At our Insolvency: A Year in Review and the Year Ahead seminar in Melbourne on 25 February 2015, we discussed a number of cases decided in late 2014 concerning the reasonableness of time-costed remuneration. It was clear from panel and audience discussion at the seminar (which included representatives from insolvency firms, companies and ASIC) that this is a developing area garnering much attention from practitioners, creditors, ASIC, the public and the Courts.
In this article, we review those recent cases and highlight the importance of proportionality as a factor which the Courts have regard to in assessing the reasonableness of remuneration.
The Corporations Act 2001 (Cth) (Act) provides a variety of matters for a Court to consider in assessing the reasonableness of a practitioner’s remuneration.1 Those matters are largely replicated for administrators, liquidators and receivers.
The commonly accepted method, and usual practice, is to ‘time-charge’ for professional insolvency services. However, the reasonableness of remuneration as a simple multiple of hours and hourly rates has long been rejected.2
Proportionality and time-charging
The concept of ‘proportionality’ is not expressly dealt with under the Act. However, the list of matters in the Act, referred to above, requires a Court to take into account factors including the time properly taken in completing work, the necessity of the work, the complexity of the administration and the value of realisations.
In practical terms, some common matters which Courts appear to scrutinise in assessing the proportionality of remuneration are:
- ‘Over-servicing’ – in respect of the decision to undertake a particular action and the subsequent amount of work undertaken pursuing the action; and
- ‘Inappropriate delegation’ – tasks undertaken by a person with disproportionate seniority (and charge-out rate) for the complexity of the task.
Moreover, in assessing proportionality, Courts appear likely to compare the practitioner’s time-costed remuneration to the amount of funds available for distribution to creditors.
In Australian Securities and Investments Commission v Letten (No 23)  FCA 985, Justice Gordon was required to determine among other things, the reasonableness of receivers’ remuneration claimed in relation to work undertaken in the adjudication of investors’ claims. One factor her Honour relied on in applying a 20% discount (on top of a voluntary 10% reduction) to the remuneration to be allowed, was that the claimed remuneration “appeared large” ($4 million) when compared to the amount anticipated to be made available for distribution to the investors ($10 million).
In two cases decided by the Supreme Court of New South Wales in the second half of 2014, Justice Brereton described the situation where remuneration exceeds or comes close to exceeding the funds available for creditors as profoundly concerning and disturbing.3
When called on to determine the reasonableness of a claim for remuneration by the liquidators of AAA Financial Intelligence Ltd (In Liquidation), Justice Brereton stated that:
Reasonable remuneration cannot be assessed solely by the application of the liquidator’s quoted standard hourly rates to the time reasonably spent. While it is a relevant consideration, it is only one of several, and neither the default position nor dominant factor. It is to be considered in the context of other factors, including the risk assumed, the value generated, and proportionality.4
In that case Justice Brereton allowed remuneration in an amount equal to 20% of the assets realised by the liquidators, rather than on the time-charging basis as sought by the liquidators. In reaching that conclusion, his Honour referred to time spent by the liquidators on an ‘ultimately value-negative’ recovery in the circumstances of that liquidation.
In an application for an order terminating the winding up of On Q Group Limited, Justice Brereton stated he found it profoundly disturbing that in such a substantial liquidation (assets recovered were in excess of $600,000), there may be no distribution even to priority creditors. After material had been adduced showing the complexities of the liquidation, Justice Brereton observed that:
Even assuming that every dollar of remuneration can be supported on the basis of time spent at usual rates, it is difficult to see how it can be justified having regard to considerations of proportionality.5
It is usual practice to apply time based charges for professional services. Insolvency practitioners bring a great amount of professional skill to corporate collapses which are often complex and time-consuming to administer as required under the Act. Courts will continue to scrutinise the proportionality of remuneration claims. To that end, it is important to have very detailed narrations in timesheets and sound records of the complexities of the administration, the reasons for and value of work undertaken and the prudent review of costs.
This article was prepared by Neil Perl, Associate.
1 The following subsections of the Corporations Act 2001 (Cth) s 473(10) (court-appointed liquidators), s 504(2) (voluntary liquidators), s 449E(4) (administrators and deed administrators) and s 425(8) (receivers).
2 See Re Korda; in the matter of Stockford Ltd  FCA 1682.
3 In the matter of AAA Financial Intelligence Ltd (In Liquidation)  NSWSC 1270; In the matter of On Q Group Limited (In Liquidation)(Subject to Deed of Company Arrangement)  NSWSC 1428
4 In the matter of AAA Financial Intelligence Ltd (In Liquidation)  NSWSC 1270 at 
5 In the matter of On Q Group Limited (In Liquidation)(Subject to Deed of Company Arrangement)  NSWSC 1428, at .