (at ).
Justice Brereton then proceeded to "…give considerable weight to the circumstance that the value of the assets realised was $180,000 - of which $104,000 was already in hand when the liquidators were appointed; and that after disbursements and costs of this application, only $102,298 will remain to satisfy commission and pay dividend…" (at ).
His Honour did not consider this to be proportionate and proceeded to fix the remuneration at 20 percent of the assets realised and made the observation:
In smaller liquidations, liquidators cannot expect to be rewarded for their time at the same hourly rate as might be justifiable where more property is available. (at )
Liquidator's remuneration claim deemed prima facie reasonable
The approach of Brereton J can be contrasted with that of Sanderson M in February 2015 in Re Strickland (as liquidators of PNP Pacific Pty Ltd)  WASC 49 (unreported). Sanderson M observed when considering whether or not the remuneration claimed by the liquidator was prima facie reasonable:
I was satisfied, prima facie, the charges claimed were justified. It is difficult to see how in any circumstance a different conclusion could ever be reached. All a liquidator can ever do is set out in broad detail what was done in the course of the liquidation and the hourly rate charged. There is no way I could, by looking at the broad description of the work done by (the liquidator) and his hourly rate, assess whether or not the charge is reasonable. (at ).
Detailed supporting affidavit material proves crucial in assessment of reasonable remuneration
Gardiner AsJ in Re Gunns Plantations Limited (In Liq) (Receivers and Managers Appointed)  VSC 102 considered an application for approval of remuneration by the liquidators for the Gunns Managed Investment Schemes.
The only opposition was from a self-represented grower who had owned a number of wood lots. He asserted, among other things, that the liquidator's professional fees were unreasonable and the hourly rates were too high.
His Honour noted, with approval, the liquidator's reasons for submitting that time based hourly rates were the most appropriate methodology for charging:
- It allowed for the remuneration to be allocated to one or more of the 18 registered managed investment schemes to which they were appointed.
- The liquidators were required to perform a number of tasks which did not relate to the realisation of assets and therefore a percentage or contingency fee was not appropriate.
- The liquidators were unable to predict accurately the level of fees that would be required due to the complexity of the insolvency and therefore a fixed fee could not be determined.
His Honour accepted that the Gunns administration was "…a most complex insolvency administration, certainly well above the run of the mill administration or liquidation" (at ).
The evidence set out in considerable detail the various activities conducted by the liquidators and how in relation to each activity, they had apportioned their costs across the numerous schemes on which they had been working. Gardiner AsJ assessed the evidence by carrying out a detailed "random survey" and concluded that:
…the evidence contains sufficient information to enable the Court to assess that, prima facie, the amounts claimed appear to be reasonable and that the liquidators exercised commercial judgment in relation to the work that was done. As to the cost attaching to that work, the amounts claimed appear, on their face, to be proportionate to the value of the services provided by the liquidators given the size, importance and complexity of the task performed and the principles by which the liquidators have allocated the expenses and remuneration amongst the schemes are appropriate, fair and reasonable. (at )
This decision highlights the importance of the supporting affidavit material setting out in some considerable detail the rationale for the basis upon which the remuneration is being claimed and highlighting the evidence relevant to the factors to be taken into account by the Court in determining whether the remuneration is reasonable as outlined in sections 504(2) and 473(10) of the Corporations Act.
Federal Court judge marks down disproportionate remuneration
In 2010, various orders were made appointing receivers to 21 unregistered managed investment schemes set up by Mark Letten, who was subsequently sentenced for many offences related to these schemes. The various appointment orders provided that the receivers were:
…entitled to reasonable remuneration and reasonable costs and expenses properly incurred in the performance of their duties and the exercise of their powers as receivers and managers [of] the Property of [each Scheme] as may be fixed by the Court on the application of the receivers, such sum to be calculated on the basis of time reasonably spent by the [receivers and managers], the partners and staff at the rates specified in Annexure B to [this order]. [Emphasis added].
The receivers made a claim for remuneration which was marked down by a Federal Court Registrar. The receivers were not happy with the mark down and sought a review which was the subject of the decision of Gordon J in Australian Securities and Investments Commission v Letten (No 23)  FCA 985.
Her Honour dealt with the issue of proportionality and agreed with the Registrar that the claim for remuneration in relation to a category of work described as "investor/distribution" was large when compared with the distribution actually made or the amount available for distribution:
…the total sum of funds available for distribution after deduction of the Receivers' remuneration, costs and expenses incurred but not paid as well as an allowance for future expenses (is) $10.9 million. The present claim, for over $4 million, appears large compared to these figures, all the more so given that the Receivers have already received about $14.2 million and there will be additional future claims by the Receivers. (at )
Her Honour, after taking a number of factors including "proportionality" into account, agreed with the Registrar's decision to mark down the remuneration.
Application of proportionality challenged on appeal
The judgment of Gordon J was appealed to the Full Federal Court of Australia with Judges Besanko, Middleton and Beach JJ delivering judgment on 18 September 2015 - Templeton v Australian Securities and Investments Commission  FCAFC 137. The grounds of appeal included a challenge to the use of the concept of proportionality and how that concept was applied by Gordon J.
The Court referred to the appointment orders and noted that it was apparent that the guiding theme was the fixing of reasonable remuneration and observed that an amalgam of the factors in section 425(8) (along with 504(2) and 473(10)) of the Corporations Act) have as a unifying theme the concept of proportionality:
The question of proportionality in terms of the work done as compared with the size of the property or activity the subject of the insolvency administration or the benefit or gain to be obtained from the work is an important consideration when determining overall reasonableness: see In the matter of AAA Financial Intelligence Ltd (In liquidation)… (at )
Another way to look at proportionality can be to conclude from a lack of proportionality between the cost of the work done relative to the value of the services provided that there has been overcharging or excessive remuneration claimed... (at )
The Court held that it was clear that Gordon J was entitled to consider proportionality between the size, nature, and value of the work and the claimed remuneration. The Court emphasised, however, the importance of comparing the size, nature and value of the category of work against the remuneration claimed for that work.
The Court was concerned that Her Honour had failed to make a "like with like" comparison. For example, Her Honour referred to the receivers having already received about $14.2 million. That remuneration related to work done in relation to the secured creditor and not the investor/distribution category. Furthermore, the true comparator for the sum of $14.2 million was not the "investor distribution" category but the value of the work achieved or undertaken for secured creditors which had realised $92 million.
Expected return and complexity may justify higher cost to benefit ratio
The Court further observed that there are other points which should not be overlooked when considering the question of proportionality. It might be inappropriate to use with hindsight the known return to assess proportionality. Instead, consideration should be given to the expected realistic return at the time the work was performed. Furthermore, some work may be sufficiently complex and labour intensive such as to justify a higher cost to benefit ratio:
…After all if the duty of the Receivers is to maximise return and it is necessary to spend $0.60 to achieve $1.00, then proportionality is satisfied even if the ratio might be high. (at )
The receivers did submit that Gordon J failed to take into account the fact that their claim for remuneration was for a sum which was calculated after applying a 10 percent discount to their time recorded. The Court said that no weight should be attached to that discount in the absence of an explanation as to what the discount represented. Was it, for example, simply a discount on the potential arithmetical time based claim or a discount on the real claim?
The Appeal Court set aside Her Honour's Orders and remitted the hearing of the application for review to another judge to be considered afresh but subject to the Court's reasons.
Courts in Victoria increasingly scrutinising litigation costs
Finkelstein J in Stockland and Brereton J in AAA Financial each emphasised the importance of scrutinising the lawyers' fees.
This is consistent with the increasing scrutiny of litigation costs. The Victorian Court of Appeal in Yara Australia Pty Ltd & Ors v Oswal  VSCA 337 referred (at ) to the second reading speech of the Victorian Attorney General where he referred to the proposed reforms to the Civil Procedure Act 2010 (Vic):
At the core of these reforms is the concept of proportionality. Participants in litigation are expected to use reasonable endeavours to ensure that the legal and other costs spent on the proceeding are reasonable and proportionate to the complexity or importance of the issues in dispute, and the amount in dispute.
The Victorian Courts are now firmly implementing this policy with an increasing number of examples of costs orders being made against both parties and their lawyers personally.
On 1 July 2015, The Legal Profession Act came into effect in both Victoria and NSW. This provides at section 172(1) that a law practice must charge costs that are:
no more than are fair and reasonable in all the circumstances and that in particular are -
(a) proportionately and reasonably incurred; and
(b) proportionate and reasonable in amount.
Ensure supporting material demonstrates that claim is proportionate and reasonable
It is apparent that both insolvency practitioners and the lawyers working with them are expected to ensure that their claimed remuneration is in proportion to the work they have undertaken.
It is clear that a claim based simply on time based remuneration is now unlikely to be accepted as being reasonable.
The Federal Court in Templeton has highlighted that "reasonableness" requires a consideration of proportionality, which is not simply looking at comparing the remuneration claimed with the return to creditors, but should involve a comparison of "like with like".
It is important that your supporting material breaks down the areas of your work, the perceived value or return from that work at the time it was undertaken and sets out in detail, by reference to the appropriate provisions of the Corporations Act such as sections 504(2) and 473(10), an explanation as to why the factors are relevant and your claim for remuneration and expenses is, in light of those factors, proportionate and reasonable.
This article was first published in the Australian Insolvency Journal Vol 27 #4 (2015) and is reproduced by permission of the Australian Restructuring Insolvency & Turnaround Association.