FEDERAL COURT OF AUSTRALIA

Korda, in the matter of Stockford Limited (Subject to Deed of Company Arrangement) [2004] FCA 1682

CORPORATIONS – external administration – administrators – remuneration – resolution of creditors – validity of resolution – failure to fix – factors to be taken into account

WORDS AND PHRASES – “fix”

Corporations Act 2001 (Cth) ss 436E, 439A, 445F, 449E, 473

Insolvency Rules 1996 (UK) IR 4.30(1)

Avonwood Homes Pty Ltd (in liquidation), Re [2002] VSC 147 cited

Beuregard v The Queen in right of Canada  (1983) 148 DLR (3d) 205 cited

Board of Supervisors of Yavapai County v Stephens 177 P 261 (1919) applied

Boston and Maine Corporation v Moore, In re 776 F 2d 2 (1^st Circ 1985) applied

British Bank of Australia Limited, In re (1893) 19 VLR 54 cited

Carton, Limited, In re (1923) 39 TLR 194 discussed

Copeland v Marshall 641 F 2d 880 (DC Circ 1980) cited

Culberson v Watkins 119 SE 319, 322 (1923) cited

Daily Telegraph Newspaper Company Limited, Re (1931) 48 WN (NSW) 236 cited

Fraser Henleins v Cody (1945) 70 CLR 100 applied

Gallard; Ex parte Harris, In re [1892] 1 QB 532 applied

Hill v State (1913) 14 DLR 158 cited

Independent Insurance Co Ltd (in provisional liquidation), Re [2002] 2 BCLC 709 cited

Kaye v Croydon Tramways Company [1898] 1 Ch 358 applied

Kirchoff v Flynn 786 F 2d 320 (7^th Cir 1986) cited

Mayne v Jaques (1960) 101 CLR 169 applied

Medforce Healthcare Services Ltd (In Liquidation), Re [2001] 3 NZLR 145 followed

Mirror Group Newspapers plc v Maxwell (No 2) [1998] 1 BCLC 638 followed

Mysore Reefs Gold Mining Company, In re (1886) 34 Ch D 14 cited

Potters Oils Ltd, In re [1985] 1 WLR 201 cited

Powers v Isley 183 P 2d 880 (1974) cited

Queensland Forest Limited (In Liquidation), Re [1966] Qd R 180 cited

Solfire Pty Ltd (in liq) No. 2, Re [1999] 2 Qd R 182 followed

Standard Insurance Co Ltd (In Liquidation), Re [1967] VR 600 cited

Superior Preserving Company Limited, In re [1953] QWN 49 cited 

Royal Bank of Canada v Bjorklund (1985) 36 Man R (2d) 54 cited

Universal Distributing Company Limited (In Liquidation), In re (1933) 48 CLR 171 referred to

Van Sandau v Moore (1826) 1 Russ 441; [38 ER 171] cited

Venetian Nominees Pty Ltd v Conlan (1998) 20 WAR 96 followed

Western Metal Engineering, Re (unreported, 24 February 1998, Supreme Court of Western Australia) cited

Woodcock v Dick 222 P 2d 667 (1950) cited

Young v Ladies Imperial Club, Limited [1920] 2 KB 523 applied

Zimmerman v Carfield  42 Ohio St 463 (1885) cited

Attorney General’s Department, Review of the Regulation of Corporate Insolvency Practitioners: Report of the Working Party (1997)

Montagu & Ayrton, Bankruptcy Law (2^nd ed, 1844), vol 1

Mr Justice Ferris, “Insolvency Remuneration – Translating Adjectives Into Action” (1999) 2 Insolvency Law Journal 48

Mr Justice Lightman, “Office Holders’ Charges – Costs Control and Transparency” (1998) 11 Insolvency Intelligence 1

Palmer’s Company Precedents (16^th ed, 1952)

Report of Mr Justice Ferris’ Working Party on the Remuneration of Office Holders (Chancellors Department) July 1998 (UK)

Shelford’s Bankrupt Law (2^nd ed, 1854)

Trade Practices Commission, Final Report on Accountancy:  Study of Professions (1992)

IN THE MATTER OF Stockford Limited and the companies listed in Schedule “A” hereto (All subject to Deed of Company Arrangement)

MARK ANTHONY KORDA AND MARK FRANCIS XAVIER MENTHA in their capacity as Joint and Several Deed Administrators of the companies listed in Schedule “A” hereto

V 1012 of 2004

FINKELSTEIN J

21 DECEMBER 2004

MELBOURNE

IN THE MATTER OF Stockford Limited and the companies listed in Schedule “A” hereto (All subject to Deed of Company Arrangement)

REASONS FOR JUDGMENT

1                     The effective cause of this application, which is brought by the joint administrators of the Stockford Group (there are 83 companies in the group – originally there were 84 but one company has been sold – and each is subject to a deed of company arrangement) is ASIC’s concern that the administrators’ remuneration has not been fixed either by the creditors (although the creditors have purported to pass resolutions to that effect) or by the court and as a result the administrators have without any authority taken $2,421,175.50 on account of their fees.  For their part, the administrators insist that they have acted within their rights in taking their fees out of the assets under their control.  The administrators seek declarations to vindicate their position but, being cautious men, ask for directions in the event they are wrong.  The administrators’ caution is justified.  Except for the work performed in the initial two weeks of the administration, their remuneration has not been validly fixed pursuant to s 449E of the Corporations Act 2001 (Cth) and the situation must be rectified.

2                     In the course of explaining the reasons for this conclusion it will be necessary to address some of the vexed issues that concern the fees of insolvency practitioners, particularly registered liquidators, receivers and administrators.  There is a widespread belief, not confined to Australia, that there is overcharging and that overcharging is rife.  This has led to numerous reports which have looked into the issue.  In Australia insolvency practitioners’ fees have been examined or subjected to critical comment in the following reports:  Australian Law Reform Commission, General Insolvency Inquiry, Report No 45 (1988) (commonly known to as the Harmer Report); Trade Practices Commission, Study of Professions – Accountancy, Final Report (1992); Attorney General’s Department, Review of the Regulation of Corporate Insolvency Practitioners: Report of the Working Party (1997); Legal Committee of the Companies and Securities Advisory Committee, Corporate Voluntary Administration (1998); Parliamentary Joint Committee on Corporations and Financial Services, Improving Australia’s Corporate Insolvency Laws (Issues Paper) (2003); Parliamentary Joint Committee on Corporations and Financial Services, Corporate Insolvency Laws:  A Stocktake (2004).  In England there is the report of Mr Justice Ferris’ Working Party on the Remuneration of Office Holders (Chancellors Department) July 1998.  In the United States see: American Bankruptcy Institute National Report on Professional Compensation in Bankruptcy Cases (G R Warner, rep 1991); Professional Fees in Bankruptcy:  Oversight Hearings Before the Subcomm on Courts and Administrative Practice of the Senate Comm on the Judicary, 102d Cong., 2d Sess 55-72 (1992); American Bankruptcy Law Institute, Professional Compensation:  Does Bankruptcy Cost Too Much? (1995); United States Trustee Guidelines for Reviewing Applications for Compensation and Reimbursement of Expenses Filed under 11 USC, s 330 (Draft, Jan 30, 1996).  To date, at least in Australia, no legislative action has been taken, despite many recommendations for change.  This suggests to me that there is a need for closer judicial scrutiny of fees.

3                     I wish to preface my remarks with the following observation.  Nothing I say in these reasons should be regarded as reflecting adversely on the administrators or as suggesting that the remuneration which they have charged is excessive or unwarranted.  The case which ASIC makes against the administrators raises important matters of principle, but that case is confined to the validity of several resolutions which have purported to fix the administrators’ fees.  At some time in the future it will be necessary for the administrators to justify the quantum of their claim.  Only then will it be appropriate for the tribunal (a court or the creditors) to cast a careful eye over the claim.  In the meantime it is sufficient to observe that the administration of the Stockford Group presented many difficulties.  The group provided accounting, business and financial services through offices in Australia, New Zealand and the United Kingdom.  There were in all 67 offices and to a large extent the business at each office was conducted on a stand alone basis.  At the time of the administrators’ appointment the group had no cash and had monthly expenses of approximately $7 million.  If there were to be any significant return to creditors, the business had to be sold.  By the very nature of the business the sale had to take place quickly for otherwise the goodwill would be lost.  Rather than sell the business as a single unit the administrators decided to sell the practice conducted at each office.  Within two weeks of their appointment the administrators had sold 31 practices to former employees and had executed agreements in principle to sell a further 19.  The remaining practices were sold after a few months.  As a result the return to unsecured creditors was substantially higher than had initially been anticipated.  To achieve that result involved work which was difficult and time consuming.  Thus, the fees claimed by the administrators may well be justified.  But that is not a matter to be resolved at this juncture.

4                     The purpose for placing an insolvent company into administration is to enable its creditors to decide whether it would be in their interest:  (a) for the company to execute a deed of company arrangement the effect of which, hopefully, would be to restore the company to solvency or, if that is not possible, to provide a better return for creditors than they would receive on an immediate winding up of the company; (b) for the company to be wound up; or, (c) for the administration to end and the company returned to the control of its directors:  ss 435A and 439C.   So that creditors can make an informed decision the administrator (who must be a registered liquidator) is required to investigate the company’s affairs, form an opinion on the issue to be decided by the creditors and provide that opinion in a written report:  s 438A and s 439A.  In the meantime the administrator has control of the company’s affairs to the exclusion of its directors and has power to carry on the company’s business and manage its property:  s 437A.  If the creditors resolve that the company execute a deed of company arrangement there must be an administrator of the deed (s 44A(2)) and his powers and duties must be defined in the deed.  Those powers and duties might be onerous, for example the administrator might be required to run the company’s operations for a period, or the duties may be relatively confined, such as to distribute a fixed fund between the creditors.  Whatever the task, whether it be simple or difficult, an administrator is not expected to act gratuitously.  In this sense he (or she) is unlike a trustee.  The administrator is entitled to “such remuneration as is fixed by a resolution of the company’s creditors” or, if they do not fix the remuneration then “such remuneration as the Court fixes”:  s 449E(1).  If the administrator’s remuneration is fixed by the creditors their decision may be reviewed by the court on the application of the administrator or an officer, member or creditor of the company:  449E(2)(a).  There is a surprising gap.  ASIC has no standing to apply for a review.

5                     Although s 449E requires the remuneration to be “fixed” by the creditors or the court, the section does not specify how it is to be “fixed”.  It could be “fixed” as a periodic salary, a lump sum, a percentage of some amount (such as the value of the company’s assets under the administrators’ control) or according to the amount of time spent by the administrator determined by reference to a scale or formula.  The matter is simply left at large.  So also is the basis upon which the quantum of the remuneration is to be determined.  That is, the section is silent on the factors to be taken into account both for deciding the appropriate method of “fixing” an administrator’s remuneration and in determining the amount to be “fixed”.  The only guidance that is given, and it is given by necessary implication, is that an administrator is entitled to reasonable remuneration.  That offers little assistance to the tribunal that is required to decide what is reasonable in a particular case.

6                     There are only two points in time when the creditors are able to fix an administrator’s remuneration.  The first is at the meeting convened under s 439A, which is the second meeting of the creditors of a company under administration.  The second is at a meeting convened by the administrator of a deed under s 445F.  The importance of this timing is a matter to which I will return.  At present it is sufficient to note that in the case of a company under administration, the administrator will have performed much of his work before his remuneration is fixed and in the case of a company subject to a deed of company arrangement, the administrator may have carried out some of his duties.  In those respects at least the legislation contemplates that his remuneration will be fixed retrospectively.

7                     The statutory basis upon which an administrator must rely to receive his fees appears to be derived from the provisions dealing with liquidators.  This is not surprising.  Both office-holders’ principal task is to administer the affairs of a company, usually an insolvent company.  Both are answerable to the company’s creditors and members.  Both have similar duties.  Liquidators, however, have a much longer history than do administrators.  For that reason I propose to examine the manner in which a liquidator’s remuneration is or should be fixed and apply what is learnt to administrators.

8                     The history of liquidators has its origins in bankruptcy law.  For many centuries a judgment creditor could enforce his judgment by imprisoning the debtor or seizing his property.  The right to imprison a debtor was in due course acknowledged to be unjust and this led to the passage of the Bankruptcy Acts.  The first Bankruptcy Act, 53 Geo 3 c 102 (known as Lord Redesdale’s Act), established the Court for Relief of Insolvent Debtors and enabled debtors after three months imprisonment to petition for a discharge upon surrender of their estate.  Later statutes abolished the imprisonment of debtors on mesne process (for example 1 & 2 Vict c 110) and got rid of other deficiencies in procedure.  The general principles of bankruptcy law were all but settled by the 1842 statute, 5 & 6 Vict c 122.  A debtor could petition for his estate and effects to vest in an official assignee who held the property for the benefit of the petitioner’s creditors.  There were 30 official assignees appointed by the Lord Chancellor.  They were merchants, brokers or accountants engaged in trade in London or Westminster:  1 & 2 Will 4, c 56, s 22.  Every official assignee was entitled to be paid out of the bankrupt’s estate “by way of remuneration for his services such sum of money as to the court may seem just and reasonable”:  1 & 2 Will 4, c 56, s 57.  For later statutes see 5 & 6 Vict c 122, s 51; 12 & 13 Vict c 106, s 44.  The amount to which the official assignee was entitled depended upon the degree of difficulty in the collection of the assets:  Shelford’s Bankrupt Law (2^nd ed 1854) at 51.  Usually the amount was one percent of the money received and one and one half percent of the money divided between the creditors:  Montagu & Ayrton, Bankruptcy Law (2^nd ed 1844) vol 1 at 423.  In 1854 that changed.  The Lord Chancellor with the assistance of the judges of the Court of Appeal fixed a scale of fees for official assignees:  17 & 18 Vict c 119, s 11.  The scale was a sliding percentage of the value of the amount distributed by the official receiver.

9                     Although companies of various kinds had existed for many years before the 1800s there was no machinery for their winding up:  Van Sandau v Moore (1826) 1 Russ 441; [38 ER 171].  In 1844 the first Joint Stock Companies Act, 7 & 8 Vict c 110 was passed.  The very next statute, 7 & 8 Vict c 111, provided that certain acts of a joint stock company were deemed to be an act of bankruptcy and proceedings could be brought “in like manner as against other Bankrupts”:  s 1.  On the adjudication of bankruptcy the assets of the “bankrupt” joint stock company would vest in the official assignee who had the same powers and duties as in the case of a bankrupt estate.  This was changed by The Joint Stock Companies Winding-Up Act 1848 (11 & 12 Vict c 45) and The Joint Stock Companies Winding-Up Amendment Act 1849 (12 & 13 Vict c 108).  By those statues a company could petition for its own winding up in the Court of Chancery.  If a winding up order was made the company was placed under the control of an official manager:  11 & 12 Vict. c 45, s 20.  Officers called liquidators were first introduced by The Joint Stock Companies Act 1856, 19 & 20 Vict c 47.  Under that statute a company could be wound up by the court on the application of a creditor or contributory:  s 69.  Provision was also made for a member’s voluntary winding up:  s 102.  In each case a liquidator would be appointed for the purposes of the winding up.  In a compulsory winding up the liquidator was entitled to “such salary or Remuneration by way of Per-centage or otherwise, as the Court directs”:  s 92.  If the winding up was by the members they could “fix the Remuneration to be paid to [the liquidator]”:  s 104(3).  These provisions found their way into the Companies Act 1862, 25 & 26 Vict c 89, the first modern companies statute.  They were adopted in the Australian colonies and later in the States.  A creditors voluntary winding up was introduced by The Companies Act 1929, 19 & 20 Geo 5 c 23, s 238.  In a voluntary winding up the committee of inspection or, if there was no committee, the creditors could “fix the remuneration to be paid to the liquidator”:  s 241(1).  This type of winding up and the procedure for fixing the liquidator’s fees were also adopted in Australia.

10                  The distinction between “fixing” the remuneration of a liquidator appointed in a voluntary winding up and “directing” what that remuneration should be in a compulsory winding up has, subject to one minor alteration, been maintained in Australia:  see ss 473, 495 and 499 of the Corporations Act 2001.  The alteration to which I refer is that since the Uniform Companies Acts of 1961 in a compulsory winding up the remuneration of a liquidator is “determined” rather than “directed” by the court:  see for example s 232 (2) of the Companies Act 1961 (Vic).  I have not been able to discover the reason for this change.  The distinction was also maintained in England until the enactment of the Insolvency Act 1986 (UK):  see Companies Act 1985 (UK) ss 536, 580, 591.  With the Insolvency Act  the remuneration of liquidators, administrators, receivers and special managers is dealt with in regulations:  Insolvency Act, s 411 and Sch 8, r 15.

11                  Whenever it is necessary to “fix” a liquidator’s remuneration or “determine” what that remuneration should be, two issues arise.  First, what is meant by “fix” or “determine” the liquidator’s remuneration?  Second, according to what standard should that remuneration be “fixed” or “determined”?  So far as my researches go the first issue has not been considered expressly in any case, perhaps because there has never been any doubt that the method chosen to quantify the liquidator’s remuneration amounts to fixing or determining that remuneration.  Unfortunately this is not one of those cases.  The second issue has been the subject of comment in a number of cases but the guidance to be derived from them, apart from recent English authority, is not as helpful as it might be having regard to the importance of the topic.

12                  I will examine each of these issues in a moment.  They require consideration in this case because the method chosen to fix the administrator’s remuneration was ineffective (in part because their remuneration was not “fixed” as required) and must be properly fixed.  Before embarking upon that exercise I will explain what went wrong.

13                  The events begin with the first meetings of creditors held on 28 February 2003, five days after the appointment of the administrators.  I mentioned earlier that there were 84 companies in the Stockford Group.  The meeting for each company was held at the same time and place.  This was a convenient course to follow.  The meetings were chaired by Mr Mentha.  Shortly after opening the meetings he made what might be his first mistake.  According to the minutes “Mr Mentha … sought to determine if any of the creditors had any objection to his running all eighty four meetings concurrently.  None were noted.”  Mr Mentha then conducted the 84 separate meetings as one:  that is, every resolution was put to a single vote.  The consequence was that a person who was a creditor of only one company (and so only entitled to vote on resolutions relating to that company) was treated for voting purposes as a creditor of every company.  This was irregular to say the least.  The resolutions carried at the meetings would only be valid if a majority of the actual creditors of each company voted in their favour.  What the true position is I simply do not know for no point was made of the irregularity.  (If it be a problem it may not be insurmountable – s 447A could be called in aid).  Returning then to the business of the first meetings, it was resolved that, as contemplated by s 436E(1)(a), there be a committee of creditors for five companies and that the committee comprise Ms Ledney who was from the Commonwealth Bank and Mr Lucas who represented the employees.

14                  Following the first meetings the administrators prepared the report required by s 439A for consideration by the creditors at the second meetings.  The report gave an account of what the administrators had done since the first meetings and their preliminary suggestions for the future.  It also contained the administrators’ proposal that the second meetings should occupy two days.  On the first day (21 March 2003) the creditors would receive the report, be asked to approve the administrators’ remuneration and then adjourn the meeting for a period not exceeding 60 days.  The second day (in the event, 20 May 2003) would be devoted to receiving a further report from the administrators and considering whether to approve deeds of company arrangement for the Stockford Group.

15                  As regards the administrators’ remuneration, the report gave notice that the following resolution would be proposed:  “That the creditors of the Stockford Group of Companies approve the Administrators’ remuneration for the week ending Friday, 28 February 2003 in the amount of $403,133 and remuneration for the week ending Friday, 7 March 2003 in the amount of $236,956 and that the committee of creditors of the Stockford Group of Companies be authorised to approve the Administrators’ remuneration for any subsequent period at the hourly rates as stated in the Report to Creditors’.”  The hourly rates were set out in the form of a table.  The table provided a brief but largely uninformative description of the work to be performed by the administrators and their staff and the fees that would be charged for that work.  This information was provided under four headings:  “Korda Mentha”, “Position”, “Major Activity” and “Hourly Rate”.  In the case of the administrators themselves, the following information appeared beneath the headings:  “Mark Mentha”, “Partner”, “Administrator”, “$450” and “Mark Korda”, “Partner”, “Administrator”, “$450”.  This was followed by an entry for each staff member who would work in the administration.  The staff members were not named, but were identified by the position held.  The positions were “Director”, “Associate Director”, “Executive Analyst”, “Business Analyst”, “Administration”, “Partner”.  The hourly rate to be charged by the staff members did not depend upon the position held or the activity to be engaged in.  For example, according to the table a “Director” might engage in “Business Sales” for which he could charge any of the following hourly rates:  $400, $350, $255 or $184; a Business Analyst undertaking “Trading and Operations” might charge $110 or $100.  The report did not explain why persons who occupied the same position could charge different rates for performing the same activity, though a partial explanation may be that the administrators have different charging rates in different States.  Importantly, the report provided no information which would enable the creditors to determine the reasonableness or otherwise of the proposed rates.  The report did mention, in something of an understatement, that “[i]t is not possible at this stage to provide an estimate of total fees for the duration of the Administration.”

16                  The first day of the second meetings (21 March) was jointly chaired by Mr Korda and Mr Mentha.  Once again the creditors agreed to hold all 84 meetings concurrently.  Mr Korda provided a brief summary of the administration, its complexities and difficulties.  He then raised the administrators’ remuneration.  He informed the meeting that the administrators had received correspondence from a creditor, Mr Cook, who had complained about the quantum of the fees.  Mr Cook is a chartered accountant and a registered liquidator and so has some knowledge of fees charged by insolvency practitioners.  The following resolution was then put and carried as a single resolution:  “That the creditors of the Stockford Group of Companies approve the Administrators’ remuneration for the week ending Friday, 28 February 2003 in the amount of $403,133, and remuneration for the week ending Friday, 7 March 2003 in the amount of $236,956, and approve the administrators’ further remuneration on the basis of the hourly rates set out in the Creditors’ Report for the remainder of the Administration period subject to the Committee of Creditors reviewing and confirming the details of the remuneration claim.”

17                  Putting to one side for a moment the validity of this resolution, several aspects of it should be mentioned.  First, the administrator’s “further remuneration” was to be fixed to the end of the period during which the companies were under administration:  the “administration period” to which reference is made was not intended to cover the period during which the companies were subject to deeds of company arrangement.  Second, the Committee of Creditors to which reference was made is the committee established at the first meetings.  I will assume that the members of the committee had agreed to carry out the duties imposed upon them by the resolution.  Third, there is a dispute regarding the committee’s duties.  According to the administrators, their function was largely procedural:  it was “to make sure that the [the administrators’] claim accords with the hourly rates”, and “to make sure that the arithmetic is correct”.  That is, the administrators reject the notion that the committee was required to look into the reasonableness of the fees claimed.  In my view the obligation to “review” the fees was much more onerous than the administrators would have it.  The committee was under a duty to examine each claim with a critical eye for the purpose of deciding whether the claimed amount was payable; the amount would only be payable if it was reasonable in all the circumstances.

18                  Following the adjournment of the meetings a second report was sent to creditors.  In it the administrators expressed the opinion that it was in the interests of the Stockford Group to execute a deed of company arrangement the principal function of which would be to “group” or “pool” the assets of each company and apply those assets in discharge of the group’s liabilities, which would also be “pooled”.  The proposed deed would make provision for the administrators’ remuneration.  The report advised that:  “The remuneration of the Administrators from the Commencement date will be based on the hourly rate (set out in the Second Report and approved by the creditors), subject to the Committee reviewing and confirming the details of the remuneration.”

19                  The second day of meetings (20 May 2003) was chaired by Mr Korda.  He tabled a copy of the proposed deed.  The parties to the deed were the 84 Stockford companies of the one part and the administrators of the other.  By a single resolution it was resolved that the companies execute a deed of company arrangement in the form outlined in the report and that Messrs Korda and Mentha be appointed administrators of the deed.  The deed was executed six days later.

20                  The administrators’ remuneration was dealt with by cl 6.6.  Relevantly this clause provides: 

The Voluntary Administrators and the Administrators will be:

(a)   remunerated by the Stockford Group Companies in respect of any work done by the Administrators, and any partner or employee of the Administrators:

(i)                 since the Appointment Date to the Commencement Date in their capacity as Voluntary Administrators:

(A)              all remuneration previously approved by the creditors of the Stockford Group Companies at the Second Meeting: and

(B)               all further remuneration at on the basis of the hourly rates set out in the report to creditors of the Stockford Group Companies tabled at the Second Meeting subject to the Committee reviewing and confirming the details of the remuneration; and

(ii)               in connection with this document on the basis of the hourly rates set out in the report to creditors of the Stockford Group Companies tabled at the Second Meeting subject to the Committee reviewing and confirming the details of the remuneration; and

(b)   reimbursed by the Stockford Group Companies in respect of all costs, fees and expenses incurred since the Appointment Date and in connection with the performance of their duties, obligations and responsibilities as Voluntary Administrators and as Administrators.

21                  “The Committee” is a reference to the Committee of Inspection established by cl 15.1.  According to that clause the committee comprised the persons who had been elected to the committee of creditors at the first meetings of creditors and those persons chosen by the administrators who had previously been nominated or authorised by deed creditors to form part of that committee.  One of the committee’s functions was to “consider and, if appropriate, approve the Administrators’ remuneration from time to time in accordance with clause 6.6(a)”.

22                  Clause 6.6 was intended to fix the administrators’ remuneration for the period in which the group was under administration (cl 6.6(a)(i)) as well as while the group was subject to a deed of company arrangement (cl 6.6(a)(ii)).  As regards the administration period, clause 6.6(a)(i)(A) is superfluous as it adds nothing to the resolution of 21 March 2003.  Clause 6.6(a)(i)(B) is there to deal with the fact that the committee had not approved all claims for remuneration for the administration period.  Clause 6.6(a)(ii) is an inelegant attempt to fix the administrators’ remuneration for the period the group is subject to the deed.  I should mention that the administrators make the assumption that a resolution under s 439C that a company execute a deed of company arrangement which deed makes provision for the administrators’ remuneration is able to be characterised as a resolution fixing that remuneration under s 449E.  While there might be difficulties with the assumption, it seems to be reasonably based; at least it was not challenged by ASIC.

23                  I said at the outset that the administrators’ fees had not been validly fixed under s 449E(1).  Now I will explain why.  There are in fact several reasons.  The first is that neither the resolution of 21 March, nor cl 6.6 (which I will treat as a resolution passed at a meeting convened under s 439A) “fixed” the administrator’s remuneration as required by s 449E, save for the amounts of $403,133 and $236,956 respectively for the initial two weeks of the administration.  The power to fix remuneration under s 449E(1) lies with the creditors.  The effect of each resolution is to delegate that power to a committee of the creditors.  This the creditors have no power to do.  A similar mistake was made in In re Carton, Limited (1923) 39 TLR 194, an important case to which I will return for other purposes.  It may be very convenient in a large administration to delegate the power of fixing fees to a committee or even to a cost consultant.  In its present form, however, the legislation does not permit that course.  If the administrators’ remuneration is to be fixed by a tribunal other than the court or creditors that can only occur pursuant to an order under s 447A which, I am sure, is available to achieve that purpose.

24                  The second reason is that even if it be permissible to “fix” remuneration prospectively by reference to a rate or scale of charges, such as an hourly rate, which is open ended and has no upper limit (which is what the administrators argue) here the resolutions go far beyond that.  The natural meaning of the word “fix” in the context of an entitlement to “such remuneration as is fixed by a resolution of [creditors]” is, so it seems to me, to quantify that remuneration, that is to calculate or ascertain the amount of remuneration:  Mayne v Jaques (1960) 101 CLR 169, 173, 174, 180.  See also In re Gallard; Ex parte Harris [1892] 1 QB 532, 544.  Thus, remuneration will be “fixed” if it is stated as a money sum, or is based on a formula which is capable of being applied according to some objective standard so the sum “can be calculated or ascertained definitely”:  Fraser Henleins v Cody (1945) 70 CLR 100, 128.  In the case of a formula all the objective elements must be identified.  Other cases which support this approach in related contexts include, in Canada:  Hill v State (1913) 14  DLR 158, 163; Beuregard v The Queen in right of Canada  (1983) 148 DLR (3d) 205, 235; Royal Bank of Canada v Bjorklund (1985) 36 Man R (2d) 54, 59;  and in the United States:  Zimmerman v Carfield 42 Ohio St 463, 468 (1885); Board of Supervisors of Yavapai County v Stephens 177 P 261, 262 (1919); Culberson v Watkins 119 SE 319, 322 (1923); Woodcock v Dick 222 P 2d 667, 669 (1950); Powers v Isley 183 P 2d 880, 884 (1974).

25                  The early methods of fixing the fees of a liquidator conform to this meaning.  In England, for example, the usual method of fixing those fees was as a precise sum or as a percentage of the value of assets under the liquidator’s control:  In re Carton, Limited (1923) 39 TLR 194.  Sometimes the court adopted the scale of fees applicable to trustees in bankruptcy.  The scale was published in (1868) LR 3 Ch App lxiv.  It provided for a daily fee which varied according to the size of the estate.  The scale was not binding:  In re Mysore Reefs Gold Mining Company (1886) 34 Ch D 14, 19;  In re Amalgamated Syndicates Limited [1901] 2 Ch 181, 183.  It is important to observe that the scale required a retrospective calculation as the application for remuneration had to be supported by an affidavit stating the number of hours devoted to the business of the estate.

26                  For a time in Australia the bankruptcy scale was applied to liquidators:  In re British Bank of Australia Limited (1893) 19 VLR 54.  But the practice did not survive Dixon J’s decision in In re Universal Distributing Company Limited (In Liquidation) (1933) 48 CLR 171 where he said (at 176), in reference to the scale that:  “[s]tandards of remuneration for skilled services must depend upon local conditions, usages and conceptions.”  To that point, as the case itself indicates, a liquidator’s fee was either a fixed amount or a percentage of the assets under his control.  That practice changed in the 1950s and 1960s.  At least in complicated administrations, the remuneration of liquidators began to be fixed on a time basis:  In re Superior Preserving Company Limited [1953] QWN 49; Re Queensland Forests Limited (In Liquidation) [1966] Qd R 180; compare Re Standard Insurance Co Ltd (In Liquidation) [1967] VR 600 where a more flexible approach was adopted.  This was despite the view of P O Lawrence J in In re Carton, Limited (1923) 39 TLR 194 that this method of fixing remuneration was unfair.  P O Lawrence J said (at 197) that:

“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.”

27                  Shortly after the time basis for fixing remuneration took hold in Australia the insolvency practitioners guild, the Insolvency Practitioners Association of Australia, published a recommended scale of time based charges to guide their members.  The recommended scale soon became the norm.  Indeed in Re Queensland Forest Limited (In Liquidation) [1966] Qd R 180 the Full Court of the Supreme Court of Queensland held that rates of professional organisations (in that case those of the Institute of Chartered Accountants) should generally be applied because reputable professional bodies are likely to fix a scale of charges that was reasonable.  This approach had one thing to commend it.  For many years judges have said how difficult it is to fix the remuneration of a liquidator and that the court was ill-equipped to conduct the detailed examination required:  In re Potters Oils Ltd [1985] 1 WLR 201, 207.  By adopting the IPAA scale the task was made simple.  Surprisingly, however, the courts which took this approach appeared to overlook completely the anti-competitive effect of adopting a scale.  In fact the adoption of a scale undermined effective price competition.  This did not go unnoticed.  In 1992 the Trade Practices Commission (the predecessor of the ACCC) published its Study of Professions - Accountancy.  The report examined the use of fees scales by insolvency practitioners.  It found that use to be a powerful restriction on competitive behaviour.  It noted (at 78) that “widespread dependence on the scale effectively eliminates price as a factor in selection of a practitioner …”.  It went on to say (at 82):  “The scale of fees used by insolvency practitioners appears to have become a widely applied standard which reduces price competition.  …  The structure of the scale, being as it is a tabulation of hourly rates based upon average costs, increases the likelihood that it will retain a strong influence in the negotiation process and discourage price competition in the market.”

28                  The IPAA ceased to produce a guide in June 2000.  It advised its members to thereafter claim fees based on their own rates, which for the most part are time based:  IPAA, Statement of Best Practices – Remuneration, 1 July 2000.  The Statement assumed that every insolvency practitioner had a uniform basis of charging fees to his clients.  Nothing is likely to be further from the truth.  Even if an insolvency practitioner publishes a rack rate, his fees will almost always be subject to negotiation.

29                  The movement to a time based system of charging has led to a potentially irregular practice.  It has become commonplace to approve time-based fees on a prospective basis, without any limit in time or without any cap on the fees.  So common has the practice become in Australia that in his Consent to Act, a liquidator is required to set out the hourly rates charged by the liquidator and those of his partners and employees who may perform work in the administration:  Federal Court (Corporations) Rules 2000, Form 8.  The practice may not be confined to Australia.  The sample resolution for a liquidator’s remuneration in Palmer’s Company Precedents, (16^th ed, 1952) Form 794 (at pp 748-749), while not clear on this point, at least suggest that a similar practise was adopted in England.  I see that the Rules of Court in England dealing with the remuneration of receivers, which initially provided for their remuneration to “be fixed by the Court”, were amended in 1982 to enable that remuneration to be assessed by reference to professional scales.  See also the form of order in Re Independent Insurance Co Ltd (in provisional liquidation) [2002] 2 BCLC 709, 711.

30                  The question arises whether the approval of prospective fees charged on a time basis amounts to “fixing” or “determining” the liquidator’s remuneration.  On one view such approval does no more than fix the rate at which remuneration is to be charged; as the method sets no limit to the amount to be charged it may not “fix” the remuneration.  At least there must be real doubt about the validity of the practice.  It is not, however, a matter which I need resolve, for the issue does not arise squarely on the facts and no submissions were directed to the question.  To reach a concluded view would require consideration of, among other things, the knowledge of the practice by Parliament when the Companies Acts were re-enacted or amended.  If Parliament knew of the practice and did not change the statute that is relevant to its interpretation.  I should say that if the practice be irregular that would not mean that a liquidator must complete his administration before he receives any remuneration.  He could be allowed interim remuneration while work is being performed, leaving the precise amount of his remuneration to be fixed when the winding up is complete.  In any event, the problem may not be as large as at first it seems.  Oftentimes, especially in a complex administration, it will be too difficult to fix fees prospectively having regard to the matters that should be taken into account, as I will later explain.  For this reason courts have from time to time refused to fix fees prospectively:  for instance Re Daily Telegraph Newspaper Company Limited (1931) 48 WN (NSW) 236.

31                  Be that as it may, whatever be the correct meaning of “fixing” remuneration, it was not “fixed” in this case.  The resolutions purporting to fix the administrators’ remuneration did so by reference to the rates in the administrators’ report.  According to those rates work performed by persons occupying the same position could attract a different hourly charge.  There was no criteria by reference to which one could determine which hourly charge would be applied.  In reality it was left to the administrators to decide what the rate would be.  In this state of affairs it was the administrators and not the creditors who fixed their remuneration.

32                  To make matters worse, if on this aspect they could be any worse, there is the manner in which the committee dealt with the task assigned to it.  The committee was required to “review” and “confirm” the fees claimed by the administrators.  In fact the committee did nothing of the sort.  For one thing, their task was made impossible as they were not provided with information which would enable them to determine whether the fees claimed were reasonable.  They had no information from which to determine whether the hours spent were excessive, redundant or otherwise unnecessary.  For another, the task of “reviewing” and “confirming” was given to the committee, it was not given to the individual members of the committee.  Accordingly, the members were required to get together (ie meet) to carry out their task:  In re Gallard; Ex parte Harris [1892] 1 QB 532, 543-543.  In this way the view of each committee member would have been influenced by the knowledge, experience and judgment of the other.  But the committee did not adopt this procedure.  Instead, what the members did was to signify their assent to the fees by each signing and returning to the administrators a copy of their statement of fees without any discussion between them.  In the result, if the resolutions were otherwise lawful, the condition upon which the fees were payable had not been satisfied.

33                  ASIC pointed out these and other deficiencies, such as the improper constitution of the committee (apparently Mr Lucas was replaced by Mr Cauchi without the latter holding the requisite authority) to the administrators.  So the administrators knew they had a problem on their hands.  By that time the administrators had taken most of their claimed fees and for all they knew had done so without authority.  Something needed to be done.  There were several options available.  One was for the administrators to apply to the court to fix their remuneration.  That would be a costly exercise, with no guarantee that the administrators would end up with the remuneration which they had taken.  Another option was to ask the creditors to fix the remuneration.  This was the more attractive option.  The Commonwealth Bank is the group’s largest creditor.  It appears that the bank is content for the administrators to receive the remuneration which they have claimed.  Presumably this is because the bank is satisfied that this has been a very successful administration.

34                  A notice to convene a meeting was sent to creditors, accompanied by a report from the administrators.  The report referred to the correspondence from ASIC recording its view that the administrators’ remuneration had not properly been fixed.  The report then noted that the administrators had been advised by their lawyers and by senior counsel that the resolutions fixing their remuneration were valid.  The inference which the creditors were invited to draw was that ASIC was wrong in its view.  The report went on to say that “in any event any doubts about the validity of the remuneration taken can be resolved by creditors in a further meeting”.  Importantly, the report advised that the administrators’ remuneration, “[h]ad been presented to the Committee of Inspection to review and confirm”, here the implication being that the committee had carried out its assigned task.

35                  Following receipt of the notice, Mr Cook again wrote to the administrators.  Mr Cook was particularly critical of the lack of information which the administrators had provided in support of their claimed fees.  Mr Cook pointed out that:  “There is a total lack of information in the report … to enable creditors to make an informed decision as to the work done and the level of remuneration, for which approval is sought.  The position is exactly the same as when you sought approval of remuneration at the creditors meeting held on 21 March 2003.”  He wrote, correctly in my view, that: “[w]ithout the necessary details creditors have no basis to assess the remuneration.  In my experience the remuneration would not be approved by the Court without that detail.”  The administrators made no effort to remedy the deficiency, probably on legal advice.

36                  At the meeting, which was held on 28 September 2004, the creditors passed several resolutions the effect of which was to fix the administrations’ remuneration in a specific amount for each week of the administration from 10 March 2003 to 27 August 2004.  On any view of the matter the resolutions satisfied the requirement that the administrators’ remuneration be “fixed”.  Nevertheless the resolutions are not legally effective because the report which was sent to creditors was misleading in several important respects:  Kaye v Croydon Tramways Company [1898] 1 Ch 358, 372-373; Young v Ladies Imperial Club, Limited [1920] 2 KB 523, 534.  The report was misleading by implying that the position taken by ASIC was wrong in law.  In fact ASIC’s stated position was correct.  It was also misleading by implying that the committee had reviewed and confirmed the administrators’ fees, when they had not done so.

37                  Having thus far failed to secure their remuneration what should the administrators now do?  They have three choices.  Their remuneration can be fixed by the court or by the creditors, or the administrators can apply for an order under s 447A that some other tribunal fix their fees.  Whichever course is adopted the administrators will be required to provide sufficient information to enable the tribunal to properly assess their claim.  It will, I think, be helpful if I indicate what should be done in that regard.  It will also be helpful if I indicate the factors that should be considered when the tribunal assesses the claim.  Judges have often noted the absence in the legislation of criteria to be taken into account in determining what remuneration is reasonable in a particular case:  Re Avonwood Homes Pty Ltd (in liquidation) [2002] VSC 147 at [31]; Re Western Metal Engineering (unreported, 24 February 1998, Supreme Court of Western Australia).  The time has now come where the court should lay down some guidelines.

38                  The first thing to do is fasten upon a principle which will guide the fixing of fees.  Obviously, the ultimate object is to fix a reasonable fee.  But by what standard is reasonableness to be judged?  Unless some standard is identified determining the appropriate amount will involve too much discretion on the tribunal’s part.  There are really two opposing views.  At one end is the view that the object to be attained is to conserve the fund under administration thereby maximising the return to creditors.  The early English position, where fees were fixed in a specific amount or were based on a percentage of the estate, was based on the notion of conservation of the estate and economy of administration.  The other view is simply to allow the market to operate in the normal way:  insolvency practitioners should be entitled to charge their usual hourly rates which, at least to a degree, are likely to be competitive.

39                  The difficulty with the conservation approach is that insolvency practitioners might forsake liquidations and administrations if they can earn higher incomes in other fields.  These specialists, who by and large allow an insolvency administration to operate smoothly, efficiently and expeditiously, would then be lost.  On the other hand, it is difficult to ignore the criticism that Easterbrook J makes of fees based on hourly rates.  In Kirchoff v Flynn 786 F 2d 320 (7^th Cir 1986) Easterbrook J, with the concurrence of Posner CJ, said (at 324) in relation to fees claimed by an attorney:

“The market for legal services uses three principal plans of compensation:  the hourly fee, the fixed fee, and the contingent fee.  The contingent fee serves in part as a financing device, allowing people to hire lawyers without paying them in advance (or at all, if they lose).  It also serves as a monitoring device.  In any agency relation, the agent may pursue his own goals at the expense of the principal’s.  A fixed fee creates the incentive to shirk; a lawyer paid a lump sum, win or lose, may no longer work hard enough to present his client’s case.  Fixed fees therefore are used only in cases where the client can monitor the results of the lawyer’s work (did the lawyer secure the divorce or not?) or where the client (or the client’s general counsel) is sufficiently sophisticated to assess what the lawyer has accomplished.

An hourly fee creates an incentive to run up hours, to do too much work in relation to the stakes of the case.  An hourly fee may be appropriate where it is hard to define output (in litigation, for example, the outcome turns on the merits and not simply on the lawyer’s skill and dedication), so the hourly method measures and prices the inputs, the attorney’s hours.  Again, however, it is necessary to monitor the lawyer’s work.”

40                  It seems to me that some balance must be struck between the two opposing views.  The balance must achieve some moderation in fees to protect the fund so that creditors can achieve the largest possible return, but not be so moderate as to discourage competent practitioners from providing their important services.  For this reason the fees charged by an insolvency practitioner to his (best) private clients will be an important point of reference but it should not be the sole criterion.  What other factors should be taken into account?  There is a difficulty in simply setting them out in a list.  A mere list of factors to be taken into account without any guidance as to the relative importance of each does not provide a suitable analytical framework.  Moreover, a mere list of factors without any means of determining the weight to be attached to each is often of little use as the result will be too subjective.  That said, some guidance can be useful.  In England, for example, the Insolvency Rules made under the Insolvency Act govern the fixing of remuneration of provisional liquidators (IR 4.30(1)), special managers (IR 4.206), liquidators (IR 4.127), administrators (IR 2.47) and trustees in bankruptcy (IR 6.138).  There is diversity in approach and, except in relation to provisional liquidators, the rules lay down no criteria by reference to which the remuneration of a particular office-holder is to be fixed.  The criteria to be applied to a provisional liquidator is, however, to be taken into account in relation to liquidators, where a choice must be made between remuneration by way of percentage of the assets dealt with and remuneration by reference to time properly spent.  In the case of a provisional liquidator the factors to be taken into account are:

(a)               the time properly given by him (as provisional liquidator) and his staff in attending to the company’s affairs;

(b)               the complexity (or otherwise) of the case;

(c)               any respects in which, in connection with the company’s affairs, there falls on the provisional liquidator any responsibility of an exceptional kind or degree;

(d)               the effectiveness with which the provisional liquidator appears to be carrying out, or to have carried out, his duties; and

(e)        the value and nature of the property with which he has to deal.”

41                  The assumption behind the criteria for a provisional liquidator and the criteria applied when choosing between percentage or time based remuneration for a liquidator is that remuneration will be assessed on a case by case basis.  The problem with this assumption, as Ferris J pointed out in a lecture given to the Insolvency Lawyers’ Association which is reproduced in 1999 (2) Insolvency Law Journal 48, is that it is “rather like ignoring Marks and Spencer and assuming that everyone will have their suits made in Savile Row”.  In most insolvencies the estate is small, the work to be undertaken is not extensive and few difficulties will arise.  For these cases the court should develop a rate or scale that is fair and reasonable for both insolvency practitioners and creditors.  The rate could be fixed as a percentage (perhaps on a sliding scale) of the assets distributed.  This was the view of Ferris J’s Working Party and it is a view with which I agree.  Guidance for the appropriate percentage may be obtained from the legislation that regulates fees for trustee companies.  See for example s 21 of the Trustee Companies Act 1984 (Vic).  Reference might also be made to the fees charged by trustees in bankruptcy:  Bankruptcy Act 1966 (Cth), s 162(2) and Bankruptcy Regulations 1996, reg 8.07

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 In re Carton, Limited (1923) 39 TLR 194 are as true today as they were in 1923.  The 1997 Working Party report commented at para [10.34] that:

“Practitioners working on a time-based remuneration system have an incentive to maximise the time that they spend working on an administration, subject to their obligations to account for all the time spent. … [C]omplaints have been received along the lines that practitioners working on a time-costing have increased the remuneration they receive by engaging in practices such as:

·        Spending time on speculative investigations and recovery possibilities which would not be contemplated if funds were more limited;

·        Assigning either too many or too highly qualified staff to tasks; and

·        Taking too long to perform tasks.”

See also the comments of the Parliamentary Joint Committee on Corporation and Financial Services in its Corporate Industry Laws:  A Stocktake at para [7.7].

43                  In Mirror Group Newspapers plc v Maxwell (No 2) [1998] 1 BCLC 638 Ferris J said (at 652) that the principal problems with time based remuneration, such as the insolvency practitioner’s “usual hourly rates”, were that they paid no regard to complexity, exceptional responsibility, the effectiveness of the work done and the value and nature of the property dealt with.  The Mirror Group Newspaper case arose out of the death of the head of the Mirror Group, the late Robert Maxwell.  Following Maxwell’s death it was discovered that he had misappropriated large sums of money belonging to the Mirror Group.  On application by Mirror Group Newspapers in proceedings commenced against Maxwell’s estate, the court appointed three joint receivers to protect the estate.  In due course it became apparent that the estate was hopelessly insolvent and there was likely to be little or no return to creditors.  The estate was very complex to administer with investigations undertaken in 10 different countries.  By 1997 the joint receivers had recovered £1,672,500 and expected to realise a further £300,000, but their total costs and expenses by then were £1,628,572 with further costs to accrue:  that is, the receivers’ costs would exhaust the entire estate.

44                  It was against this background that the receivers applied to court for their remuneration.  They had received £600,000 on account and sought a further payment on account of £505,000.  Ferris J said that his task was to assess the value of the services rendered by the receivers.  In this regard he said (at 651) that it was important not to place too great an emphasis on time spent, referring to In re Carton, Limited.  He then went on to add (at 652):

“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 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.”

45                  The question of time-based fees was also taken up by the Appeal Committee of the House of Lords when considering the principles applicable to the remuneration of counsel in criminal legal aid cases.  The House of Lords said:  “The use of hours of worked multiplied by an hourly rate will seldom be helpful in taxing counsel’s fees. [The relevant regulation] requires the appropriate authority to have regard to ‘the time involved’ …  But the time expended by Counsel is not necessarily the time to be remunerated.  Only the time reasonably expended is to be remunerated:  otherwise the inefficient slow worker gets paid for the same work than the efficient worker.  Add to this the risk (not a feature of these present cases) of counsel consciously or unconsciously exaggerating the time expended and the limitation on the hours worked approach becomes even more apparent.”:  Report on the Clerk of the Parliament’s Reference Regarding Criminal Legal Aid Taxation, October 6 1998, at para 41.

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:  In re Boston and Maine Corporation v Moore 776 F 2d 2, 7 (1^st Circ 1985); Copeland v Marshall 641 F 2d 880, 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.

48                  To have his fees fixed it will be necessary for the administrator to do more than simply state the amount of time spent and the rate to be charged for that time, as happened in this case.  The amount of detail to be provided in support of a claim must be proportionate to the size of the estate and the amount of time spent.  A useful discussion of what is required appears in Re Medforce Healthcare Services Ltd (In Liquidation) [2001] 3 NZLR 145, 155:

“In our view the exercise which must be undertaken by the court in fixing the reasonable costs of the liquidator is similar to that which is undertaken when approving solicitor and client costs or costs for legal aid purposes.  In each case what is required is enough information to enable an assessment to be made as to whether the total costs charged are reasonable. 

As a minimum it seems to us that what is required is a statement of the work undertaken during the course of the liquidation, together with an expenditure account sufficiently itemised to enable the charges to be made related to the work done.  The detail would have to be sufficient to enable the judicial officer to determine whether the personnel involved in the liquidation and their respective charge-out rates were appropriate to the nature of the work undertaken.  This information may in some cases raise concerns as to whether there has been overservicing and overcharging.  If there are suggestions of this in the information provided, the Court can request further information.

See also Mirror Group Newspapers plc v Maxwell (No 2) [1998] 1 BCLC, 638, 648:  (“[The office holder] must explain the nature of each main task undertaken, the considerations which led them to embark upon that task and, if the task proved more difficult or expensive to perform than at first expected, to persevere in it.  The time spent needs to be linked to this explanation, so that it can be seen what time was devoted to each task”); Re Solfire Pty Ltd (in liq) No. 2 [1999] 2 Qd R 182, 191: (“[W]hen a provisional liquidator seeks to have his remuneration determined by the court he should provide a document not dissimilar in form to the Bill of Costs in taxable form provided by a solicitor to his client …”); Venetian Nominees Pty Ltd v Conlan (1998) 20 WAR 96, 103: (“It may well be that in a particular case information particularised as suggested by [the judge in Re Solfire Pty Ltd (in liq) No. 2] would be appropriate.  In other cases less detailed information may be required.  Every case depends on its own circumstances.  But the overriding principle remains:  sufficient information must be provided to the court to enable it to perform its function …”).

49                  If the administrator is to ask the creditors to fix his fees then the information in support of that claim may need to be more detailed than in an application to the court.  My fear is that if the request is made to the creditors the fees will not be closely scrutinised.  In the first place, in a large administration the task of scrutiny will be a difficult one.  Secondly, creditors, or even a small committee of creditors, will often lack the knowledge to be able to mount a successful challenge to the practitioner’s claims.  Thirdly, the creditors (even a committee of creditors) may not think that the effort is worthwhile.  Thus, the greater the detail presented to the creditors the easier their task will be.  Nevertheless, in a large administration it is likely that the creditors will need to call in a cost consultant.

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.

52                  I will hear the parties on the orders that should be made and what further directions (if any) should be given.

Associate:

Dated:              21 December 2004