Nobody expects the reviewing liquidator! Current approaches to contested remuneration
The Insolvency Law Reform Act 2016 (Cth) introduced a range of measures intended to better inform and arm creditors in relation to external administrations and bankruptcies generally, but also specifically in the contentious area of practitioner remuneration.
The Insolvency Law Reform Act 2016 introduced a range of measures intended to better inform and arm creditors in relation to external administrations and bankruptcies generally, but also specifically in the contentious area of practitioner remuneration. Although many of the reforms do appear to be changing the dynamics in disputes about remuneration, it is far less clear that the reviewing liquidator position is being utilised in corporate insolvency.
This article briefly comments on some recent examples of remuneration disputes and queries whether the reviewing liquidator concept has gained any traction.
What is working?
The reforms targeted at increasing creditor rights (such as the right to request information have been a success). In 1st Fleet Pty Ltd (in liquidation) the Commonwealth of Australia successfully obtained orders compelling the liquidators of 1st Fleet to provide extensive information (including itemised accounts) relating to the Commonwealth’s concerns about remuneration that had been approved by a committee of inspection. The liquidators’ refusal to provide those documents highlights the previous information asymmetries that should now be minimised.
There also seems to be an increased tendency for creditors to take steps to replace appointees with their own nominee by exercising their right to call meetings and taking action if practitioners refuse to convene a meeting.Similarly, creditors appear to be prepared to continue to press for practitioners’ removal even if they are unsuccessful in having them removed at a meeting. It may be that empowered creditors are now more actively taking steps to scrutinise remuneration and remove practitioners before issues arise.
It also appears that ASIC is proactively raising concerns about practitioner remuneration and intervening in practitioners’ remuneration approval applications. For example, in Lock, in the matter of Cedenco JV Australia Pty Ltd, ASIC intervened in proceedings commenced by the liquidators seeking orders pursuant to section 1322 of the Corporations Act 2001 intended to address the implications of defects in the liquidators’ remuneration reports identified by ASIC. ASIC played a “major role” in the proceedings, in that it not only made submissions (as is often the case), but filed evidence and cross examined the liquidators.
The Cedenco judgement is long and worthy of its own article, but the following brief observations can be made about matters that may have more general implications:
- The Federal Court agreed that the remuneration reports were deficient in that, amongst other things, the description of the work undertaken was at such a high level of generality that creditors could not make an assessment of whether the remuneration claimed was reasonable. Although the remuneration reports were based on the form recommended in the ARITA Code of Professional Practice, the liquidators accepted that they were deficient and in some instances materially inaccurate. The judgment in Cedenco is perhaps an extreme example, but it is a timely reminder that although summary descriptions of the tasks undertaken can be acceptable, a remuneration report must give enough detail for creditors, (and ultimately the court) to assess the reasonableness of the amounts claimed and matters such as whether the work has been undertaken by staff at appropriate levels of seniority.
- Similarly, the Court appeared incredulous that the liquidators had not reviewed WIP reports at the time the remuneration reports were prepared, after ASIC raised its concerns or even in preparing evidence for the proceedings. This led the Court to not only be critical of the liquidators’ evidence, but to reject the relevance of significant write-offs made by the liquidators. It is vitally important that practitioners have robust systems of review to ensure that WIP is properly considered.
- As the remuneration reports were seriously deficient, creditors’ resolutions approving the remuneration were invalid. The Federal Court refused to excuse the invalidity as it considered that the failure to deliver proper remuneration reports caused, or was likely to cause, substantial prejudice to creditors. However, the Court did acknowledge that a “minor deficiency…(assuming that there can be such a thing)” may not invalidate a resolution approving remuneration and “may lead to an increased willingness on the part of the Court to make an order under s 1322”. It is far from clear that practitioners can take any comfort from this comment, and it is obviously far preferable to have remuneration reports done properly to avoid issues arising.
- ASIC’s complaints give an insight into the regulator’s concerns and areas of focus. In addition to concerns that creditors were not adequately informed about the remuneration claimed, in the context of fixing the liquidators’ remuneration ASIC raised 4 categories of complaint:
- that the hourly rates charged by the liquidators’ firm were excessive;
- that remuneration associated with various work streams should be discounted, in some instances substantially;
- irrespective of the success on above points, further reductions should be made for remuneration claimed for tasks such as preparing minutes of meetings and remuneration reports where the time claimed was excessive; and
- if there was no discount in the hourly rates and no substantial reduction in relation to the impugned work streams, further reductions should be made for categories of claims such as travel arrangements, work performed at inappropriate seniority and "legal work" performed by the liquidators’ and their staff.
- The Court rejected objections from the liquidators and accepted expert evidence from a senior insolvency practitioner about whether the work for which remuneration was claimed would have been undertaken by reference to a standard of a “competent and prudent insolvency practitioner”. In effect, the expert (and ultimately the Court) undertook an analysis of the steps taken (and not taken) by the liquidators in considering whether they should be dis-entitled to remuneration.
- The Court also accepted evidence from 10 practitioners about the rates charged by their firms. The liquidators argued that their rates were higher than other firms because they accepted appointments that had a greater risk that they would not recover their remuneration. The liquidators were unsuccessful in that argument because no such risk existed in Cedenco and their rates were reduced by up to 20%. However, as the extent of any higher risk than is usually the case is a factor identified in the IPS as a matter the court must consider, additional and unusual risk or responsibility may justify higher remuneration in an appropriate case; and
- The evidence filed by other insolvency practitioners demonstrated that firms’ policies on charging for travel varied considerably, and in some instances varied depending on the nature of the appointment. In Cedenco the liquidators’ claim for travel is a very large one (nearly 1,300 hours) and it seems likely that the liquidators’ claim will be reduced (particularly as the liquidators admitted to errors in the claims). However, it will be interesting to see if the Court makes any broader comments about the appropriateness of charging travel.
The practical outcome in Cedenco is that there is, in effect, an inquiry into the liquidators’ conduct through the lens of remuneration approval, notwithstanding that an inquiry does not appear to have been sought. Courts are also continuing to use their pre- ILRA powers to inquire into practitioners’ conduct and remuneration. Although those powers already existed, they were reinforced in the ILRA reforms.
The judgement in the ongoing Westpoint Corporation Pty Ltd proceedings is a good example of where the Court has ordered an inquiry into practitioners’ conduct coupled with a review their remuneration. At its heart, the Westpoint proceedings are a dispute between the receivers appointed to Westpoint Corporation Pty Ltd and the liquidators appointed to Westpoint Finance Pty Ltd about whether the liquidators have acted reasonably in incurring costs and remuneration in pursuing three proceedings seeking to recover commission for the sale of real estate in circumstances where WPF did not hold a licence and there were statutory provisions prohibiting the recovery of commission in those circumstances.
The Westpoint judgment is also long and merits its own detailed consideration. In short, the Supreme Court of Victoria has ordered an inquiry into the liquidators’ conduct in maintaining one proceeding after it became apparent it was doomed to fail and a review of the liquidators’ remuneration relating to all three proceedings, notwithstanding that the remuneration was already approved by creditors. Although the court made some allowances for the liquidators’ commercial judgment, the liquidators are compelled to explain their conduct over a four year period and justify their remuneration over a five year period.
Both the Cedenco and Westpoint judgements arise in circumstances where the practitioners’ remuneration was under direct attack. However, even where there is not necessarily a dispute about remuneration, courts also seem to readily involve ASIC or another party as “amicus curiae,” or contradictor to ensure that all relevant issues are ventilated.
For example, in Australian Executor Trustees Ltd v Provident Capital Ltd, Justice Rares requested ASIC’s assistance in considering a remuneration application by the court appointed receivers of Provident. Relevantly, the receivers’ firm had engaged a consultant whose time had been charged to the receivership with a margin above the cost to the receivers. Notwithstanding the receivers’ conduct being to a “high professional standard and of substantial benefit to the estate”, they fell into “error or judgment or oversight” in relation to the engagement of the consultant.
In reducing the receivers’ claim to largely remove the margin charged by the receivers the court also stated that “receivers (or liquidators) ordinarily should select the means for performing the work required to discharge their duties that will cause the least financial burden on the estate”. It is not clear whether this statement is intended to imply any additional obligations beyond the principles of reasonableness and proportionality. ASIC has adopted this statement and considers that the Provident judgment gives guidance on the engagement of consultants.
Similarly, in the most recent Banksia Securities Limited remuneration judgment, the Supreme Court of New South Wales appointed a contradictor in circumstances where ASIC did not oppose the application and no other parties intended to appear. Ultimately the special purpose receivers’ “relatively modest” claims were approved in full, but only after an exchange of detailed submissions explaining why the special purpose receivers’ actions in fiercely contested ligation of “exceptional complexity” were not causative of any unnecessary remuneration.
It is clear that practitioners’ remuneration is now under extensive scrutiny from an array of sources. The noticeable absence in all of the above is the reviewing liquidator. Why is this?
Reviewing liquidator- a quick refresher
The concept of the reviewing liquidator commenced in the September 2017 tranche of the ILRA reforms. A reviewing liquidator can be appointed by the Court,on application to ASIC by a creditor,by creditors or by agreement with the incumbent external administrator. Although the focus of this article is on remuneration, it is worth noting that a reviewing liquidator appointed by the court or ASIC can consider any matter relating to the external administration, whereas a reviewing liquidator appointed by a creditor can only consider remuneration, costs or expenses.
A reviewing liquidator has broad powers to, amongst other things, engage experts to assist, give directions to the incumbent practitioner to provide itemised invoices, to direct any party to give written statement and to direct the incumbent practitioner to produce books.A reviewing liquidator must prepare a report but does not act in a judicial function and adjudicate on a dispute. The focus of a reviewing liquidator’s report is a review of “reasonable remuneration”, presumably by reference to the factors in section 60-12 of the IPS and caselaw such as the Sakr Nominees judgment.
Are reviewing liquidators being appointed?
It is unclear whether reviewing liquidators are being appointed, but it seems unlikely that they are or, if they are, the appointments are infrequent at this stage.
Firstly, there are no reported judgments where reviewing liquidators have been appointed. Of itself this does not mean that appointments have not occurred. However, it seems clear from judgments like those referred to above that Courts are continuing to favour ASIC involvement, the use of the inquiry powers to otherwise review the remuneration claims without the assistance of a reviewing liquidator.
Secondly, although ASIC has established a reviewing liquidator panel, it has confirmed that it will only be appointing reviewing liquidators to investigate phoenix activity. In April 2019 ASIC said it had appointed or would shortly appoint reviewing liquidators to 8 external administrations where there were “sufficient indicators” of illegal phoenix activity. It is unclear whether ASIC will use its power to appoint reviewing liquidators purely in relation to practitioners’ remuneration.
Thirdly, it is also unclear whether creditors are appointing reviewing liquidators. Circulars to creditors attach ARITA’s “Creditor Rights in Liquidations” factsheet or otherwise advise creditors of their right to appoint a reviewing liquidator. However, anecdotally most practitioners are not aware of a reviewing liquidator being appointed.
The ILRA reforms do appear to have assisted creditors in better assessing and disputing practitioners’ remuneration. However, it appears that the reviewing liquidator concept has not been adopted at this stage. It will be interesting to see if this starts to change as a result of ASIC’s appointments of reviewing liquidators to consider phoenix activity. There certainly appears to be a broader role for the reviewing liquidator in disputes such as those in Cedenco and Westpoint.
It is also tolerably clear that courts are giving anxious consideration to remuneration and will involve ASIC or other parties to ensure all viewpoints are argued. As part of this, there seems to be a greater analysis of not just the reasonableness of practitioners’ remuneration but the merits of decisions made by them. The admission of expert evidence about the actions of a “competent and prudent insolvency practitioner” in Cedenco and detailed analysis of practitioners’ decisions in judgments like Banksia does seem to demonstrate a shift away from the reliance on practitioners’ commercial judgment and to hold practitioners to a counsel of perfection.
The news is not all bad for practitioners. Courts have recently acknowledged that it can be counter-productive for creditors to refuse to approve any remuneration as doing so simply increases costs and that practitioners are entitled to reasonable remuneration associated with seeking court approval for their remuneration. The Cedenco and Westpoint judgments may be extreme examples but they give valuable insights into ASIC’s likely concerns and issues that practitioners need to be prepared to address. As both proceedings appear to be ongoing practitioners may have some further guidance this year.
Finally, it should be noted that the Inspector-General in Bankruptcy has the role equivalent to a reviewing liquidator in personal insolvency.
This article was first published in LexisNexis’ Australian Insolvency Law Bulletin Vol 20 no 2 (17 June 2019).
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