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Excessive remuneration and inadequate remuneration reports: Validation of Liquidators’ remuneration refused, with their fees to be reduced by the Court

This week’s TGIF covers the Federal Court’s refusal in Lock, in the matter of Cedenco JV Australia Pty Ltd (in liq) (No 2) [2019] FCA 93 to validate creditors’ resolutions fixing $5m+ of remuneration where creditors were given insufficient information; reduced remuneration to be fixed.

11 February orders refusing validation

On 11 February 2019, Justice Besanko of the Federal Court of Australia refused an application under s 1322(4) of the Corporations Act 2001 (Cth) by Adelaide liquidators, John Sheahan and Ian Lock (Liquidators), to validate creditors’ resolutions fixing over $5 million in remuneration for the Liquidators’ role as administrators and liquidators of SK Foods Australia Pty Ltd (in liquidation), Cedenco JV Australia Pty Ltd (in liquidation) and SS Farms Australia Pty Ltd (in liquidation) (collectively, the Companies). Justice Besanko’s reasons also form the basis for reductions which will be made to the Liquidators’ remuneration.

The proceedings

The Liquidators commenced the proceedings in July 2015, after ASIC raised concerns that the Liquidators had failed to comply with the requirements (then in sections 449E(7) and 499(7) of the Act). It appeared that the Liquidators had drawn remuneration where the creditors’ resolutions fixing the remuneration were passed on the basis of:

  • inadequate remuneration reports;
  • remuneration reports which did not cover the correct period of time; or
  • no relevant remuneration report.

ASIC intervened in the proceedings and opposed the orders sought by the Liquidators under s 1322(4) effectively “rubber stamping” the remuneration as well as raising extensive objections to the remuneration sought. Corrs acted for ASIC in the proceedings.

No rubber stamping exercise

Justice Besanko held that the Liquidators contravened sections 449E and 499(7) of the Act in that all of the remuneration reports provided to the creditors were inadequate. His Honour found that the contraventions had caused substantial injustice to creditors who had been deprived of the opportunity for meaningful examination and discussion of the remuneration sought.

His Honour also referred to further reasons to exercise the discretion against granting relief under s 1322(4) as he found that the remuneration claimed could not be said to appear reasonable and that it was “very high” in the circumstances.

Reductions to remuneration

A further hearing is listed on 24 April 2019 for final orders fixing the Liquidators’ remuneration, taking into account Besanko J’s reasons, which will require substantial reductions to be made including with respect to the Liquidators’ hourly rates which His Honour found were “excessive”.

By way of comparison to the Liquidators’ hourly rates, ASIC tendered evidence from 10 insolvency practitioners practicing in different offices in Australia and from firms of different sizes.

Having regard to that evidence, His Honour considered a discount of 20% was appropriate on partner and senior manager rates, and 10% on manager rates.

His Honour’s reasons also provided for significant discounts to be made to the remuneration claimed by the Liquidators for some of the work performed by them.

Expert evidence relevant as to what work was reasonably necessary

The Court also received expert opinion evidence from Mr Peter Gothard (managing partner at Ferrier Hodgson in Sydney) as to what work the Liquidators should have done in the circumstances from the perspective of a competent and prudent insolvency practitioner applying what is now the ARITA Code of Professional Practice.

His Honour overruled the Liquidators’ objections to that evidence and held that evidence of what a competent and prudent insolvency practitioner would do in the circumstances would likely be of assistance to the Court in considering whether the work performed was reasonably necessary. His Honour rejected the submission that the evidence of Mr Gothard was no more than one professional commenting on the conduct of another, as he considered that Mr Gothard had the necessary additional training, study or experience to demonstrate specialist knowledge of what a competent and prudent insolvency practitioner would do.

Take-aways

Final orders are yet to be made in relation to the matter which will next be before the Court on 24 April.

In the meantime, His Honour’s reasons emphasise:

  • that failure to properly obtain creditor approval of remuneration by giving inadequate or incomplete information will result in substantial injustice and is unlikely to be “rubber stamped” by the Court;
  • practitioners will need to justify their hourly rates in any application to the Court to fix remuneration including by reference to the market rates pertaining to the relevant jurisdiction/s where work is performed, the experience of the practitioners and the relevant circumstances, including the level of risk of recovery attaching to the matter;
  • the Court may find expert opinion evidence helpful in circumstances where remuneration is challenged on the ground that the work for which the remuneration is claimed was not reasonably necessary; and
  • preparation of work plans, budgets and cost/benefit analyses before and during a matter will assist practitioners to show that work was properly performed and chargeable.

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