It is generally recognised by Courts that an insolvency practitioner’s remuneration must be proportionate to the size of the external administration, value of realisations and distributions available to creditors. We covered some of the key judicial decisions in our article last April 2015 (link is here).
Although the proportionality requirement is not new, its meaning and application remains controversial and hotly debated. In that regard, one matter receiving much attention is the appropriateness of determining remuneration by time-cost, as compared to a percentage of realisations.
In this article, we cover two recent Supreme Court of New South Wales judgments from the first quarter of 2016 dealing with the appropriateness of time-based remuneration from the perspective of proportionality and provide some insight about the circumstances in which a challenge to time-based remuneration is less fertile.
In the matter of Wine National Pty Limited, James Estate Wines Pty Limited and Liquor National Pty Limited
On 20 January 2016, Justice Black of the Supreme Court of New South Wales handed down his decision in the matter of Wine National Pty Limited, James Estate Wines Pty Limited and Liquor National Pty Limited [2016] NSWSC 4. This was an application by voluntary administrators and court appointed receivers to entities associated with the James Estate winery in the Hunter Valley for approval of their remuneration, costs and expenses. The claims were substantial – more than $2,000,000 between the various practitioners.
After hearing submissions including from one of the investors disputing the reasonableness of the remuneration claimed, his Honour granted the remuneration on a time-costed basis saying among other things (at 34)(our emphasis added):
I recognise the importance of proportionality in determining the amount of an insolvency practitioner’s remuneration, a matter which was emphasised in the judgment of Brereton J in AAA Financial Intelligence Ltd (in liq) (No 2) above. However, it seems to me that the substantial costs claimed in these receiverships reflect several matters, none of which were in the insolvency practitioners’ control, namely the issues as to ownership of the wine; the significant costs involved in physical custody, transport and sale of 200,000 bottles of wine; that Messrs Cussen and Strawbridge were faced with an unsuccessful challenge to their appointment as Court-appointed receivers in the Douglas Hawkins application and are unlikely, as a practical matter, to be able to recover the costs of that challenge from the persons who brought it; the range of legal issues; and the complexity of the arrangements for distribution or sale of the wine. In those circumstances, notwithstanding the desirability of proportionality, it seems to me that the Court cannot arbitrarily reduce the amount allowable by way of the actual costs, disbursements and remuneration of the insolvency practitioners to reach a total that would be less than that which was actually incurred.
In the matter of Independent Contractor Services (Aust) Pty Limited ACN 119 186 971 (in liquidation) (No 2)
In another decision of the Supreme Court of New South Wales on 23 February 2016, Justice Brereton handed down his decision in the matter of Independent Contractor Services (Aust) Pty Limited ACN 119 186 971 (in liquidation) (No 2) [2016] NSWSC 106. That application was in part for approval of the liquidators’ time-based remuneration in the amount of $49,510.50 plus GST. This figure was already substantially discounted on total time incurred in the liquidation of approximately $115,000.
Justice Brereton repeated the observations he made in In the matter of AAA Financial Intelligence Ltd (In Liquidation) [2014] NSWSC 1270 that time-costed remuneration may not be allowed in circumstances where the total remuneration is not proportionate to the administration. Further, Justice Brereton repeated that he considered a commission based method was preferable in smaller administrations where less property was available for realisation and distribution to creditors.
In this application, Justice Brereton allowed remuneration of $30,000 being:
- 2% of realisations ($4,236);
- Plus 15% of distributions ($16,647); and
- Plus a further approximately $9,000 which was a discretionary amount awarded having regard to the size of the fund and challenges in this liquidation.
In coming to this determination, Justice Brereton had taken into account that a substantial amount of the work had occurred during the voluntary administration (for which the applicant had already been remunerated) and remarked that the Court ought not to discourage liquidators from undertaking small but difficult liquidations.
Implications for time-based remuneration claims
Having regard to the two decisions mentioned in this article, and the preceding authorities, the strongest challenge to time-based remuneration comes in matters where the insolvency practitioner’s remuneration seems disproportionate to the amount available to the creditors.
The volume of work undertaken in both large and small matters is often impacted by factors that are beyond the practitioner’s control such as complexities in securing and realising assets, disputes with claimants, as well as, personal risk and exposure for the practitioner.
In view of what Justice Black said about the Court not arbitrarily reducing the practitioner’s remuneration and the concern raised by Justice Brereton to not discourage practitioners from taking on small but difficult appointments, time-based remuneration is likely to continue to be seen generally as a reasonable and preferable measure of determining remuneration in complex and unpredictable administrations.
This article has been prepared by Jonathan Kramersh, Partner and Neil Perl, Associate.