Insolvency practitioners’ remuneration: NSW Court of Appeal weighs into the controversy

A five-member bench of the New South Wales Court of Appeal recently heard argument in an appeal from a decision by Justice Brereton dealing with a liquidator’s remuneration claim.

Re Sakr Nominees Pty Ltd, New South Wales Court of Appeal, Bathurst CJ, Beazley P, Gleeson JA, Barrett and J Beach AJJA, heard on 23 November 2016, judgment reserved.

The decision under appeal – Re Sakr Nominees Pty Ltd [2016] NSWSC 709 – is one of a line of recent decisions by Brereton J in which insolvency practitioners’ remuneration claims were slashed on the grounds of proportionality and value of the services provided.

Differing approaches to fixing remuneration

Insolvency practitioners are entitled to reasonable remuneration for the work they do.  The worth of this work can be calculated in various ways, including by:

• time-based costing (eg the firm’s usual hourly rates for the time spent); or
• commission calculated by reference to a percentage of the assets under the practitioner’s control or by reference to the results attained (eg an appropriate percentage of the assets realised and/or distributed in the administration) –  sometimes described as ad valorem remuneration.[1]

Ad valorem remuneration was once conventional.  However, over time, there was a move towards fixing remuneration by reference to time-based systems of charging.  Time-based costing is now a well-entrenched and popular practice among insolvency practitioners.

While it is accepted that time-based costing is an appropriate way to calculate remuneration, and is often used as a starting point, the approach has its drawbacks.  It is widely acknowledged that time-based charging can be difficult to check, rewards the inefficient, and poses the potential for abuse such as by overservicing and overcharging.

Since 2014, Brereton J had delivered a series of controversial decisions[2] in which his Honour fixed liquidators’ remuneration claims on an ad valorem basis, rather than by reference to time-based costing.[3]  Although these decisions sparked much handwringing among insolvency professionals in New South Wales, none of them was taken on appeal.  And, to date, the decisions have received scant judicial attention in other jurisdictions including Victoria.  Enter Sakr Nominees Pty Ltd.

Sakr Nominees was a small family company.  Its only worthwhile asset was some land, which was sold by the liquidator.  The liquidator retained agents and solicitors to negotiate and act on the sale.  Out of the sale proceeds, the liquidator was able to pay all creditors 100 cents in the dollar, with a surplus to be distributed to the members.

The company’s creditors had approved the liquidator’s remuneration up to a cap of $197,000, which the liquidator had drawn in full.  The liquidator went to court seeking approval of further remuneration of about $63,000, calculated using hourly rates.  Brereton J applied a hefty discount to the remuneration claim, approving only a further $20,000.

Consistent with his earlier decisions, Brereton J gave a clear warning to insolvency practitioners that, despite its prevalence, a time-based costing approach will not be treated as the default position, nor as a dominant factor, when it comes to fixing remuneration.  His Honour said that liquidators will not necessarily be allowed remuneration at their firm’s standard hourly rates for time spent.  This will be particularly so in smaller administrations, where considerations of proportionality must be taken into account.  In such cases, liquidators cannot expect to be rewarded for their time at the same hourly rate as would be justifiable when more property is available.

While Brereton J recognised that ad valorem remuneration is not without its shortcomings, it is ‘inherently proportionate, and incentivises the creation of value rather than the disproportionate expenditure of time’.

In this particular case, his Honour noted that the land owned by the company was the only significant asset that had to be realised.   Much of the heavy lifting in that regard had been outsourced, appropriately enough, to agents and solicitors.  According to his Honour, the administration was not particularly difficult or challenging.  Although proofs of debt had been disputed, and the liquidator had received no cooperation from the company’s directors or accountants, these features of the administration were said to be hardly unusual.

His Honour suggested that, ordinarily, an appropriate rate of commission for this particular liquidation would have been:

• 2.5% on realisations and 3% on distributions; or
• alternatively, 10% on the first $100,000 of realisations and 5% thereafter.

Applying these rates of commission produced figures which approximated the amount of the remuneration that had already been drawn by the liquidator.  His Honour considered that that would have been ample reward for the liquidator, but for two considerations. First, the members had not opposed the application.  Secondly, the liquidator had had to do additional work that had not been anticipated at the time his remuneration had been approved by creditors.  In the result, his Honour approved an additional $20,000 – $43,000 short of the amount claimed.

Comment

In applications for approval of insolvency practitioners’ remuneration, competing considerations are in play.  There is a balance to be struck between the interest in conserving the company’s assets, while at the same time ensuring that insolvency practitioners’ reward is not limited to such a degree that they are discouraged.

While time-based costing has attracted well-founded criticism, it remains appropriate in many cases.  Insolvency practitioners must contend with complicating features inherent in insolvency appointments, for which they are not responsible.  There will be work that must be done to meet statutory requirements.  The books and records may be in disarray.  Directors may be uncooperative or absent.  Assets will be scarce.  Issues attending the administration will often be complex.

Further, there will be cases where, unless work is undertaken, there is no prospect of any distribution being made.  In other cases, the practitioner might embark upon litigation which has potential upside, but which also carries risk that no return will ultimately be achieved.

If a commission-based approach were to become prevalent, the prospect of having remuneration claims discounted for no reason other than the size of the administration might deter insolvency practitioners from accepting appointments – particularly smaller administrations or where the issues are complex relative to the size of the asset pool.

Because of the principle of judicial comity, the New South Wales Court of Appeal’s decision in Sakr Nominees, when delivered, will have an important impact on how Victorian courts approach claims of this kind.

[1] The language of the relevant statutory provisions and of the ARITA Code of Professional Practice for Insolvency Practitioners permits the adoption of either approach.

[2] Re AAA Financial Intelligence Ltd (in liq) (No 2) [2014] NSWSC 1270; Re Hellion Protection Pty Ltd (in liq) [2014] NSWSC 1299; Re Gramarkerr Pty Ltd (No 2) [2014] NSWSC 1405; and Independent Contractor Services (Aust) Pty Ltd (in liq) (No 2) [2016] NSWSC 106.

[3] Compare Re Idylic Solutions Pty Ltd [2016] NSWSC 1292, in which Black J observed that ‘potentially differing approaches’ to fixing insolvency practitioners’ remuneration had been adopted in recent case law including Sakr Nominees.  His Honour suggested that time-based remuneration claims should at least be tested by reference to a percentage of realisations and, in an appropriate case, displaced by remuneration on that basis or by a ‘mixed approach’.  In his view, evidence as to what percentage of the remuneration claimed constitutes realisations will enable the proportionality of the remuneration claimed to be tested objectively, and will identify cases in which there ought to be cause for concern in that regard.