The Insolvency Law Reform Act 2016 (Cth) (ILRA), expected to come into effect on or before 1 March 2017, will change the existing relationships of insolvency practitioners such as administrators, liquidators and trustees. In new content written for Quick on Costs, Roger Quick conducts a comparative analysis of the pre ILRA regime and the amendments by ILRA, and considers the usefulness of developments in the United Kingdom (UK) and the United States of America (America) in addressing how Australia responds to the problems surrounding the remuneration of insolvency practitioners and service providers to them. Following this analysis Roger makes a case for change that extends beyond ILRA to an Australian answer to these problems.

Remuneration v Disbursements

Currently in Australia an insolvency practitioner’s disbursements, such as lawyers’ fees, are not determined under a statutory provision requiring a court to determine the insolvency practitioner’s remuneration. The right to remuneration is statutory, the right to reimbursement of outgoings “costs, charges and expenses”, derives from the indemnity from a trust estate given to a trustee by equity against “costs, charges and expenses” properly incurred. In Australia and other jurisdictions, such as Hong Kong, an insolvency practitioner must subject disbursements such as lawyers’ bills to critical scrutiny as they must justify their disbursements to be able to recoup them from a trust estate. Lawyers’ bills to an insolvency practitioner for services rendered in the winding up of a company will commonly rank as the insolvency practitioner’s largest single disbursement and so a failure to provide this critical scrutiny can amount to conduct prejudicial to the interests of some or all of the company’s creditors or members and result in the consideration of the insolvency practitioner’s removal. See for example In the matter of Joe and Joe Developments Pty Ltd (subject to a Deed of Company Arrangement) [2014] NSWSC 1444 and In the matter of Joe and Joe Developments Pty Ltd (subject to a Deed of Company Arrangement) [2014] NSWSC 1703.

A case for change

Following this analysis, Roger makes a case for change based on three high level problems:

1. where courts have to quantify the remuneration and disbursements of insolvency practitioners relying on two different, potentially inconsistent, processes ie the statutory determination of remuneration and the determination of disbursements by process of assessment or referral to a referee;
2. the use of assessment as a mechanism for determining satisfactorily the amount of lawyers’ bills; and
3. determining what is the proper place of proportionality in quantifying an insolvency practitioner’s remuneration, in particular with the use of time billing by the insolvency practitioner or the practitioner’s service providers.

Time billing

Treating the assessment of remuneration and disbursements as one and treating the different categories of insolvency professional as one category of appointee might resolve some of these problems. However it does not address the problems of the abuse of time billing. Brereton J in Re AAA Financial Intelligence Ltd (in liq) ACN 093 616 445 (in liq) [2014] NSWSC 1270 at [40], quoted UK judge Ferris J to explain these difficulties:

... charging by reference only to time spent, was capable of being exploited as virtually a licence to print money. Further the person charging had complete control over the amount of time spent; he could work at whatever rate he chose or of which he was capable; he was subject to no control; save that of his own conscience and he could make sure that he achieved those rates for every hour actually worked, largely without regard to the value achieved for the client.

In response to the potential for abuse, Finkelstein J in Korda, in the matter of Stockfield Limited [2004] FCA 1682, suggested the adoption of the American “lodestar” amount, which is an amount reached by the number of hours reasonably spent by the insolvency practitioner multiplied by a reasonable hourly rate, considered with necessary provisions for adjustment based on quality, difficulty and result of the work. The lodestar method and Finkelstein J’s judgment met with great approval and were perhaps the origin of changes made by the Corporations Amendment (Insolvency) Act 2007 (Cth) intended to allow a court to exercise close and more effective scrutiny of remuneration for insolvency practitioners  in insolvency administrations.

After an analysis of the lodestar method, Roger suggests that it does not provide an answer to the contemporary problems faced in Australia. Two reasons he gives for this are:

1. the importance in Australian law of the indemnity principle; and
2. the link between civil rights legislation and bankruptcy legislation that has proved central to the development of the lodestar method but which does not relate to Australia.

An Australian answer

At the conclusion of the comparative analysis of retainers by insolvency professionals, briefly referred to above, Roger suggests the following elements that should be considered for a distinctly Australian answer to current Australian problems in remunerating insolvency professionals:

1. consideration of UK developments including the Kempson Review of Insolvency Practitioners’ Fees in mid 2013 and the  Practice Statement of 2004, now a Practice Direction of 2014;
2. a greater recognition of concepts and techniques such as Legal Project Management and Alternative Fee Arrangements as tools to check, if not reverse, institutionalised time billing; and
3. a full consideration of current bases of remuneration in addition to percentage and updated hourly rates models.

The full version of this content will be released in the December update of Quick on Costs.