The unanimous decision by the Full Court of the Federal Court in Templeton v Australian and Securities Investments Commission  FCAFC 137 confirms that the concept of proportionality is a well-recognised factor in considering the question of reasonable remuneration for an insolvency practitioner, and that, in assessing a remuneration claim, the Court can take into account the quality and complexity of the work as well as the value and nature of any property dealt with and the time reasonably spent. In applying the concept of proportionality, the Full Court noted that it is important that ‘like’ is compared with ‘like’, in the sense that the remuneration claimed for any particular aspect of an appointment is to be measured against the above factors as they apply to that particular aspect.
This is an important decision for external administrators whose remuneration is being reviewed by the Court, because various sections of the Corporations Act 2001 (Cth) import the requirement that remuneration fixed by the Court be reasonable: see, for example, sections 425(8), 449E(4), 473(10) and 504(2). Considering that external administrators are commonly appointed to companies that have complex issues but little property, this decision reiterates that external administrators must be able to justify the reasonableness and prudence of the tasks undertaken. This can go to the heart of the planning and execution of an appointment.
The Full Court decision is a timely contribution to the ongoing debates regarding insolvency practitioner remuneration.
The two perspectives to that debate are clear. On the one hand, behind every insolvency there invariably exists creditors, or other investors, who have suffered genuine loss and can ill-afford further substantial depletion of the limited asset pool. On the other hand, the insolvency practitioners with the skills and experience required to manage the myriad issues which arise (including, quite often, internal tensions between the stakeholders competing for those limited assets), and to maximise the return to creditors, are entitled to expect a reasonable return for their efforts.
The current system of the fixing of insolvency practitioner remuneration attempts to rationalise this tension by having judicial officers undertake a review task in respect of which they (with great respect) rarely have sufficient specific experience or expertise, by application of such poorly defined concepts as “reasonableness” and “proportionality”. To some extent that lack of specific experience or expertise can be compensated with evidence, and sometimes large amounts of it, re-hashing the detail of the tasks involved (as was the case in the Templeton matter) – but at what cost to the limited fund? One wonders what the cost to the relevant stakeholders has been of the preparation of detailed affidavit material for consideration by a judicial Registrar; again on review by the primary judge; then on appeal to the Full Court and now to be reconsidered yet again by another judge. And all of that for just one period of the relevant receivership.
It is submitted that some reform is required here, for the sake of optimising insolvency administration outcomes. Perhaps a system of summary peer review should be introduced whereby the work of the appointed insolvency practitioner is reviewed by an appropriate expert in order to identify any inefficiencies in approach or execution, such that the court can then quite simply undertake the task identified by the Full Court, being “to start with the Receivers’ claims and then to apply appropriate and justified discounts”. Such peer review should be limited to identifying inefficiencies which were clearly unreasonable, as opposed to “second guessing” all of the appointee’s judgment calls which fell within the range of reasonableness. Where the approach adopted by the Receivers was in accordance with court directions or orders, then that approach should not be subject to subsequent review or challenge; only its execution.
Failing such reform, there will continue to be cases where the creditors/investors are left feeling that the remuneration review process has itself added unnecessarily to their cost burden, and insolvency appointees are left feeling that there has been somewhat arbitrary adjustment to their claimed remuneration.
Background to Decision
In 2010, the Australian Securities and Investment Commission (ASIC) obtained orders for the winding up of 21 unregistered managed investment schemes and 52 associated companies (Schemes) and the appointment of receivers and managers by the Court to the Schemes (Receivers).
In relation to remuneration, the appointment orders provided that the Receivers were ‘entitled to reasonable remuneration and reasonable costs and expenses properly incurred in the performance of their duties and the exercise of their powers as receivers and managers…such sum to be calculated on the basis of the time reasonably spent…’ (Remuneration Order). A schedule of hourly rates was appended to the appointment orders.
The appointment involved investigation (and detailed reporting to the Court) in relation to alleged misconduct in the structuring and management of the Schemes, realisation of diverse scheme property (ultimately realising in the order of $100 million) and distribution of the proceeds to secured lenders and the balance to scheme members under a somewhat complex proof of debt process.
In June 2013, the Receivers filed an interlocutory application seeking approval for their remuneration, costs and expenses for the period 1 January 2012 to 31 March 2013. This amounted to $4,309,813.79. These costs related predominantly to the distribution phase of the receiverships. The Receivers had themselves applied a 10% discount to all of their fees and legal costs. On 17 March 2014, Registrar Luxton of the Federal Court fixed the Receivers’ remuneration, costs and expenses for the relevant period at $3,764,738.39, by applying certain reductions to the Receivers’ claimed remuneration.
The Receivers’ appealed the decision to Justice Gordon of the Federal Court who conducted a de novo hearing and ultimately dismissed the application for review on 12 September 2014. The Receivers appealed to the Full Federal Court.
Justices Besanko, Middleton and Beach unanimously found that the appeal should be allowed. The Full Court found that, although the language of the Remuneration Order and the context in which it was made allowed proportionality to be considered by the Court in assessing the question of ‘reasonable remuneration’, the primary judge had not appeared to have made ‘like with like comparisons’ in applying the concept of proportionality. The Full Court said that the size, nature and value of particular work is to be weighed against the remuneration claimed for that work. For example, the value of the “Investors / Distribution” work ought to have been compared with the remuneration claimed for work done in that category, rather than compared with the full amount of the remuneration claimed.
The Full Court recognised the need for the proportionality comparison to accommodate the reality that, in performing certain tasks, it may not be entirely clear ahead of completing those tasks what the precise benefit might be and that some work may be sufficiently complex and labour intensive to justify a higher cost/benefit ratio. However, the Court provided no real quantitative guidance as to what would be regarded as “proportional”, save to say that “some work may be sufficiently complex and labour intensive such as to justify a cost/benefit ratio of 6/10”.
The second successful ground of appeal was in relation to a reduction applied by the primary judge to the Receivers’ remuneration by reference to a delay of two years between a pooling judgment and the filing on an application for directions for distribution. Their Honours said that for the delay to justify a reduction, there had to be a link to increased work or an increased level of inefficiency that would not have arisen absent the delay. In the Court’s view, this link was not shown; the evidence demonstrated that the delay was not unreasonable and while her Honour took the delay into account in partly justifying a 20% reduction, her Honour did not give any direct linkage to support the reduction or to explain what part of it was caused by the delay.
The last error arose in relation to a discount or penalty applied by the primary judge by reference to the absence of evidence as to the efficiency of the Receivers’ adjudication process. Her Honour considered that the amount claimed by the Receivers for the adjudication of claims was ‘too high’. The Court considered that as the appellants led uncontested evidence as to the method implemented and the reasons for this, it was not open to say that the time spent was ‘too high’. Further, there was no evidence of any other more efficient process that would have reduced the time taken.
This matter will now be listed for rehearing of the application for review before another judge of the Federal Court to be considered afresh on all issues, subject to the Full Court’s reasons.
Pending further clarification of the law or reform, the following lessons may be taken from the decision:
- Careful consideration should be given at the outset to the form of the court order appointing the receiver. Depending upon the purpose of the appointment, it may be appropriate to clearly set out in the order that the remuneration is to be determined purely on a time costing basis only without importing any concept of proportionality. In cases where there are doubts as to the utility of any proposed action, consideration should be given to seeking the appropriate directions from the court in a timely manner appreciating that this course will add to the costs of the administration.
- Care should be taken in selecting the categories of work for which approval is being sought to ensure that the work can be easily reconciled to the benefits derived from the insolvency administration on a cumulative “like for like” cost benefit basis.
- In the event a decision is made to voluntarily discount from the time-based charge, care needs to be taken to explain the nature and the extent of any previous time write offs and the discount so it is clear that the voluntary discount is off the “real or actual” claim as distinct from the “notional arithmetic ambit” claim.