This article has been contributed to the blog by Caitlin Fell and Justine Erickson. Caitlin Fell is an associate in the insolvency and restructuring group of Osler, Hoskin & Harcourt LLP and Justine Erickson is a summer student at Osler, Hoskin & Harcourt LLP.

Ontario courts have recently reviewed the reasonableness of fees of court-appointed officers in the insolvency context. In two recent cases, Bank of Nova Scotia v Diemer, 2014 ONSC 365, and Re TNG Acquisition Inc. 2014 ONSC 2754, the court considered what is fair and reasonable and, in both cases, lowered the fees requested by the relevant officers.

Legal Principles

In Diemer, the court discussed the law as it relates to fee approvals for court-appointed officers. The court referred to Re Bakemates International Inc., [2002] OJ No 3569, where the Ontario Court of Appeal held that there is an onus on a receiver to prove that the fees for which it requires approval are fair and reasonable, and that a court can adjust these fees. There are several methods to determine what is reasonable in each circumstance.

In Borins J.A.’s opinion, the court approval process exists to allow any interested party to question the receiver’s activities and conduct. The Court of Appeal indicated that accounts should be clear and easy to understand by those affected by the proceeding and should be verified by an affidavit. Bakemates also cited with approval a New Brunswick Court of Appeal case – Federal Business Development Bank v. Belyea (1983), NBJ No 41 – where the court discussed the concept that compensation must be reasonably proportionate to the quantum of money at stake in the case and that while a receiver’s services should be valued in a manner that sufficiently induces the right people to be receivers, the process should be done efficiently. The court in Diemer held there should be a practical limit on the fees allowed based on the value contemplated in the proceeding.

The court in Diemer determined that the factors it should consider include “(a) the nature, extent and value of the assets handled; (b) the complications and difficulties encountered; (c) the degree of assistance provided by the company, its officers or its employees, and (d) the cost of comparable services when performed in a prudent and economical manner”. The assumption that the court will automatically approve a standard hourly rate is incorrect, and the rates charged should suit the size of the estate and the nature of the task. The court also cited Pandya v. Simpson, [2006] OJ No 2312: “The court, with the assistance of opposing counsel, has to play the role of what a client would ordinarily do, namely consider whether the hourly rate is fair and reasonable in light of the nature of the work involved and the amounts in issue.”

Goodman J. indicated that although counsel does not generally have to come to court often to seek approval, they are risking criticism of their fees if they wait to obtain approval when fees are accumulating quickly relative to the size of the estate.

Bank of Nova Scotia v. Diemer

Bank of Nova Scotia v Diemer was a motion to settle fees for counsel of a court-appointed receiver. In this case, the receiver and counsel’s work lasted around two months – all secured creditors had been satisfied and there was an agreement of Purchase and Sale that had already been substantially completed before this receiver became involved. The debtor had continued to carry on the day-to-day operation of the business.

In this case, the court referred to Bakemates and Belyea and considered the proportionality of the effort expended relative to the size of the receivership. Goodman J. determined that the efforts here are not equivalent to a receiver who has to spend time learning to operate the business and preserving and realizing on the assets. As such, rates should be adjusted to reflect the work expended and size of the estate, which was ~$8 million.

He noted that many of the matters listed should have been taken care of by more junior staff at a lower cost and was concerned about the number of hours spent on matters that seemed to be administrative. He was also concerned about duplication of efforts because of the number of lawyers who charged time to the file, but did note that some can be justified due to the different expertise needed.

Even though there was previously a general approval of a fee order that included the term “standard rates”, the court noted that counsel are at risk of non-acceptance when they wait to bring their accounts to court. The court determined that the number of hours in relation to the nature of this receivership reflects inefficiency and that counsel had not assessed the reasonableness of their fees in relation to the size of the estate. The court significantly reduced receiver’s counsel’s fees. Goodman J. stated that the responsibilities of the receiver and its counsel “should not be made into a means of absorbing money of creditors, debtors and others whose interest this court must protect.”

Re TNG Acquisition Inc.

NexInnovations Inc., now known as TNG Acquisition Inc., had entered into CCAA protection in 2006, appointed a Monitor, and had a plan sanctioned. It later filed for CCAA protection again and was ultimately assigned into bankruptcy. The trustee made a request for information to the Monitor asking it for information relating to the 2006 Plan. The Monitor and its counsel provided the information and the trustee moved for an order to have the Monitor and its counsel’s fees relating to the request be paid out of a fund that had been set up as part of the previous plan. The fund was set up to pay creditors and fees and was not part of the bankruptcy estate. At that point, the final distribution had been paid to the unsecured creditors and the remainder of the fund was reserved for professional and administrative costs. The trustee also moved to have the remainder after payment of fees be paid into the estate.

The court referred to the work provided by the Monitor as an archive retrieval request. The tasks were generally administrative and clerical and the Monitor’s counsel was only required to put together a protocol for making the information available to the trustee. The majority of the hours billed were by a partner and a senior manager. The court decided it was only appropriate for the Monitor to bill at rates appropriate to clerical work, regardless of whether a partner or senior manager actually completed those tasks. It noted that partner rates are more appropriate for complex advisory tasks where their unique skills are required, especially in the context of court-appointed officers.

In this case, the court applied the lower clerical rate to all hours charged by the Monitor and rejected an “administrative expenses” charge that had been added to each account, explaining that overhead is usually included in professional hourly rates. Disbursements were accepted, as well as the proposed fees charged on another account that the court inferred was related to the preparation of a Monitor’s Report.

With regard to the Monitor’s counsel’s fees, the court questioned why a simple request would incur that level of fees and concluded that they were disproportionately high when measured against the type of request made by the trustee. The court ultimately determined that a lesser payment would be reasonable in light of the relationship between two court-appointed officers and the nature of the work.  The remainder of the fund was paid into the estate.

In conclusion, Brown J. stated:

“I would conclude by observing that we are reaching the end of the era where the fees for professional services, such as the giving of legal or insolvency advice, are calculated and billed on an hourly rate basis. I think court-appointed officers, such as the Trustee or the Monitor, when called upon to perform routine clerical or administrative tasks, must explore, as part of the prudent discharge of their duties, alternative billing arrangements, including capped fees, instead of persisting in employing the hourly rate fee-billing system which has been popular for the last half century.”

Conclusion

As shown in these recent cases, the courts are taking a more active stance in assessing the appropriateness of fees charged by court-appointed officers and their counsel in the context of insolvency proceedings. It would be prudent for officers and counsel to consider the court’s guidelines when approving fee’s going forward and to appropriately document and detail the nature of the work, including the complexities and issues on the file and to ensure that the file is properly leveraged.

 Caitlin Fell and Justine Erickson.