Reasonableness of Insolvency Practitioner’s Remuneration

By: Adam Chen & Muna Laloo

External administrators are only entitled to an amount of fees that is reasonable for the work that they and their staff properly perform. This is only once these fees have been approved by a creditors’ committee, creditors or a court.

What is reasonable will depend on the type of external administration and the issues that need to be resolved.

How are fees calculated?

Fees may be calculated using one of a number of different methods, such as:

  • On the basis of time spent by the external administrator and their staff;
  • A quoted fixed fee, based on an upfront estimate; or
  • A percentage of asset realisations.

The commonly accepted method, and usual practice, is to ‘time-charge’ for professional insolvency services, but does this method apply proportionality?

Proportionality and time-charging

The concept of ‘proportionality’ is not clearly dealt with under Australian law.  However, the Corporations Act 2001 (Cth) does provide a list of matters which 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.

Some common matters which Courts appear to examine 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 inconsistent seniority (and charge-out rate) for the complexity of the task.

In assessing proportionality, courts appear likely to compare the practitioner’s time-costed remuneration to the amount of funds available for distribution to creditors. It has been described by Justice Brereton that the situation where remuneration exceeds or comes close to exceeding the funds available for creditors as extremely concerning and disturbing.

In AAA Financial Intelligence Limited [2014] NSWSC 1270, Justice Brereton assessed the “reasonable and proper costs and expenses” which liquidators were entitled to claim from trust assets under their control.

In determining 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.”

In the above 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.  To reach that decision, his Honour referred to time spent by the liquidators on an ‘ultimately value-negative’ recovery in the circumstances of that liquidation.

Applying time based charges for professional services is the usual practice. Insolvency practitioners bring a great amount of professional skill to corporate collapses which are often complex and time-consuming to administer.  Adding to this, external administrators must undertake some statutory tasks that may not directly benefit creditors such as forms to be submitted to ASIC. The external administrator is entitled to be paid for completing these tasks.

Courts will continue to examine the proportionality of remuneration claims. Therefore it is important to have very detailed narrations in timesheets and sound records of the complexities of the administration, the reasons for and the value of work undertaken, as well as a the prudent review of costs.