The recent decision of the Federal Court (Besanko J) in Lock, in the matter of Cedenco JV Australia Pty Ltd (in liq) (No 2)  FCA 93 illustrates the critical importance for administrators and liquidators of complying with the requirements in relation to remuneration reports to creditors, and the severe adverse consequences which may flow if they fail to do so.
The plaintiffs, Mr Lock and Mr Sheahan, are the joint and several liquidators of three related companies, having previously been the joint and several administrators. Between 2010 and 2014, Mr Lock and Mr Sheahan performed their roles, first as administrators and then as liquidators.
Mr Lock and Mr Sheahan purported to receive remuneration for their work following resolutions by creditors of the companies. The Corporations Act 2001 provided (now see section 70-45 of the Insolvency Practice Rules (Corporations) 2016) that before a remuneration determination for an administrator or liquidator of a company is made by resolution of the creditors, the administrator/liquidator must:
- prepare a report setting out such matters as will enable the company’s creditors to make an informed assessment as to whether the proposed remuneration is reasonable, and give a copy of the report to each of the company’s creditors at the same time as the creditors are notified of the relevant meeting of creditors;
- the report must contain a summary description of the major tasks performed, or likely to be performed, by the administrator/liquidator, and the costs associated with each of those major tasks.
The present proceeding came about because Mr Lock and Mr Sheahan did not comply with the above requirements, with the consequence that the creditors’ resolutions fixing or determining their remuneration were prima facie invalid (the Court observed that the reports in question described the work being carried out at “such a high level of generality” that the reports fell well short of the requirements). This led to Mr Lock and Mr Sheahan making an application to the Court seeking orders pursuant to s 1322(4)(a) of the Act that the fixing of their remuneration was not invalidated by any non-compliance with the Corporations Act; or, in the alternative, they asked the Court to determine their remuneration.
ASIC intervened in the proceeding and played a major role in it, including cross-examining witnesses, adducing evidence and making detailed submissions.
ASIC submitted that the plaintiffs had not established the circumstances necessary for the making of orders under s 1322(4)(a) and that it was accordingly for the Court to determine the plaintiffs’ remuneration. It further submitted that the amount claimed by the plaintiffs for remuneration of approximately $5.7 million was significantly overstated for a number of reasons, including excessive hourly rates, unnecessary work carried out and inappropriate allocation of tasks in terms of the seniority of staff allocated to the task.
The Court accepted ASIC’s submissions.
Pursuant to section s 1322(4)(a) of the Act, the Court may make an order declaring that any act, matter or thing purporting to have been done under the Act (or in relation to a corporation) is not invalid by reason of any contravention of a provision of the Act (or a provision of the constitution of a corporation). The Court must not make such an order unless it is satisfied of various matters, such as, the relevant act, matter or thing is essentially of a procedural nature; that the person or persons concerned in the contravention acted honestly; and that no substantial injustice has been or is likely to be caused to any person.
The Court here concluded that the plaintiffs acted honestly with respect to the contraventions. However, substantial injustice had already been caused to creditors because they have been deprived of the opportunity of meaningful examinations of and discussions with fellow creditors about the plaintiffs’ fees before the resolutions were carried.
This meant it was left to the Court to determine the plaintiffs’ remuneration having regard to what is reasonable in accordance with the Act. Before descending into a detailed analysis of the remuneration claimed by the plaintiffs, the Court observed that “it cannot be said that the remuneration claimed appears reasonable”, for reasons including that:
- the plaintiffs’ overall remuneration of approximately $5.7 million is very high in circumstances where there were effectively no assets to get in (other than a tax refund), no business to carry on, no claims to defend and no proceedings brought and recoveries made;
- the plaintiffs’ hourly rates (partners at $700 per hour, senior managers at $550 per hour and managers at $450 per hour) are high and the major justification given for such high hourly rates – the risk of not recovering fees – was not present in the case of these administrations and liquidations.
The Court ultimately concluded that a discount of 10-20% with respect to the plaintiffs’ hourly charges was appropriate and, further, a substantial discount of the fees claimed for various ‘work streams’ (up to 65%) was also called for. The parties were given the opportunity to consider the Court’s reasons and make the necessary disallowances/reductions before the proceedings are finally disposed of.
- It is imperative for insolvency practitioners to dot the i’s and cross the t’s in relation to remuneration reports. If a report does not meet the requirements, then any subsequent creditors’ resolution determining the insolvency practitioner’s remuneration will be invalid.
- The Court may not excuse any contravention of the requirements in relation to remuneration reports, on the basis that the “no substantial injustice” limb of section s 1322(6) of the Act is not satisfied.
- If it is left to a Court to determine the remuneration that an external administrator or a liquidator of a company is entitled to receive, then expect the Court to be thorough and exacting in this process, even more so if ASIC elects to intervene in the proceeding.