09 December 2005
Key Points:
In Re Stockland the court had to consider what was meant by "fixing" or "determining" remuneration, which had never been expressly considered in any prior decision.
In late 2004 Justice Finkelstein of the Federal Court of Australia delivered the decision of Re Stockford Ltd (Subject to Deed of Company Arrangement) [2004] FCA 1682; (2005) 23 ACLC 150 regarding insolvency practitioner remuneration, specifically that of administrators and deed administrators.
This article examines that decision and its potential impact upon insolvency practitioners and the broader profession.
The statutory framework
As a starting point, it is important to note that no remuneration levels are prescribed by the Corporations Act 2001. Rather, there are procedures for the insolvency practitioner and the creditors to agree remuneration. The Court only intervenes (and assesses remuneration) where agreement cannot be reached, or where review is sought.
The applicable statutory provision is section 449E of the Act, which relevantly provides:
"(1) The administrator of a company under administration, or of a deed of company arrangement, is entitled to:
(a) such remuneration as is fixed by a resolution of the company's creditors passed at a meeting convened under section 439A, or under section 439A or 445F, as the case may be; or
(b) if no remuneration is so fixed - such remuneration as the Court fixes on the application of the administrator.
(2) Where remuneration is fixed under paragraph (1)(a), the Court may, on the application of the administrator or of an officer, member or creditor of the company:
(a) review the remuneration; and
(b) confirm, increase or reduce it."
In summary, Justice Finkelstein held that, excepting the work performed in the initial two weeks of the administration, the administrators' remuneration was not validly fixed pursuant to section 449E and the situation required rectifying. In the course of explaining this finding, he attempted to address the "widespread belief, not confined to [insolvency practitioners in] Australia, that there is overcharging and that overcharging is rife".
The relevant facts
This case involved the large and complex administration of the Stockford Group of 84 companies. The Stockford Group carried on business as a provider of accounting, business and financial services through 67 offices in Australia, New Zealand and the United Kingdom.
To provide some context, the administrators' fees drawn from the Stockford Group's assets totalled $2,421,175.50.
It is necessary to pause and note that the matter in issue in this case was not the reasonableness of the fees charged, rather whether the remuneration had been validly fixed pursuant to section 449E. Accordingly, Justice Finkelstein prefaced his judgment by stating that "[n]othing 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 administration of the Stockford Group presented many difficulties … the fees claimed by the administrators may well be justified".
Throughout the course of the administration, the administrators sought, and obtained, a number of remuneration resolutions. The following resolution was passed, and carried, as a single resolution at the second meetings of creditors of the Stockford Group (held concurrently):
"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 $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.".
The second meeting was otherwise adjourned for a period of up to 60 days.
In the section 439A report that preceded the second meeting, the administrators' firm's hourly rates were set out in a table. He described the table as 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". One problem was that the hourly rates did not necessarily correspond with the position held or activity undertaken. Furthermore, he found the report provided no information enabling creditors to determine the reasonableness of the rates.
At the adjourned second meeting, a majority of creditors resolved that the Stockford Group execute a Deed of Company Arrangement (DOCA). A further report preceded the adjourned second meeting and informed creditors the DOCA proposed the Deed Administrators' remuneration be based on the above hourly rates but "subject to the Committee reviewing and confirming the details". No formal remuneration resolution was tabled or passed at the adjourned second meeting. However, a copy of the draft deed, containing a remuneration provision (in terms set out above), was tabled at the meeting. It is apparent that the relevant parties assumed the resolution that the companies execute the DOCA was also a sufficient remuneration resolution under section 449E.
During the deed administration, the Australian Securities and Investments Commission raised possible deficiencies in the remuneration resolutions rendering them invalid. By that time the administrators had taken most of their claimed fees. The Administrators' response was to proceed with the most attractive option available, namely convening a further meeting of creditors to ratify the remuneration taken.
The form of the further remuneration resolutions was uncontroversial. However, the report accompanying the notice of meeting contained what Justice Finkelstein found to be two misleading statements. Firstly, the report inferred the position taken by ASIC was wrong in law (the administrators had stated they had been advised by their legal representatives that the resolutions fixing their remuneration were valid). Secondly, the report inferred the Committee of Creditors had in fact reviewed and confirmed the administrators' fees (when they had not). He considered the Committee's obligation to be far more onerous than the largely procedural role envisaged by the administrators; that is, the Committee was required to determine whether the claim was reasonable in the circumstances.
Even though the creditors "passed" the further remuneration resolutions at the further meeting on 28 September 2004, Justice Finkelstein held the (otherwise valid) resolutions were not legally effective because of the above misleading statements.
Less than a month later, the administrators applied to the Court for declarations affirming their position, alternatively for directions. It was that application that gave rise to the present decision.
The key finding
Justice Finkelstein had no hesitation accepting the initial resolution "fixed" the remuneration for the first two weeks work in the administration (namely, the amounts of $403,133 and $236,956). This is unsurprising, as that remuneration was a precise sum.
However, there were two reasons why the other remuneration resolutions were invalid. Firstly, the resolutions had proposed a time based remuneration subject to a review and confirmation by the Committee. That is, the Committee would be the ultimate body "fixing" the remuneration, as opposed to the creditors generally (as required under section 449E(1)).
The only exception is if an order is made under section 447A of the Act modifying the operation of Part 5.3A. From a practical perspective, such a requirement may be inconvenient in a large and complex administration (such as the present one). This is further compounded in administrations that extend the usual time limits prescribed under Part 5.3A. However, no other interpretation is open under the legislation. [1]
Secondly, the remuneration resolutions failed to "fix" a remuneration. In practical terms, the resolutions were open ended and it was left to the administrators themselves to determine their remuneration. Justice Finkelstein considered this situation to be unsatisfactory.
Justice Finkelstein had to consider what was meant by "fixing" or "determining" remuneration. This issue had never been expressly considered in any prior decision. He adopted the obvious construction in finding that the meaning of the word "fix" required one:
"[t]o quantify that remuneration, that is to calculate or ascertain the amount of remuneration ... 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' ... In the case of a formula all the objective elements must be identified."
Related issues
While not being required to do so, Justice Finkelstein also looked at the related issues of assessing reasonableness, the process of applying for remuneration and the incurring of disbursements.
It is beyond the scope of this article to provide a detailed analysis of those issues. However, they are touched upon in the final section below.
Implications and other comments
Unfortunately, the critical issue arising from this decision (that is, whether there can be a valid remuneration resolution fixing fees charged prospectively on a time basis) was not considered by Justice Finkelstein. However, he did identify the issue and gave an indication of his position by stating "(a)t least there must be real doubt about the validity of the practice".
Obviously, this issue has serious implications for insolvency practitioners. However, the point needs to be taken and answered in another decision before an authorative opinion can be proffered. Now that the issue has been identified, it will simply be a matter of "watch this space". It is also not certain that a "capping resolution" (prescribing an upper limit for the remuneration to be charged) [2] would be a solution, as capping does not "fix" the remuneration. [3]
In his comments regarding assessing reasonableness of remuneration, Justice Finkelstein identified the opposing approaches of "fund conservation" (imposing limits on fees to maximise the return to creditors) and "market forces" (competition results in competitive fees). He acknowledged a balance must be struck between these two approaches. However, he appeared to advocate a rate or scale (fixed as a percentage - perhaps, on a sliding scale - with the assets distributed) in small administrations. This approach may prove more problematic in ensuring there is accountability in respect of administrators' fees. Furthermore, it does not appear to account for an administration that is bereft of assets.
Justice Finkelstein also suggested the engaging of a costs consultant in a large and complex administration, to provide assistance in the fee fixing process. This suggestion seems prudent as such measures may provide protection for the insolvency practitioner (for example, a reference to an independent review may assist a remuneration resolution being passed and the resisting of any application for Court review of remuneration). Of course, the fees of the independent costs consultant would be a disbursement in the administration and may lead to a smaller return to creditors.
In relation to disbursements, Justice Finkelstein counselled insolvency practitioners against forming personal or "cosy" relationships with legal practitioners. In this context, the insolvency practitioner should "shop around" and closely scrutinise legal fees and whether or not to commence (or continue with) litigation. It is important to note that this suggestion is not new, having been raised by the Court in the past. [4]
Re Stockford Limited provides some practical guidelines for administrators and deed administrators in dealing with their remuneration. However, the decision may have opened the door to greater judicial challenge. If this eventuates, it is likely to mean further pressure is placed on the court system (in the form of increased applications), an increase in the costs of administrations and delay in concluding administrations.
Post-Stockford developments
Following Re Stockford Limited, new proceedings were commenced by the Deed Administrators seeking to rectify the effect of not having their remuneration fixed properly by either the creditors or the Court. As a result of these further proceedings, the Court ordered that:
Interestingly, ASIC has now also written to all insolvency practitioners asking them to "let ASIC know whether they have received remuneration in voluntary administrations without first ensuring the amount has been properly assessed and fixed either by the creditors or by the Court".
A number of cases have also considered, or made reference to, Re Stockford Limited. In Re Bosnjak Holdings Pty Ltd (Administrators Appointed) & Ors; Lombe & Anor [2005] FCA 275, Justice Gyles of the Federal Court noted Justice Finkelstein's treatment of this issue, and made orders pursuant to section 447A of the Act that enabled a Committee of Creditors to consider and approve remuneration claims. The administration in question was a complex one involving an insolvent corporate group and the Committee of Creditors had been appointed in one of the companies under administration. However, as it represented 97% of the value of the total claims against all companies in the group, and as all companies within the group had (with one exception) given cross guarantees, Justice Gyles was prepared to allow the Committee to deal with remuneration claims in respect of all of the companies under administration. While this was a sensible approach, a consideration that emerges out of this decision is whether, when application is made to Court for extension of the convening period of the second creditors' meeting, a practitioner should also consider whether to include in such an application orders for the approval of fees by an appropriately constituted and representative committee of creditors pursuant to section 447A.
In Re Clynton Court Pty Ltd (Subject to a Deed of Company Arrangement); Korda & Anor (as joint and several Deed Administrators of Clynton Court Pty Ltd (Subject to a Deed of Company Arrangement)) vThe JAron Corporation & Anor [2005] FCR 543, Justice Finkelstein commenced his judgment by stating:
"Perhaps my decision in [Re Stockford Limited] has caused insolvency practitioners some difficulties. I trust that those difficulties will be sorted out without creditors being over burdened with the associated costs."
In this case, the Deed Administrators brought an application to the Court under section 449E(1)(b) of the Act for orders that their remuneration be fixed by the Court. The application came about as a result of concerns the Deed Administrators had with the resolution passed by the creditors of companies in the Newmont Yandal Group (ie. it was not one "fixing" their remuneration for the purposes of section 449E(1)(a) following Re Stockford Limited). Justice Finkelstein determined that, given the facts of the case (serious disputes and litigation between the Deed Administrators and creditors), it was not fair to ask the creditors to determine the Deed Administrators' remuneration. However, he also concluded that this task was not one for a judge. Rather, he ordered the remuneration be fixed by a Registrar of the Court. Justice Finkelstein also held the Deed Administrators were entitled to some amount by way of interim remuneration. They had drawn this interim remuneration in good faith and the belief that the remuneration had been fixed. It was reasonable to permit them to retain what they had received to date and to take 80% of their claims for future remuneration pending fixing of that remuneration. However, the Deed Administrators would need to provide an undertaking to pay interest on the amount (if any) which must be repaid in the future, at a rate of interest to be fixed by the Court if it becomes necessary to do so.[5]
[1] This problem appears unique to voluntary administrations. Most other forms of external administration permit determination of remuneration by committee - for example, see sections 473(3), 499(3) and 473(2) of the Act.
[2] The IPAA Statement of Best Practice - Remuneration: 1 July 2000 provides "[w]here remuneration is approved prospectively, an upper limit must be included in the resolutions". While Justice Finkelstein made a passing reference to the Statement, he did not consider the effect of these words.
[3] See Vaughan, J. 'Re Stockford Limited: Implications for Insolvency Practitioner Remuneration', IPAA Discussion Group Paper delivered on 3 March 2005, at pages 8-9.
[4] See, for example, Re Western Corporation Continental Limited (In Liquidation) (1990) 1 WAR 402 at 405.
[5] See also "ASIC's Increased Focus on Insolvency" by Professor Berna Collier, ASIC Commissioner (4 August 2005).
For further information, please contact Cameron Belyea.
