Pay cut on the horizon for liquidators

Articles, Restructuring + Insolvency

On Friday, the NSW Supreme Court handed down two further decisions in its drive to hammer home to liquidators the importance of proportionality when claiming remuneration.

In both cases, his Honour Brereton J built on his earlier decision in AAA Financial Intelligence Ltd (in liquidation) (No 2) [2014] NSWSC 1270 (see update here), emphasising that hourly-rate-based charging – even if every attendance is meticulously recorded and all of the time spent can be justified – may be a wholly inappropriate basis for claiming remuneration.

 

Right on Q…

In On Q Group Limited (in liquidation) (subject to deed of company arrangement) [2014] NSWSC 1428, the circumstances of a sizeable winding up came before the court.

It emerged that the liquidators had recovered in excess of $725,000 in the winding up, but spent the entire amount on their remuneration and expenses, seemingly without scrutiny.

The court observed:

This expenditure has exhausted the recovered assets, and there has been no dividend at all for creditors – even for the relatively small claims of the priority creditors. Thus the practical effect of the liquidation has been to recover in excess of $725,000 of assets and transfer it to the liquidators, their agents and advisors, with no benefit at all to those for whose benefit the liquidation is supposed to be conducted.

The court described this as “profoundly disturbing” and ordered that a report be sent to creditors linking to the judgment and highlighting “the potential for priority creditors to obtain a superior outcome by having the liquidators’ remuneration reviewed”.

 

What the Hellion?

The NSW Supreme Court published a second decision on Friday.

In Hellion Protection Pty Ltd (in liquidation) [2014] NSWSC 1299, in the course of considering an application for the fixing of a liquidator’s remuneration, the court remarked that “liquidators cannot be expected to be remunerated at the same hourly rate for small liquidations as for large liquidations”.

The court also made a worrying reference to authorities for the proposition that, when it came to remunerating liquidators, historically “5 percent on realisations and 5 percent on distribution was a very high allowance”.

Both cases are comparatively short and practitioners are encouraged to click through and read the whole decisions:

 

 

Bloody hell!

Unlike the previous two headings, this one is not a superb pun. It was just my reaction when considering the ramifications of these new decisions. We now have four authorities which suggest that if (as is often the case) time-based charging will exhaust available funds, it should give way to percentage-based charging:

As a result of these decisions, insolvency pracitioners are surely going to come under pressure to slash their hourly rates for work that was reasonably and necessarily conducted.

However, what about their lawyers?

 

Lawyers

Pursuant to section 325 of the Legal Profession Act 2004 (NSW), it is a criminal offence for a lawyer to act on a claim for damages on the basis that his or her fee will be a percentage of the amount recovered. This prohibition also applies in Victoria and Queensland, Tasmania, South Australia, the Northern Territory and the ACT – and even in Western Australia.

In the circumstances, unless a flat fee is able to be calculated at the outset, lawyers are compelled to charge hourly rates for damages claims. Even if not compelled, most would anyway, as it has long been recognised practice for professionals to be remunerated by time spent (I do not know how our current judges used to charge for advice and representation before their elevation to the Bench, but I assume time-based charging was not a complete stranger).

 

What does this mean for me?

The comments made in this earlier update remain apposite. Practitioners should ensure that, at the outset of an administration, proper consideration is given to the basis for charging.

If time-based charging is preferred (as it generally will be), practitioners should then give consideration to applying a discount at the point of claiming remuneration, so as to ensure the proportionality principle is observed.

As always, practitioners in doubt about the correct course should talk to their lawyers. If there has to be an argument about whether or not time-based charging is appropriate, practitioners will benefit from having someone on their side who is not only aware of the recent decisions critical of time-based charging, but also aware of the many decisions and policy considerations that support time-based charging.

ERA Legal have represented insolvency practitioners for years and are experts in the field of insolvency practitioner remuneration. Please do not hesitate to contact us with any queries you may have.

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