15 Sep 2016

Administrators' remuneration: proportionality as a test of reasonableness

By Matthew Edwards

Particularly in smaller external administrations, the court will not blindly accept time-based remuneration as reflecting the value of the work, but will consider the proportionality of the remuneration.

In a number of recent judgments, the courts appear to be favouring considerations of proportionality coupled with an assessment of the realisations achieved when assessing application for the approval of remuneration for external administrators.

A liquidator's/receiver's remuneration must be "reasonable". The courts have held that what is reasonable cannot be assessed solely on the time spent as against a quoted hourly rate. Instead, there has been a move to review, particularly in smaller scale external administrations, reasonableness as against a number of factors including the risk assumed, the value generated, and proportionality.

There has been an emphasis on the fact that remuneration assessed against the value added, rather than the time spent by practitioners, is inherently proportionate and, it is said, incentivises the creation of value.

In light of the recent decisions, it is clear that, particularly in smaller external administrations, the court will not blindly accept time-based remuneration as reflective of the value of the work conducted, but will consider the concept of proportionality of the remuneration sought. A number of factors will be considered when assessing proportionality, including:

  • the complexity of the matter;
  • the recovery obtained; and
  • the amount of the distributions paid.

In that respect, and linked with the concept of proportionality, courts have been considering the value of the gross realisations recovered by a liquidator when assessing what would be an appropriate amount to be paid as remuneration. In cases where only a small return is achieved, particularly if the liquidator has had to do little to obtain that return or where risk has been moved to an alternative party (such as a real estate agent), the courts have been reluctant to approve any substantial remuneration claim.

By way of illustration, in the case of Gramarkerr Pty Limited (No 2) [2014] NSWSC 1405, the liquidator of a small family company retained external agents and solicitors to act on his behalf in relation to the sale of the only asset (representing a transfer of risk). The Court considered that remuneration based on a scale of 10% on the first $100,000 of realisations and 5% thereafter was suitable remuneration.

In preparing any necessary application seeking approval of remuneration, to improve the prospects of obtaining approval for the remuneration sought, external administrators should be conscious to ensure that thorough evidence is provided to the court. That evidence should:

  • detail why the work conducted was required (particularly if that work may be considered in excess of the norm);
  • explain the complexities encountered;
  • indicate whether creditor approval for the remuneration has been obtained (and if not why); and
  • state the recovery achieved by the liquidators and the likely distribution to creditors.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.