The Changing Landscape of Remuneration and Fees for Insolvency Practitioners

The Changing Landscape of Remuneration and Fees for Insolvency Practitioners

Introduction

Over recent times there have been indications from a number of public groups that there needs to be a level of reasonableness adopted by Insolvency practitioners on the issue of remuneration and fees, taking into account the specific nature and circumstances of each insolvency job. From recent decisions it appears that the Courts have taken notice, with some judgments being issued that all insolvency practitioners need to take note of and it seems that more are on the way

Recent Cases

In a recent Supreme Court decision from Brereton J in the matter of AAA Financial Intelligence Pty Ltd (In Liquidation) ACN 093 616 445 (No2) [2014] NSWSC 1270, his honour identified three main issues that were before him:

  • Whether the liquidators should be permitted to recover their remuneration and expenses from trust funds;
  • Whether the residue of trust funds after payment of the Liquidator’s remuneration and expenses should be between the beneficiaries equally; and
  • The quantum of the liquidator’s remuneration and expenses.

His honour was satisfied that the liquidators were entitled to their reasonable and proper costs and expenses from the trust assets, but only in relation to work that was referrable to administration of the trust assets.

Turning to the issue of the quantum of the liquidator’s remuneration and expenses, his honour allowed the majority of the expenses incurred by the liquidators, however on the issue of remuneration, this was reduced on the basis that the remuneration cannot be assessed solely on the quoted standard hourly rates to the time reasonable spent. At paragraph, 30 the issue was outlined as follows:

“I do not doubt that substantially all the work in respect of which remuneration is claimed was performed, and took the time claimed. Nor do I doubt that the liquidator’s standard rates are within the range of those charged by similar professionals for similar work. If the cost of the Liquidators’ services for the time spent at their standard quoted rates is the correct measure of remuneration, then their claim for remuneration is justified. The real issue is whether the costs of their services, so calculated, is a reasonable fee in all the relevant circumstances – including the nature and value of the property in question. Alternatively put, does the formula of time reasonably spent at standard hourly rates provide the proper measure of reasonable remuneration?”

It was clear that if the liquidator’s full remuneration was allowed then it would have exhausted all the trust funds, leaving no return to beneficiaries and accordingly the remuneration claimed was reduced by his honour to reflect 20% of the trust assets realised.

In the recent Supreme Court of New South Wales matter of Hellion Protection Pty Ltd (In Liquidation) [2014] NSWSC 1299, his honour Brereton J was once again required to decide on a matter whereby the liquidator was seeking to review the remuneration that had previously been fixed at a creditor’s meeting. In essence, the liquidator’s remuneration for a creditor’s voluntary winding up had been fixed at $25,000.00 and he was seeking to have them reviewed and increased to $47,399.00 plus GST.

In the matter, his honour referred to his decision in the case of AAA Financial Intelligence Pty Ltd (In Liquidation) ACN 093 616 445 (No2) [2014] NSWSC 1270 (“AAA matter”) and once again highlighted the difficulties with time/cost approaches to liquidations, especially smaller liquidations. At paragraph 5 of his reasons, his honour outlined:

“..I referred to authorities which supported a percentage –or commission – approach to a liquidator’s remuneration and to cases which indicated ranges that might be appropriate, starting from the statutory $5,000.00 where no amount is otherwise approved; to the bankruptcy scale commencing from 10 percent of realisations in smaller bankruptcies; to cases which had commented; in the liquidation context, that 5 percent on realisations and 5 percent on distribution was a very high allowance.”

In the case, his honour ultimately rejected the application by the liquidator outlining that there was no need to disturb what had already been approved and that there was no basis to increase the remuneration above the cap that had been approved.

Effects

Ultimately these cases demonstrate the need for insolvency practitioners to take precautions when deciding / adopting a method for which expenses and remuneration will be claimed from a job.  It will not be sufficient in all matters for liquidators to adopt a time based approach where the value of assets in a job will not support such a method. Perhaps Brereton J summed up the position best in the AAA matter at paragraph 36:

“…liquidators are under a fiduciary duty to protect, get in and realise assets and property belonging to creditors or beneficiaries and pass it on to them, and in doing so are expected to exercise proper commercial judgment in carrying out their duties and to account both for the way in which they exercised their powers and for the property dealt with. Where the sole or dominant beneficiary of a liquidation is not the creditors but the liquidator, that fundamental purpose has not been achieved.”

What this means is that each insolvency matter needs to be dealt with taking into account the specific nature and circumstances of the matter in determining the reasonable remuneration and expenses to be paid to liquidators. Some matters have different complexities than others whereby liquidators are forced to obtain specific advice or seek other services from outside professionals in determining the best steps to be taken in the matter for the benefit of the creditors.  There will also be instances where despite proper attempts by liquidators for the recovery of assets, such a return is unsuccessful and will not be greater than the reasonable remuneration and expenses of the liquidators. The Courts have advised that these matters need to be monitored closely and may not always allow for full the remuneration and expenses claimed by liquidators.

It can also be noted that as a result of the Court’s recent approaches taken to reviewing the remuneration and expenses of insolvency practitioners, that more reviews will be on the way. Interestingly, Justice Antony Siopis of the Federal Court in Perth has previously ordered an inquiry into the remuneration and expenses claimed by the receivers and managers of the three businesses related to Burrup Fertilisers, which was placed into receivership in 2010. It is noted that the receivers and managers are disputing the basis for the inquiry and are seeking to have the proceedings struck out.

On the basis of the underlying principles coming to effect from such recent cases, it can be expected that further review and scrutiny will be adopted by Courts in moving forward in the future. It is important not to lose focus on preserving the nature of the liquidators’ duties in protecting the interests of creditors whilst also being paid reasonable remuneration and expenses for undertaking such duties.

JHK Legal is well versed in dealing with all forms of insolvency matters.  We have previously acted on behalf of creditors, shareholders, directors, insolvency practitioners and other professionals involved in the insolvency process. If you have any enquiries or require any assistance with any insolvency matter you may be involved in, please don’t hesitate to contact our office.

 

 

Author: Patrick Hanrahan, Legal Practitioner Director

Published: November 2014

The Increased Scope of Penalty Clauses

Introduction

Issues of contract interpretation occupy a great deal of the time for busy commercial practitioners and judges. These issues have been called the very nucleus of commercial law. Disagreement on basic contractual concepts such as the plain meaning of particular words and whether clauses are ‘common sense’ or ‘commercially realistic’ is widespread.

The outcome of litigation founded on contractual construction is notoriously unpredictable and this includes the judicial interpretation of penalty clauses.  A penalty clause is a clause in a contract that provides for an excessive pecuniary charge against a defaulting party.  Disputes regarding penalties are commonly raised by contractors who seek to defend themselves against the levying of liquidated damages for delayed completion of a project.

The Dunlop Decision

The starting point for any dialogue of the penalty rule must be the decision of Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd. This 1915 House of Lords decision set out the applicable test and guidelines to determine whether a stipulated sum payable on breach of a contract was to be treated as liquidated damages and enforceable, or a penalty and hence unenforceable. That test was then universally applied in the common law world.

Lord Dunedin’s four rules which form the Dunlop test are:

  1. the words “penalty” or “liquidated damages” in a contract are not conclusive as to their meaning;
  2. the essence of liquidated damages are a genuine agreed pre-estimate of damage but the purpose of penalty clauses are to threaten the offending party;
  3. whether a sum is penalty or liquidated damages is a question of construction to be decided upon the terms and circumstances of each particular contract, judged of as at the time of the making of the contract;
  4. To assist this task of construction various tests have been suggested:

(a) examining whether the sum is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach;

(b) a clause will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid under the contract;

(c) There is an assumption that a penalty clause exists when a single lump sum is made payable by way of compensation, on the occurrence of one or several events, some of which may occasion serious and others but insignificant damage;

(d) It is no obstacle to the sum stipulated being a genuine pre estimate of damage, that the consequences of the breach are such as to make precise pre estimation almost an impossibility. This is just the situation when it is probable that pre estimated damage was the true bargain between the parties.

The Andrews Decision

In 2012 the decision of the Australian High Court in Andrews v Australia and New Zealand Banking Group Ltd reformulated the Dunlop test by establishing that a clause requiring payment of sums of money can be a penalty even if it is triggered by an event other than a breach of contract.  Under the reformulated test, any stipulated sum clause is now open to challenge on the basis of penalty.

In this case ANZ entered into contracts with customers which contained clauses enforcing fees as a result of actions such as cheques being dishonoured, overdrawn accounts or credit cards exceeding permitted limits. The court found there was no contractual breach in these situations because i) ANZ had a choice regarding whether or not to allow the accounts to be overdrawn and ii) customers had 25 days to pay the late payment fees before a contractual breach would occur.

The Court did not accept ANZ’s argument that the late payment fee imposed by ANZ constituted an additional charge in connection with the operation of the account. The court decided that the increased risk to ANZ when repayments were not made within the required timeframe did not justify these clauses which were held to constitute penalties despite the absence of a contractual breach.

Security for performance v enjoyment of an additional right

The equitable nature of the penalty doctrine considers the substance of the clause rather than its form. This involves closely examining the construction of the contract, construing the agreement as a whole, requiring the legal form of the contractual arrangement to be ignored and its actual substance considered.

The High Court stressed that there is an “operative distinction” between i) an obligation to pay a sum of money as security for the performance of a contractual obligation to which the penalty rule applies and ii) an obligation to pay a sum of money for the enjoyment of an additional right or service which does not attract the penalty doctrine. If the purpose of the clause is the former, to secure performance of an obligation, this will only be enforceable if it is a genuine pre-estimate of the damages suffered by that party’s non-performance of the contract.

In the Queensland Court of Appeal case of Kellas-Sharpe v PSAL Ltd the court considered the nature of a clause in a loan agreement that provided that a reduced rate of interest would apply while the borrower was not in default. The court agreed that under the current equitable doctrine of penalties, such a clause would not constitute a penalty.

The court focused upon whether or not the failure to satisfy the relevant principle obligation was capable of compensation. If the failure was compensable in respect of actual damage suffered, equity considers whether or not to intervene ‘to ensure the recovery of no more than compensation.’

Courts will enforce liquidated damage clauses when they represent a legitimate calculation of true damages.  Penalties are only enforced to compensate the party for the extent of the loss suffered and a party is relieved from liability to satisfy the rest of the penalty – Andrews v ANZ.

A party seeking to uphold a clause which is alleged to constitute a penalty should consider the following:

  1. A penalty clause does not exist if the clause is a genuine pre-estimate of the damage suffered; or if it is instead genuine payment under an undisputed pre-existing arrangement in return for ‘something more’ e.g. an additional service or further benefit; and
  2. the party who is alleging that a clause is a penalty bears the onus to prove that the liquidated damages are unconscionable or unreasonable.

The Andrews decision has had wide ranging ramifications for commercial transactions including the drafting of commercial contracts. Lawyers should review contractual provisions that could have a punitive effect in circumstances other than breach of a contract by one of the parties, and consider whether the provision could be rephrased so that, any amount payable does not secure the performance of the principal obligation, but rather forms part of a secondary arrangement.

It has been argued that the removal of the breach requirement from the penalty doctrine will give rise to an increase in challenges to contractual stipulations leading to uncertainty, confusion and increased costs to the contracting parties. However, as the penalty doctrine requires that for a sum to be penal it must be “extravagant and unconscionable” in amount, it is uncertain if the Andrews decision will lead to a large increase in the amount of clauses that are found to be penal. Save where the sum is payable for an additional service, this aspect of the penalty doctrine test remains and will always have to be applied to the clause, to determine if it is penal in character.

Author: Vicky O’Brien

Published: November 2014