Remuneration
25The liquidators' claim $49,915 for remuneration from the Adviser Funds.
26As I sought to explain in the first judgment (at [18]), in allowing remuneration to a liquidator out of trust property, the Court treats the work done in administering the trust as an incident of the liquidation and approaches the application for remuneration as if it were one by a liquidator for approval of remuneration [Alphena Pty Ltd v PS Securities Pty Ltd [2013] NSWSC 447; (2013) 94 ACSR 160, [53], [63]-[64]]. A liquidator is entitled to "reasonable remuneration" for his or her services in winding up the company [Re Wm Rose & Co Ltd (1897) 3 ALR (CN) 65, 66; Re Stockford Ltd; Korda [2004] FCA 1682; (2004) 52 ACSR 279, [38]], and the court has a very wide discretion in allowing and fixing the level and the basis of remuneration [Re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171]. The liquidator bears the onus of establishing that the remuneration claimed is fair and reasonable, including that the work was properly performed in the due course of administration and that the amount claimed is a fair and reasonable reward for it [Re Anderson Group Pty Ltd [2002] NSWSC 764; (2002) 20 ACLC 1607].
27Corporations Act, s 499, relevantly provides, in respect of a creditors' voluntary winding up (which the present liquidation is) as follows:
(3) [How liquidator's remuneration may be fixed] The remuneration to be paid to the liquidator may be fixed:
(a) if there is a committee of inspection - by that committee; or
(b) by resolution of the creditors.
(3A) [Where remuneration not fixed] If:
(a) no remuneration has been fixed under subsection (3); and
(b) a meeting of the company's creditors is convened; and
(c) a resolution under paragraph (3)(b) cannot be passed because of the lack of a quorum; and
(d) there has been no previous application of this subsection to the remuneration of the liquidator;
the creditors are taken to have passed a resolution under paragraph (3)(b) determining that the liquidator is entitled to remuneration of:
(e) whichever is the greater of the following amounts:
(i) $5,000;
(ii) if an amount is specified in regulations for the purposes of this subparagraph - that amount; or
(f) if the liquidator determines a lesser amount - that lesser amount.
28Section 504(1) provides that the court may, at any time before the deregistration of the company, review the amount of the remuneration of the liquidator.
29At the creditors meeting which resolved that the company be wound up, the creditors by resolution approved remuneration for the administrators of $95,000, and remuneration for the liquidators at their firm's standard rates, subject to a cap of $80,000 plus GST. While Mr Tonks reiterates that the total amount claimed of $110,497 claimed for remuneration and expenses in the respect of the Adviser Funds "form part of the remuneration amount approved by creditors to date during the administration and liquidation of the Company" [Tonks, 15/8/14, para 62], as I pointed out in the first judgment, if the remuneration is to be paid from trust funds, the general creditors who participated in that meeting (to the exclusion of the trust beneficiaries) have no interest in the trust funds, and their approval is to that extent of little significance. There is no approval from the Advisers and Stockbrokers, whose interest in the trust funds will bear the burden. Thus while it is correct that the liquidators' remuneration - for the whole of their work, both general liquidation and trust-specific - has been fixed by the creditors under s 499(3) at $80,000, and there is no application before the Court for a review of that, that is of little moment in the exercise of the jurisdiction presently invoked, to authorise the application of the trust funds in payment of remuneration - save that it sets an outer limit on the total remuneration for the whole liquidation, including general liquidation work and administration of the non-trust assets as well as administration of the trust funds.
30The Liquidators' remuneration claim of $49,915 comprises (a) $4,455 for identifying all Advisers; (b) $20,485 for identifying and collecting clawback commission and adviser debt; (c) $2,617.50 for identifying and separating adviser funds from the company's general moneys; (d) $7,097.50 for issuing adviser notices; (e) $11,442.50 for liaising with advisers; and (f) $3,817.50 for liaising with Acompli and others in respect of Adviser commissions. The claim is supported by itemised records derived from the liquidators' time recording database and is calculated in accordance with their firm's standard hourly rates, as set out in the Administrators' Report to Creditors of 11 March 2013, pursuant to which they were appointed as liquidators. Mr Tonks deposes that he believes that all the work claimed was necessary to discharge the liquidators' functions, and that the time taken was reasonable having regard to the nature and complexity of the tasks involved. While one might quibble with individual items in the liquidators' claim - and I will in due course refer to some of them - that is not the real issue. I do not doubt that substantially all the work in respect of which remuneration is claimed was performed, and took the time claimed. Nor do I doubt that the liquidators' standard rates are within the range of those charged by similar professionals for similar work. If the cost of the liquidators' services for the time spent at their standard quoted rates is the correct measure of remuneration, then their claim for remuneration is justified. The real issue is whether the costs of their services, so calculated, is a reasonable fee in all the relevant circumstances - including the nature and value of the property in question. Alternatively put, does the formula of time reasonably spent at standard hourly rates provide the proper measure of reasonable remuneration?
31As originally framed, the liquidators' claim for remuneration and expenses would have exhausted the trust funds. Allowing it would have meant that the only beneficiaries of the liquidation would have been the liquidators. The concessions made by the liquidators, coupled with my disallowance of a component of the disbursements, have, to some extent, moderated that position, which may be summarised as follows.
32The Adviser Funds amount to $180,593. While they were the administrators of the company - before they became its liquidators - the liquidators had identified $103,943 in designated "commission accounts", representing Adviser Funds. How this was increased to $180,593 is not entirely explained; despite a direction for provision of a statement of receipts and expenditure of the trust funds, none has been provided (the only such statement provided related to the non-trust assets of the company). Only about $16,081 appears to have been recovered from debtors. (The balance might be explained by ongoing receipt of commission payments after the date of appointment of the liquidators). Of the $180,593, $60,583 has already been taken by the liquidators in satisfaction of their disbursements; my partial disallowance of the Norton Rose disbursement will effectively reduce that to $51,593. In addition, $26,702 will be payable in respect of the costs of these proceedings. If the liquidators' remuneration is allowed, as claimed, at $49,915, that will leave $52,383 for distribution to beneficiaries.
33The Adviser Funds should not however be viewed in isolation. As has been mentioned, the liquidators do not press their claim for $8,572.50 remuneration in respect of the Stockbroker Funds - which amount only to some $7,427. But in respect of the non-trust assets, of the $139,958 realised, the liquidators have, in their capacity as administrators, already received $95,000 by way of remuneration and $3,885 in expenses; they have expended a further $8,969 for debt collection costs and $2,188 for agents/valuers' fees; and unsecured creditors are unlikely to receive any dividend.
34Viewed as a whole, the administration and liquidation of trust and non-trust assets amounting to some $327,978 would result in a distribution to beneficiaries of only $59,809, while the administrators and liquidators would receive remuneration of $144,915 (plus whatever remuneration they may yet recover from the remaining non-trust assets for general liquidation work), and recoup disbursements of $90,783. Of the Adviser Funds of $180,593, over 70% would be paid to the liquidators or their agents, and less than 30% to those beneficially entitled. While this is a marked improvement on the original position, whereby by 100% would have been paid to the liquidators and none to the beneficiaries, it remains a confronting and disturbing fact that only half of the identifiable trust funds of about $104,000 received by the liquidators at the outset would be available for distribution. One cannot escape the impression that the predominant beneficiaries of the liquidation, whether viewed overall or viewed in relation to the Adviser Funds, would be the liquidators.
35Confronted with a similar, though much more extreme, situation in Mirror Group v Maxwell - where, in a very complex administration, receivers had realised net assets of $1,672,500 and claimed costs, disbursements and remuneration of $1,628,572 - Ferris J observed (at 645):
Having in this way done my best to set out the figures objectively I cannot escape saying that I find them profoundly shocking. If the amounts claimed are allowed in full this receivership will have produced substantial rewards for the receivers and their lawyers and nothing at all for creditors of the estate. I find it shameful that a court receivership should produce this result in relation to an estate of more than £1.5m.
36This is, of course, a much smaller administration. But the profound concern that the liquidators appear to be the dominant beneficiaries of the administration remains. It must be born in mind that the fundamental rationale of a liquidation is to get in and realise the assets of the company, establish who are the creditors and contributories, and distribute the assets for the benefit of the creditors and, to the extent of any surplus, the contributories. Indeed, as Ferris J explained in Mirror Group v Maxwell (at 648), liquidators are under a fiduciary duty to protect, get in and realise assets and property belonging to creditors or beneficiaries and pass it on to them, and in so doing are expected to exercise proper commercial judgment in carrying out their duties and to account both for the way in which they exercised their powers and for the property dealt with. Where the sole or dominant beneficiary of a liquidation is not the creditors but the liquidator, that fundamental purpose has not been achieved. While there are undoubtedly cases in which the proper pursuit of debtors and/or officers, in the apparent interest of creditors and/or the public, will prove unsuccessful or generate a return that will not exceed the liquidator's reasonable remuneration and disbursements, claims for remuneration in cases where the liquidator appears to be the main beneficiary of the liquidation call for close scrutiny.
37The justification advanced for the remuneration claimed in this case is founded on time spent, at the liquidators' standard rates. The shortcomings of time-based costing as the basis for remuneration, particularly in smaller liquidations, have been highlighted in a number of cases. As long ago as Re Carton Ltd (1923) 39 TLR 194, PO Lawrence J, after referring to the usual English practice of adopting a scale based on a percentage of realisations and distributions, said (at 197):
The Court as a general rule only fixes remuneration on a time-basis if there is no other method which would operate to give the liquidator fair remuneration. Experience has shown that the time occupied by a liquidator and his clerks affords a most unreliable test by which to measure the remuneration. Even the best accountant may spend hours over unproductive work, let alone his more or less efficient staff of clerks. Moreover, it is quite impossible to check charges based on such a system and to gauge the value of odd hours said to have been spent on the affairs of the company. The Court has long since come to the conclusion that the proper method to adopt whenever it is practicable is to assess the remuneration according to the results attained.
38In Mirror Group v Maxwell, Ferris J said that while time spent was a relevant factor in fixing remuneration, it was important not to place too much emphasis on it, since it was the value of the services rendered which was to be rewarded, not the cost of rendering them. After referring to the passage cited above from Re Carton Ltd, his Honour continued (at 651-2):
In more recent years the prevalence of time recording in the offices of insolvency practitioners (and, come to that, solicitors) has tended to give time an importance in the assessment of remuneration which PO Lawrence J would have denied it. But I am not aware that, in the field of remuneration for court-appointed receivers, those referred to in the Insolvency Act as 'office holders' or others in a similar position, this emphasis has received any judicial indorsement.
In my judgment it is vital to recognise three things in this field. First, time spent represents a measure not of the value of the service rendered but of the cost of rendering it. Remuneration should be fixed so as to reward value, not so as to indemnify against cost. Second, time spent is only one of a number of relevant factors, the others being, as I have said, those which find expression in r 2.47 and similar rules. The giving of proper weight to these factors is an essential part of the process of assessing the value, as distinct from the cost, of what has been done. Third, it follows from the first two points that, as the task is to assess value rather than cost, the tribunal which fixes remuneration needs to be supplied with full information on all the factors which I have mentioned.
39In Re Stockford Ltd, Finkelstein J said (at [38]-[40]) that in order to fix a reasonable fee, a balance must be struck between two competing views, one being that the object to be attained was to conserve the fund under administration, thereby maximising the return to creditors (reflected in the early English position, where fees were fixed in a specific amount or based on a percentage of the estate); and the other that the market should be allowed to operate in the normal way with insolvency practitioners being entitled to charge their usual hourly rates which, at least to a degree, are likely to be competitive (at 293-4). His Honour suggested that in small insolvencies the court should develop a rate or scale that is fair and reasonable for both insolvency practitioners and creditors, perhaps as a percentage (perhaps on a sliding scale) of the assets distributed (as Ferris J's working party had recommended), and that guidance for the appropriate percentage might be obtained from the legislation that regulates fees for trustee companies ((VIC) Trustee Companies Act 1984, s 21 - since repealed), and the fees chargeable by trustees in bankruptcy ((CTH) Bankruptcy Act 1966, s 162(2) and (CTH) Bankruptcy Regulations 1996, reg 8.07 - a sliding scale, commencing with 10% of first $30,000 of receipts). As to larger administrations, his Honour continued:
[42] In complex or large administrations it is inevitable that insolvency practitioners will wish to have their fees calculated on a time basis. The courts have endorsed this approach for so long time that it is now impossible to reverse the trend. Nevertheless, as Ferris J pointed out both in his address to the Insolvency Lawyers Association and, more importantly, in his judgment in Mirror Group Newspapers Plc v Maxwell (No 2) [1998] 1 BCLC 638, this basis of charging is one of the greatest sources of disquiet in relation to professional remuneration. The observations of P O Lawrence J in Re Carton Ltd (1923) 39 TLR 194 are as true today as they were in 1923.
40His Honour quoted the passages from Mirror Group v Maxwell set out above, and added:
[46] Ferris J returned to the theme of hourly charging rates in his lecture to the Insolvency Lawyers Association. He said that:
A moment's thought will show that charging by reference only to time spent measured in units of whatever duration, whether minutes or hours or days, is capable of being exploited as virtually a licence to print money. The person charging has complete control over the amount of time spent. He can work at whatever rate he chooses or of which he is capable. He is subject to no control save that of his own conscience which ensures that the work done is proportionate to the difficulty or importance of the task in the context in which it needs to be performed. His charging rates are fixed by himself, subject only to such modest pressures as competition may bring to bear. And, best of all from his point of view, he can make sure that he achieves those rates for every hour actually worked, largely without regard to the value achieved for the client. [(1999) 2 Insolvency Law Journal at 48.]
[47] It seems to me that the proper approach is first to establish what in the United States cases fixing the fees of trustees and attorneys under the Bankruptcy Code is called the "lodestar" amount. This amount is reached by the number of hours reasonably spent by the insolvency practitioner multiplied by a reasonable hourly rate: Re Boston and Maine Corp v Moore 776 F 2d 2 at 7 (1st Circ 1985); Copeland v Marshall 641 F 2d 880 at 891 (DC Circ 1980). This step will require the tribunal to decide whether the work performed was necessary to the administration, whether it was performed within a reasonable time and whether the rate is reasonable having regard to what the practitioner, and other practitioners, usually charge their clients. The "lodestar" amount should then be adjusted (up or down) to reflect other factors including the quality of the work performed, the complexity in the administration over and above the normal complexity of such work, the novelty and difficulty of the issues that confronted the administrator as well as the ultimate result obtained by him.
41For my part, while I have found Finkelstein J's discussion and analysis of immense assistance, I would give less weight than his Honour to the ability of market forces to control liquidators' charges, for at least two reasons. The first is that, in the insolvency context, creditors are rarely in a position robustly to negotiate a liquidator's remuneration. This is accentuated by the fiduciary nature of the liquidator's relationship with creditors. The second is that, in the Court's experience, comparative cost is rarely a factor in selection of a liquidator. While, where there is a litigated dispute over the nomination, the comparative costs are often one of several relevant considerations, they are rarely the dominant consideration (independence being a far more common one), and in any event cases in which there is such a dispute represent a tiny proportion of administrations. Moreover, when there is such a comparison it is usually between hourly rates, which imposes no real constraint on the ultimate cost. I would also doubt whether the "lodestar" approach does not give excessive weight to time spent, even in larger administrations.
42In Conlan v Adams [2008] WASCA 61; (2008) 65 ACSR 521, McLure JA, while noting (at [37]) that all parties had accepted that a time-cost basis for determining remuneration was appropriate, added that time-based costing has potential drawbacks and can be abused, and after referring to Lawrence J's statement in Re Carton Ltd, continued:
[39] Mindful of the disadvantages associated with time-based costing, courts in England and Australia have identified the object to be achieved and criterion to be applied in determining what is reasonable remuneration when faced with a time-cost remuneration claim: Mirror Group Newspapers plc v Maxwell (No 2) [1998] BCC 324; Re Korda; in the Matter of Stockford Ltd (2004) 140 FCR 424; 52 ACSR 279; [2004] FCA 1682.
43After citing several passages, also quoted above, from Ferris J in Mirror Group v Maxwell and from Finkelstein J in Re Stockford Ltd, her Honour referred to the notion of proportionality:
[47] As to the performance of a task reasonably embarked upon, the work done must be proportionate to the difficulty or importance of the task in the context in which it needs to be performed. This is what is encompassed in assessing the value of the services rendered. Using an example from the law, the time spent by an appropriately qualified and experienced practitioner in drafting a statement of claim should be proportionate to the amount in issue.
44Since those cases were decided, statutory guidance as to relevant considerations is now provided by s 504(2) (and s 473(10)), which were introduced with effect from 31 December 2007:
(2) [Factors court may consider in determining whether remuneration reasonable] In exercising its powers under subsection (1), the Court must have regard to whether the remuneration is reasonable, taking into account any or all of the following matters:
(a) the extent to which the work performed by the liquidator was reasonably necessary;
(b) the extent to which the work likely to be performed by the liquidator is likely to be reasonably necessary;
(c) the period during which the work was, or is likely to be, performed by the liquidator;
(d) the quality of the work performed, or likely to be performed, by the liquidator;
(e) the complexity (or otherwise) of the work performed, or likely to be performed, by the liquidator;
(f) the extent (if any) to which the liquidator was, or is likely to be, required to deal with extraordinary issues;
(g) the extent (if any) to which the liquidator was, or is likely to be, required to accept a higher level of risk or responsibility than is usually the case;
(h) the value and nature of any property dealt with, or likely to be dealt with, by the liquidator;
(i) whether the liquidator was, or is likely to be, required to deal with:
(i) one or more receivers; or
(ii) one or more receivers and managers;
(j) the number, attributes and behaviour, or the likely number, attributes and behaviour, of the company's creditors;
(k) if the remuneration is ascertained, in whole or in part, on a time basis:
(i) the time properly taken, or likely to be properly taken, by the liquidator in performing the work; and
(ii) whether the total remuneration payable to the liquidator is capped;
(l) any other relevant matters.
45In my view, reasonable remuneration cannot be assessed solely by the application of the liquidator's quoted standard hourly rates to the time reasonably spent. The application of a standard hourly rate to liquidations of diverse size and complexity cannot take into account a number of the factors referred to by Ferris J, Finkelstein J and McLure JA. It does not reward liquidators for value, but indemnifies them against costs. It disregards considerations of proportionality. Moreover, it cannot reflect some of the factors referred to in s 504(2), and in particular (d) the quality of the work performed, (g) the degree of risk and responsibility involved, and, above all, (h) the value and nature of the property involved. This must mean that it is wrong to assess "reasonable remuneration" by reference only to time reasonably spent at standard rates. Yet virtually every application for remuneration that the Court sees is made on that basis, regardless of the amount of property involved. In my view, while time reasonably spent at standard hourly rates is a relevant consideration, it is only one of several, should not be regarded as the default position or dominant factor, and is to be considered in the context of other factors, including the risk assumed, the value generated, and proportionality.
46The default statutory remuneration, under s 499(3A)(e)(i), is $5,000.
47While ad valorem remuneration has its own shortcomings, it seems to attract less opprobrium than time-based costing. This is probably because it is proportionate, and because it incentivizes the creation of value, rather than creating "an incentive to run up hours and to do too much work in relation to the stakes of the case" [Kirchoff v Flynn (1986) 786 F 2d 320 (Easterbrook J)]. As Finkelstein J explained in Re Stockford Ltd (at [25]-[26]), until the development of the Insolvency Practitioners Association of Australia time-based scale in the 1960s, conventionally a liquidator's fee was either a fixed amount or a percentage of the assets under administration [see also Re Universal Distributing Co]. In Re Carton Ltd, Lawrence J described remuneration on a percentage basis as the most satisfactory method. (In that case, a proposal that remuneration be 5% on realisations and 5% on distributions was described as one which would require "special circumstances which would justify the fixing of such a large commission"; about half that amount was allowed). That a commission or percentage basis of remuneration remains an appropriate one, despite the current prevalence of time-based costing, is reflected in Corporations Act, s 473(3), which provides, in respect of a Court-appointed liquidator, as follows:
(3) [Remuneration of Liquidator] A liquidator is entitled to receive such remuneration by way of percentage or otherwise as is determined:
(a) if there is a committee of inspection - by agreement between the liquidator and the committee of inspection; or
(b) if there is no committee of inspection or the liquidator and the committee of inspection fail to agree:
(i) by resolution of the creditors; or
(ii) if no such resolution is passed - by the Court.
48Turning to this case, in assessing reasonable remuneration for the liquidators' work in administering the Adviser Funds, I take into account that, based solely on time spent at standard rates, the cost of the liquidators' services was $49,915. This takes into account all the work actually performed by the liquidators in administering the Adviser Funds (though not future work, for which they have foregone any claim). On Finkelstein J's approach, it would provide the "lodestar".
49Of that, $20,485 is claimed in respect of collection of adviser debt and clawback commission. But as has already been observed, this exercise generated only $16,080, at a cost of $30,711.64 in disbursements (which I have allowed in full). The exercise, far from generating value, detracted from value. As with the Profcoll disbursement, I accept that hindsight can be an unfair tool, and just because the exercise proved unsuccessful does not mean that the liquidators should be denied remuneration in respect of it. However, the outcome is relevant to its quantification, if one addresses value rather than cost. So is the circumstance that to a significant extent this function was "outsourced" to Profcoll; this reflects a transfer of risk and responsibility away from the liquidators.
50$7,097.50 is claimed for the issue of the Adviser Notices over the period 19 March 2013 to 7 February 2014. Mr Tonks deposes to having calculated the amounts owing to or by Advisers in order specifically to identify in each notice the amount owing to or by the individual adviser. The difficulty with this is not only that the Adviser Notices were issued on 28 June 2013 and advertised on 2 July 2013, but that - unlike the Stockbroker Notices - they did not in fact identify the amount owing to or by each Adviser.
51I give considerable weight to the circumstance that the value of the assets realised was $180,000 - of which $104,000 was already in hand when the liquidators were appointed; and that after disbursements and costs of this application, only $102,298 will remain to satisfy commission and pay dividend. The result - originally that the total fund was to be expended in remuneration and expenses, albeit now moderated to 70% of it - is not proportionate, even allowing that there were additional complexities in dealing with multiple adviser claimants. A different way of putting it is that, in smaller liquidations, liquidators cannot expect to be rewarded for their time at the same hourly rate as might be justifiable where more property is available.
52These considerations would dictate a discount from the "lodestar" amount, were I to adopt that approach.
53I propose to allow remuneration of $36,000, which is 20% of the assets realised. That is a significantly higher percentage than seems to have been regarded as conventional. The time consumed by the liquidation has influenced me to allow a higher rate than might ordinarily be regarded as appropriate. I have also taken into account that the liquidators will not be remunerated for work in respect of the Stockbroker Funds - while noting that, they have already recovered remuneration of $95,000 for their pre-liquidation administration work.