Remuneration ravaged, expenses disallowed – NSW Supreme Court puts the system on trial

Articles, Procedure + Litigation

In a decision handed down yesterday, the Supreme Court got well and truly stuck in to liquidators and their lawyers. In AAA Financial Intelligence Ltd (in liquidation) (No 2) [2014] NSWSC 1270, in response to a claim by two liquidators for approval of their remuneration and disbursements, the Corporations List Judge delivered a fiery sermon which will resonate with many in the profession – and strike fear into the hearts of others.

 

First up: legal costs

The court first turned its attention to the liquidators’ claim for approval of legal costs and:

  1. cited the Stockford decision, pointing out the duty of every liquidator to:
    • “act with the same care as a prudent businessman”;
    • “shop around to ensure that he obtains the services of good lawyers (solicitors and counsel) at the best possible rate”;
    • “avoid cosy relationships with solicitors and counsel”;
    • “negotiate over fees with both solicitors and counsel”; and
    • “closely monitor the fees as they are incurred”;
  2. observed that the lawyers’ invoices before the court did not even include “a short description or narrative of the services rendered”;
  3. remarked that, given the lack of detail, the invoices “could not have enabled the close scrutiny they should have received from the liquidators”;
  4. noted the court was empowered to limit the extent to which the liquidators could reimburse themselves for the fees they had paid their lawyers;
  5. indicated that, given the lack of detail about what the lawyers actually did, the court was not prepared to approve reimbursement of the full amount;
  6. instead, only allowed about half the sum claimed; and
  7. mentioned that, “on a strict view”, the whole amount should probably have been disallowed.

 

Remuneration ravaged

Having laid waste to the lawyers’ fees, the court turned to the liquidators’ remuneration claim and:

  1. commented on the “confronting and disturbing fact” that only half of the trust money received by the liquidators would ultimately find its way back to the beneficiaries;
  2. observed that one could not escape the impression that the predominant beneficiaries of the liquidation would be the liquidators themselves;
  3. described this as a “profound concern”;
  4. stated that “claims for remuneration in cases where the liquidator appears to be the main beneficiary of the liquidation call for close scrutiny”;
  5. highlighted the “shortcomings of time-based costing as the basis for remuneration”;
  6. mentioned that “reasonable remuneration cannot be assessed solely by the application of the liquidator’s quoted standard hourly rates to the time reasonably spent”, describing it as “wrong” to assess remuneration by reference solely to time spent;
  7. noted, in response to the liquidators’ submission that creditors had approved their fees – and with the infinitive elegantly intact – that “creditors are rarely in a position robustly to negotiate a liquidator’s remuneration”;
  8. observed that, “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”;
  9. noted that the Act provides for “a commission or percentage basis” as an appropriate method of calculating remuneration; and
  10. fixed remuneration at 20% of the value of assets realised, being $36,000.

 

Praise for the liquidators’ conduct

Despite the reductions applied to both legal costs and remuneration, the court was not wholly critical of the liquidators’ conduct. At several points in the decision, the court expressly approved their approach. For instance, the court:

  1. noted that the liquidators had voluntarily reduced their claim for the costs of the proceedings;
  2. commended the liquidators for their decision (which it described as “generous”) to waive their claim for remuneration from a specific fund, as a result of which a dividend of approximately 90 cents would be paid to the beneficiaries of that fund;
  3. observed that the liquidators no longer sought any provision at all for their future remuneration;
  4. recognised that all of these concessions resulted in a “marked improvement” on the original position”;
  5. accepted that, legal costs aside, the disbursements paid by the liquidators were all reasonably incurred;
  6. said that the liquidators’ decision to outsource debt collection was “entirely reasonable”;
  7. conceded that, although the sum paid to the debt collector was more than the debt collector actually ended up collecting, this was only apparent “with the benefit of hindsight”;
  8. acknowledged that “there are undoubtedly cases in which the proper pursuit of debtors and/or officers, in the apparent interest of creditors and/or the public, will prove unsuccessful or generate a return that will not exceed the liquidator’s reasonable remuneration and disbursements”;
  9. concluded that the disbursement was reasonably incurred in a genuine attempt to maximise recoveries;
  10. mentioned that the liquidators’ claim for remuneration was supported by itemised records;
  11. noted its belief “that substantially all the work in respect of which remuneration is claimed was performed, and took the time claimed”;
  12. further noted its belief “that the liquidators’ standard rates are within the range of those charged by similar professionals for similar work”; and
  13. expressly reserved the liquidators’ right to make further submissions in light of its decision.

 

Take-away points

While the liquidators did not escape completely unscathed, the court’s criticism was seemingly directed more at shortcomings in “the system”. There was a great deal of analysis of the perceived shortcomings of time-based costing.

The key point to take away from the decision seems to be that, when formulating a claim for remuneration, liquidators need be able to justify why time-based charging was preferred over other appropriate methods. With regard to this, the court said (emphasis added):

…it is wrong to assess “reasonable remuneration” by reference only to time reasonably spent at standard rates. Yet virtually every application for remuneration that the Court sees is made on that basis, regardless of the amount of property involved.

In my view, while time reasonably spent at standard hourly rates is a relevant consideration, it is only one of several, should not be regarded as the default position or dominant factor, and is to be considered in the context of other factors, including the risk assumed, the value generated, and proportionality.

 

Sections 15.2 and 15.3.2 of the ARITA Code already require practitioners to disclose how they propose to charge and to “fully explain” their reasons for selecting that particular basis. It should be expected that such explanations will come under increased scrutiny following the court’s decision – particularly in any application for approval of remuneration by the Supreme Court.

The other important point to take away from this decision is that the Stockford duties (to pick the right lawyer for the job) are an established part of the law.  Liquidators should take care to ensure that they engage lawyers with specific expertise and a proven track record in the relevant field – be it insolvency, commercial law or litigation.

 

 

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