REMUNERATION OF ADMINISTRATOR
29 By s 449E(1) of the Act, the administrator of a company under administration is entitled to receive such administration as is determined:
(a) By agreement between the administrator and the committee of creditors (if any); or
(b) By resolution of the company's creditors; or
(c) If there is no such agreement or resolution by the Court.
30 In this case the administrator's remuneration has not been fixed under either s 449E(1)(a) or (b).
31 In those circumstances it is open to the administrator to apply to the Court to determine the remuneration to which the administrator is entitled in relation to the administration of the company, as provided for by s 449E(1)(c).
32 While nothing in s 449E suggests that an administrator must have endeavoured to agree remuneration with a committee of creditors, where one exists, or to obtain a resolution of the company's creditors before applying to the Court to fix remuneration, such steps are obviously preferred in order to avoid the possible expense and delay in obtaining an order of the Court. In this case, as may be seen from the facts as I have set them out above, the administrator endeavoured to secure a resolution at the second meeting of the company's creditors but there was reluctance by the creditors to pass such a resolution. Mr Huxtable made it clear to the creditors at that meeting that, in the event the administrator was obliged to approach the Court for a determination of his remuneration, the Court's determination may be higher than the $105,000 then proposed for the relevant period of administration.
33 Section 449E(4) requires the Court, when exercising its power to fix remuneration under subs (1), to 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 administrator was reasonably necessary;
(b) the extent to which the work likely to be performed by the administrator is likely to be reasonably necessary;
(c) the period during which the work was, or is likely to be, performed by the administrator;
(d) the quality of the work performed, or likely to be performed, by the administrator;
(e) the complexity (or otherwise) of the work performed, or likely to be performed, by the administrator;
(f) the extent (if any) to which the administrator was, or is likely to be, required to deal with extraordinary issues;
(g) the extent (if any) to which the administrator 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 administrator;
(i) whether the administrator 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 administrator in performing the work; and
(ii)whether the total remuneration payable to the administrator is capped;
(l) any other relevant matters.
34 This means that the Court has a very broad function to consider such of those matters as may be relevant - the expression "take into account any or all of the following matters" (emphasis added) indicates that some of those matters may be particularly relevant to the case at hand while others may not be. What s 449E(4) emphasises, however, is that the Court must have regard to the primary rule - whether the remuneration is "reasonable". The factors listed are designed to assist the Court in applying that rule. This seems to be confirmed by [4.90] of the Explanatory Memorandum to the Corporations Amendment (Insolvency) Bill 2007 (Cth) by which this subsection was introduced into the Act.
35 While I have observed above that the administration work claimed by Mr Huxtable, as set out in his affidavit made 23 December 2009, appears to be reasonable, it seems to me that a detailed assessment of the costs claimed in that regard still needs to be undertaken by a registrar of the Court. I will make an order to that effect. The registrar will necessarily regard the items of work claimed and assess their reasonableness by reference to such of these factors as is relevant.
36 It is however clear that the Court (and the registrar) is only able to determine what "remuneration" the administrator is entitled to under s 449E. The concept of remuneration does not include disbursements. This point was settled by the Full Court of the Supreme Court of Western Australia in Venetian Nominees Pty Ltd v Conlan (1998) 20 WAR 96 (Venetian).
37 In Venetian, Kennedy and Ipp JJ (with whom Wallwork J agreed), in their joint judgment at 100, by reference to the power of the Court under s 473(2) of the former Corporations Law, which made it a requirement for a provisional liquidator's "remuneration" to be determined by the Court, held that the provisional liquidator's "disbursements" could not be determined in the course of so doing. The reasons their Honours gave in the joint judgment by reference to the relevant provisions of the Corporations Law are, in my view, equally applicable to the provisions of the Act that presently govern the remuneration of liquidators, provisional liquidators and administrators.
38 In the course of their analysis, their Honours, at 101, noted that an administrator is liable for debts he or she incurs in the performance of his or her functions. Their Honours referred in this regard to s 443A(1) of the Corporations Law. This same or similar provision is now to be found in s 443A(1) of the Act. Their Honours also noted that s 443D of the Corporations Law conferred on an administrator an entitlement to an indemnity out of the company's property for those debts, as well as for his or her remuneration as fixed under s 449E. Those same entitlements to an indemnity are now to be found is s 443D of the Act. As a consequence, as Kennedy and Ipp JJ noted at 101, there appeared not to be a need for the Court to make any specific order as to the debts an administrator incurs under the Corporations Law, and similarly there does not now seem to be such a need under the Act.
39 Venetian has been applied in GIS Electrical Pty Ltd v Melsom [2001] WASC 314, at [55]; and Re Korda [2004] FCA 1682; (2004) 140 FCR 424 (Korda), Finkelstein J at [50]. In Korda, Finkelstein J,at [50] and [51], observed:
50 To this point I have said nothing about disbursements. The reason is that s 449E is concerned solely with remuneration. (In Venetian Nominees Pty Ltd v Conlan (1998) 20 WAR 96, 100 the court finally laid to rest the erroneous view that a liquidator's remuneration included disbursements). The right to be indemnified for properly incurred expenses is covered by ss 443A and 443D. Nevertheless, I wish to make one or two observations about disbursements, particularly legal fees which are often the largest component of an administrator's costs. My observations derive from the comments of Ferris J in Mirror Group Newspapers plc v Maxwell (No 2) [1998] 1 BCLC 638 and Lightman J in an article entitled "Office Holders' Charges - Costs Control and Transparency" (1998) 11 Insolvency Intelligence 1.
51 An insolvency practitioner stands in a fiduciary relationship with the creditors. He must act with the same care as a prudent businessman would act in his own affairs at his own cost and risk. A prudent businessman will run litigation as a last resort and when he embarks upon litigation he will keep it under close scrutiny. A prudent businessman will shop around to ensure that he obtains the services of good lawyers (solicitors and counsel) at the best possible rate. Personal relationships should not obscure the practitioner's duty. The sole selection criteria should be the benefit to him as a litigant. So he will avoid cosy relationships with solicitors and counsel. He will negotiate over fees with both solicitors and counsel. He will closely monitor the fees as they are incurred. (In some jurisdictions contingency fees are permitted and where they are they should be exploited). Overall, this approach is likely to cause disquiet among the profession. Lightman J said that the requirement of adopting the perspective of the insolvency practitioner expending his own money in place of the perspective of spending his client's money is a "sea change". If made it is a change that will restore public confidence in this area of commercial life.
40 Finkelstein J also made other observations about the appropriate manner or process by which an assessment of remuneration should be considered by a court. Subsequent to Korda, the Corporations Amendment (Insolvency) Bill 2007 (Cth), that led to s 449E being amended in a number of respects, was introduced. The amendments then made to s 449E by the Corporations Amendment (Insolvency) Act 2008 (Cth) were made at least in part by reference to what Finkelstein J had said in Korda. However, no amendment affected the concept of "remuneration" as employed in s 449E and it continues to be a legal term of art.
41 The state of the authorities therefore is that the Court has the power under s 449E(1) to determine remuneration, strictly defined, but not to determine (or review) the reasonableness of other debts or liabilities - properly called disbursements - incurred by an administrator in the course of an administration.
42 Rather, s 443D, as noted, entitles an administrator to be indemnified out of the assets of the company's property in respect of such debts and liabilities and remuneration as fixed under s 449E. Section 443F gives the administrator a statutory lien in respect of such items. In addition, s 556 sets out those debts and claims that must be paid in priority to all other unsecured debts and claims in the winding up of a company. These include, under s 556(1)(c) the debts for which s 443D(a) or (aa) entitle an administrator to a company to be indemnified (which include debts and liabilities but not remuneration as fixed under s 449E). The administrator's remuneration as fixed under s 449E is however within the category of "deferred expenses" (see s 556(2)), which is referred to in s 556(1)(de). Section 443E also provides that subject to s 556, the right of indemnity under s 443D has priority over all the company's unsecured debts and, subject to subs (2), (3) and (4), debts of the company secured by a floating charge on property of the company.
43 It follows that the Court's function under s 449E is simply to determine remuneration when the preconditions of s 449E(1) are satisfied. Having done so, the other provisions of the Act, such as those referred to, apply to protect an administrator's interests.
44 Therefore, having regard to the decision in Venetian, the only determination that the administrator can call upon the Court to make, in the circumstances of the present application before the Court, is a determination of the remuneration, strictly defined, that the administrator is entitled to, but not the disbursements incurred by the administrator in the course of the administration.
45 In that regard there is no doubt (as decided in Venetian and Korda) that solicitors' or counsel's fees and expenses incurred by the administrator fall into the category of disbursements and not remuneration.
46 I note, in passing, that in Re Bosnjac Holdings Pty Ltd [2005] FCA 275, Gyles J, at [7], appears to have left open for later discussion "the proper line" between remuneration and disbursements. Whatever his Honour may have intended by that "delphic" comment cannot deflect attention from the force of the authority I have laid out.
47 The terms of the current Code of Professional Practice (the Code) of the Insolvency Practitioners Association of Australia (IPAA) which are referred to by the plaintiff and relied upon by him seem generally consistent with the authority I have here referred to.
48 The Code commences by recognising that it does not override the law. What it intends to do is introduce principles to "clarify understanding of the desired behaviour" where the law is silent or ambiguous. See cl 1.1 of the Code.
49 The Code is expressed to apply to all members of the IPAA in so far as they conduct or are involved in the administration of insolvencies, formal and informal. The Code therefore is expressed to apply not only to liquidators and trustees, but also to lawyers, accountants, financiers and others who are members of the IPAA.
50 Consistent with the provisions of the Act to which I have already made reference, in discussing remuneration the Code emphasises that a practitioner is entitled to remuneration only in respect of work done that was "necessary for the administration": cl 12.1.
51 Again, consistent with the provisions of the Act to which I have referred, the Code emphasises that in order to claim remuneration for necessary work, a practitioner will need to establish that work was "properly performed": cl 12.2.
52 The Code also recognises that a practitioner may "outsource" work subject to the restrictions on delegation (for example, decision‑making and exercise of judgment), something recognised in Venetian and to which I will return. The Code states that outsourced work may only be claimed as remuneration and not as a disbursement and will be subject to the same test that it was necessary and properly performed: cl 12.4.
53 The Code also emphasises that a practitioner must not seek to be remunerated for work:
· outside the scope or powers of the practitioner; or
· carried out before the practitioner was appointed.
These restrictions are stated to be a "threshold test" before applying the "necessary and properly performed" test: cl 12.5.
54 The Code also deals with what is a disbursement. Clause 12.9.1 states:
The practitioner needs to determine whether the claim for payment is in the nature of a disbursement, or whether it represents remuneration. Disbursements include those costs paid from the administration's bank account directly and those costs paid by the practitioner and claimed back from the administration.
A practitioner should separate disbursements from the expenses of running their practice which may only be recovered through the charge‑out rate.
55 The Code, after cl 12.9.1, contains a table that identifies disbursement types as "Professional" and Non‑professional". Under the Professional type appears "External advice, non‑insolvency". The criteria for this disbursement type is stated to be:
These are fees that satisfy the both the following criteria. They are:
(a) for professional services (non‑insolvency services) relating to the specific tasks required to be done during the administration; and
(b) are properly incurred by independent outside consultants engaged by, and not associated with, the Practitioner and their firm.
Examples provided include "independent lawyers", auctioneers, valuers, real estate agents and tax advisers or accountants. The rationale for this disbursement type is stated as follows:
This is a disbursement because it is involves the Practitioner retaining an external adviser for work to be done in the administration, at an agreed fee or rate.
56 It may be seen that the Code therefore recognises that the engagement by an administrator of an independent lawyer and the subsequent fee for service received by the administrator constitutes a disbursement and does not constitute "part of the remuneration" claimable by the Administrator.
57 The Code then deals with "What are not disbursements?". In answer to this question the Code identifies a number of categories as not constituting disbursements including "Internal non‑insolvency professional costs". In relation to these costs cl 12.9.2 provides:
Internal non‑insolvency professional costs.
A practitioner may engage in internal non‑insolvency related professional services only after proper commercial consideration to that decision has been given that such an engagement is in the interests of creditors and the efficient conduct of the administration. This includes non‑insolvency professional services provided by another practice within a federated practice structure or associated practice.
The point to consider is whether the benefit of the engagement fee will be received by the practitioner, the practitioner's firm or an entity related to the practitioner or perceived to be related to the practitioner.
These items are remuneration.
Examples of internal professional costs
Legal advice, tax advice, real estate valuation costs, auctioneering.
58 The Code therefore, in relation to what disbursements can be claimed as remuneration, draws a distinction between legal fees incurred on account of advice sought from "independent lawyers" during the administration and legal advice obtained from an "internal" lawyer. It is not necessary for me, in dealing with the issues that arise here, to dwell on whether the cost of legal advice provided by a lawyer who is not independent, that is to say, in the language of cl 12.9.2(b) of the Code, is in "another practice within a federated practice structure or associated practice", may be considered not a disbursement, or whether the principle established by Venetian continues to apply to such work and the costs of its provision.
59 I need not dwell on this point because, in the written submissions of the plaintiff in support of the proposed amended application, the plaintiff submits:
In accordance with Venetian Nominees, the plaintiff concedes that s.449E(1)(c) does not apply to summerslegal's fees as summerslegal's services were not rendered by the plaintiff but by a separate and distinct business.
60 It follows, consistently with the principle established in Venetian and also that laid down by the Code in cl 12.9.1 and the examples of "external advice, non‑insolvency" there given, that the administrator is not entitled to be remunerated in respect of the work done by summerslegal.
61 It is therefore, not open to the plaintiff in this case to apply to the Court to determine, in effect the reasonable and proper legal fees of summerslegal that have been incurred by the plaintiff as administrator.
62 So far as these types of disbursements are concerned, the Code elsewhere deals with them. For example, Part C: Practice Notes and Templates in cl 20 deals with the Remuneration Report. Indeed, cl 20.5 concerning "type A", says that disbursements are all externally provided professional services. They are recovered at cost. An example given is legal fees. That clause then goes on to stipulate that:
Information about disbursements can be provided here or as part of the administration's receipts and payments.
You are not required to seek creditor approval for disbursements, but must account to creditors.
Creditors have the right to question the incurring of the disbursements and can challenge disbursements in court. It is recommended that the above text be included in the narrative explanation for creditors.
63 The reference to the right of creditors to question the incurring of disbursements and to challenge them in court, is a reference to the entitlement of a creditor, as well as a member and Australian Securities and Investments Commission (ASIC) to apply for remedial orders of the Court under s 447E where there is concern that the administrator has done (or not done) any act "prejudicial" to the interests of any or all of the creditors or members.
64 In effect, s 447E provides a mechanism during an administration for ASIC, members and creditors to pursue any grievance they may have about such things as legal expenses incurred or to be incurred. There is no reason why these categories of persons may not also claim under s 447E following determination of an administration.
65 Having regard to the plaintiff's concession there is no need, and no proper basis, to consider whether the summerslegal practice is a "federated" or "associated" practice for the purposes of cl 12.9.2(b) of the Code.
66 So far as an entitlement to fees and costs in the nature of a disbursement is concerned, cl 20.9 of the Code in specifying what might be set out in a "Creditor Information Sheet" specifies that an administrator is entitled to be paid reasonable fees or remuneration, for the work they perform, once these have been approved by a creditors' committee, resolution of creditors or the Court, and "to be reimbursed for out‑of‑pocket costs incurred in performing their role (these costs do not need creditors' committee, creditor or court approval)". The clause goes on to point out that out‑of‑pocket costs commonly reimbursed include "legal fees". The clause goes to further state:
Creditors have a direct interest in the level of fees and costs, as the administrator will, generally, be paid from the company's available assets before any payments to creditors are made. If there are not enough assets, the administrator may arrange for a third party, for example, another creditor, to pay any shortfall. As a creditor, you should receive details of such arrangements.
If there are not enough assets to pay the fees and costs, and there is no third party payment arrangement, any shortfall is not paid and the administrator is in 'out‑of‑pocket'.
67 It is a related issue whether an insolvency service provided by a person to whom the task has been delegated - or "outsourced", as the Code puts it - may be claimed by the insolvency practitioner in determining their remuneration. In this regard, the decision of Venetian itself supports (at least to a limited degree) delegation of such insolvency work by a practitioner without affecting the entitlement of the practitioner to claim remuneration in respect of it. I deal further with this issue below.
68 Having regard to established authority, and implicitly recognised by the Code, the result here is that, once the Court (through the registrar) has assessed the reasonable remuneration of the administrator in this case, the administrator will be in a position to act upon his entitlement to be indemnified out of the company's property by the liquidator now appointed to the company in respect of that remuneration, as well as other disbursements reasonably and properly incurred in the course of the administration. It will then be open to the liquidator to respond to the claims made. In light of the determination of remuneration by the Court under the Act, the liquidator must accept the Court's determination of remuneration. So far as other debts and liabilities incurred are concerned - the disbursements, in this case - it would seem open to the liquidator to reject them, if there were a proper basis for doing so - for example, if they were not incurred in good faith and without negligence, or in the reasonable conduct of the administration. However, in light of the fact that no creditor or member or ASIC has at any time applied for any remedial orders under s 447E and no member or creditor has objected to these proceedings, the liquidator may well consider the disbursements in question here were necessarily and properly incurred and not wish to dispute them.
69 In summary, all this means that the only function the Court has in relation to the assessment of remuneration and disbursements incurred by an administrator in the course of an administration, in circumstances such as the present, is in determining remuneration, but not in determining or assessing or reviewing disbursements (including legal fees) incurred by the administrator in the course of the administration. It is not a function of the Court to order the payment of the remuneration so determined, at least not in a proceeding like this.
70 Another issue also arises here, and that is the extent to which work done not by the administrator himself personally, in this case, though through the agency of or delegation of work to other persons, may be claimed as part of the work in respect of remuneration should be fixed. In Venetian,in the joint judgment, Kennedy and Ipp JJ noted that the respondent (Mr Conlan) was a partner of a firm of chartered accountants and several employees of his firm assisted him in carrying out his duties as provisional liquidator. Their Honours, by reference to Re Trustees Executors and Agency Co Ltd (1984) 9 ACLR 497, observed that the remuneration to which the provisional liquidator was entitled included compensation for work so done for him by the employees of his firm.
71 In the present case, as noted above, the administrator is in fact employed by a company (Sumpart Pty Ltd) that provides services to summerscorporate. It appears that Mr Huxtable, in his personal capacity as an administrator, was assisted in the provision of those services to the company by other persons engaged by summerscorporate (or perhaps Sumpart Pty Ltd). In all the circumstances it seems to me to be reasonable to accept that, however the corporate or other structures were designed, the administrator here is entitled to be remunerated for the cost of the administration performed by him for work that he personally did, whether through Sumpart Pty Ltd and/or summerscorporate, or did with the assistance of other persons whether employed by him or, as the evidence suggests, by summerscorporate, in respect of which he exercised supervisory responsibilities in the manner suggested by cl 12.4 of the Code.
72 It remains, however, for the registrar, under the order I will make, to assess the work done and costs claimed to ensure that they were reasonably and properly incurred, taking into account any or all of the matters set out in s 449E(4) of the Act.
73 One of the factors that will be relevant in this case - which gives rise to another issue - is that referred to in s 449E(4)(c), namely, the period during which the work was performed by the administrator. In my view, the administrator will not be entitled, under the Act, to be remunerated for administration work done by him or others employed by Sumpart Pty Ltd or summerscorporate (or summerslegal), or by summerslegal to advise him, that was undertaken either before the formal appointment of the plaintiff as administrator or following the termination of the administration: see Skafcorp Ltd v Jarol Pty Ltd (2002) 44 ACSR 138; [2002] NSWSC 1183 (Skafcorp), Austin J at [16] and [17].
74 Skafcorp also supports the proposition that pre-administration work - and one would necessarily also include post‑administration work - will only be subject to remuneration from the company if there was an express or implied contract between the administrator (or some other entity engaged to undertake such work) and the company in respect of such work. The alternative suggestion is that the administrator may be entitled to recover reasonable payment on a quantum meruit basis: see Skafcorp at [16]. However, in the case now before the Court, those alternative bases for seeking remuneration from the company have not been raised. Nor would one expect them to be raised on an application such as the present, which is made under the Act. There would need to be a separate action by the administrator or other entity against the company making such a claim or claims, if there is a basis for them. Additionally, if there were a relationship such that the administrator was effectively a "creditor" of the company prior to the proposal that he be appointed administrator of the company, then he would not, in respect of a sum of $5000 or more, have been entitled to be appointed administrator without leave of the Court: see s 448C(1)(b) of the Act.
75 The plaintiff submits that the facts in Skafcorp are distinguishable from the present case. The practical issue in this case, however, is whether summerslegal's fees incurred prior to 14 February 2009 are a recoverable disbursement. The first point to note is that, as discussed above, these fees constitute disbursements which do not fall within the administrator's "remuneration" for the purposes of s 449E. Whether the company through the directors actually engaged the prospective administrator, or summerslegal itself, to do the work that it apparently did prior to the formal appointment of the administrator is a separate issue that does not now arise. If the latter were the case, then either the administrator or summerslegal may have a right to claim those disbursements or fees directly against the company. But, if so, there may also be a s 448C(1)(b) issue.
76 However, the plaintiff seeks to distinguish Skafcorp generally in the following respects:
· That the work undertaken by the administrator in Skafcorp was not strictly necessary, whereas the work undertaken by summerslegal was "integral" to the administration.
· That the work undertaken by the administrator in Skafcorp was for the benefit of a secured creditor, not the body of unsecured creditors, whereas the work undertaken by summerslegal was for the benefit of Mr Huxtable and the company in administration.
· That the work undertaken by the administrator in Skafcorp was "in preparation for administration", where as work undertaken by summerslegal was necessary for the administration and would have to been done in any event.
77 In my view, these suggested points of distinction have no weight. While I accept that the work may well have been undertaken in anticipation of the appointment of Mr Huxtable as administrator, the fact is that it did not happen as part of the administration. It is only work actually undertaken during the administration that in my view can be the subject of a remuneration determination by the Court under s 449E.
78 I should also mention that the position contended for on behalf of the plaintiff is not advanced by the statement in cl 12.5 of the Code that remuneration "cannot be charged for work carried out before the Practitioner was appointed".
79 I do not consider that it is open to the Court in this case to view the work claimed prior to the appointment of the administrator as the work of the administration. Therefore it is not open to the Court to determine remuneration in respect of it.