Supreme Court New South Wales Medium Neutral Citation: In the matter of AAA Financial Intelligence Ltd (in liquidation) ACN 093 616 445 (No 2) [2014] NSWSC 1270 Hearing dates: Monday, 1 September 2014 Decision date: 17 September 2014 Jurisdiction: Equity Division - Corporations List Before: Brereton J Decision: The liquidators would be justified in distributing the Stockbroker Funds pari passu among those Stockbrokers whom they are satisfied have a proprietary claim against those funds; and in distributing the Adviser Funds, as to $26,702.18, in payment of their costs of these proceedings; as to $51,593, in recoupment of their expenses; as to $36,000, in payment of their remuneration; and as to the balance, pari passu among those Advisers whom they are satisfied have a proprietary claim against those funds Catchwords: CORPORATIONS - External administration - winding up - liquidator's applications - application for directions - liquidator's remuneration - whether entitled to remuneration out of assets held by company on trust - whether disbursements justified - fixing remuneration - whether time-cost basis appropriate held, time-cost is but one factor and neither dominant factor nor default position Legislation Cited: (CTH) Corporations Act 2001, s 473(10), s 499, s 504(2), s 511 (CTH) Bankruptcy Act 1966, s 162(2) (CTH) Bankruptcy Regulations 1996, reg 8.07 (NSW) Trustee Act 1925, s 63 (VIC) Trustee Companies Act 1984, s 21 Cases Cited: Alphena Pty Ltd v PS Securities Pty Ltd [2013] NSWSC 447; (2013) 94 ACSR 160 Conlan v Adams [2008] WASCA 61; (2008) 65 ACSR 521 In the matter of AAA Financial Intelligence Ltd (in liquidation) ACN 093 616 445 [2014] NSWSC 1004 Kirchoff v Flynn (1986) 786 F 2d 320 Mirror Group Newspapers plc v Maxwell (No 2) [1998] 1 BCLC 638 Re Anderson Group Pty Ltd [2002] NSWSC 764; (2002) 20 ACLC 1607 Re Carton Ltd (1923) 39 TLR 194 Re Stockford Ltd; Korda [2004] FCA 1682; (2004) 52 ACSR 279 Re Sutherland; French Caledonia Travel Service Pty Ltd (2003) 59 NSWLR 361 Re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171 Re Wm Rose & Co Ltd (1897) 3 ALR (CN) 65 Venetian Nominees Pty Ltd v Conlan (1998) 20 WAR 96 Category: Principal judgment Parties: Bradley John Tonks and John Vouris in their capacity as liquidators of AAA Financial Intelligence Ltd (plaintiffs) Representation: Counsel: D L Cook (plaintiffs) Solicitors: Norton Rose Fulbright Australia (plaintiffs) File Number(s): 2014/200292 Judgment 1The plaintiffs Bradley John Tonks and John Vouris are the liquidators of AAA Financial Intelligence Ltd. By originating process filed on 7 July 2014, the liquidators seek directions pursuant to (CTH) Corporations Act 2001, s 511, and advice pursuant to (NSW) Trustee Act 1925, s 63, to the effect that they would be justified in applying the certain funds that were received by the company upon trust for the Advisers and Stockbrokers engaged by it to provide services to client ("Adviser Funds" and "Stockbroker Funds" - together "trust funds"), first in payment of their reasonable costs and expenses associated with these proceedings, secondly in payment of their remuneration and expenses for administering the trust funds as may be approved by the Court, thirdly in payment of any further remuneration and expenses that the Court might subsequently approve, fourthly pari passu among the admitted claims of the Advisers and Stockbrokers, and fifthly to the liquidators as an asset of the company. The background and issues are set out in a judgment delivered on 25 July 2014 [In the matter of AAA Financial Intelligence Ltd (in liquidation) ACN 093 616 445 [2014] NSWSC 1004] ("the first judgment") - with which this judgment should be read - in which I expressed provisional and preliminary views, subject inter alia to affording the beneficiary claimants an opportunity to be heard. I then made orders adjourning the proceedings; requiring the liquidators to give notice of the application by circulars, to be approved by the Court, to the Advisers and Stockbrokers, and to post on their website the application, supporting affidavits and the first judgment; requiring the liquidators to file further evidence; and directing them to consult with any Advisers and Stockbrokers who responded to the circular, in order to facilitate the appointment of a representative defendant for the purposes of these proceedings. 2The liquidators on 14 August 2014 provided to the Court draft circulars, which the Court settled that day, and which the liquidators on 15 August posted to each Adviser (or their nominated legal representative) who was known to have a claim against the Adviser Funds, and to each Stockbroker (or their nominated legal representative) who was known to have a claim against the Stockbroker Funds. In an affidavit sworn on 15 August 2014, Mr Tonks sought to address issues raised in my earlier judgment. Copies of the circulars, the originating process, the first judgment, and the liquidators' affidavits, were posted on the liquidators' website, also on 15 August. There was only one response to the Adviser Circular, by an Adviser who sought confirmation that based on current estimates it appeared unlikely that there would be any return to Advisers, and indicated that he did not intend to appear, oppose or seek to be heard in respect of the application. There was no response to the Stockbroker Circular. 3The first judgment identified three issues: first, whether in principle the liquidators should be permitted to recover their remuneration and expenses from the trust funds; secondly, whether in principle the residue of the trust funds, after payment of such remuneration and expenses as might be approved, should be between the beneficiaries on a pari passu basis; and thirdly, the quantum of the liquidators' remuneration and expenses. Payment of remuneration etc out of trust assets 4In the first judgment (for reasons set out at [13]-[14]), I expressed the view that - subject to affording the Advisers and Stockbrokers an opportunity to be heard - the liquidators were entitled to their reasonable and proper costs and expenses from the trust funds, but only in respect of such work as was referable to administration of the trust assets. 5My provisional view that the liquidators were entitled to their reasonable and proper costs and expenses of administering the trust assets from the trust funds was also conditioned upon it being proven by evidence that there were no available non-trust assets in the liquidation, to which in the ordinary course recourse should first be had. In particular, I expressed concern that although the court had been informed that, apart from the Adviser and Stockbroker Funds, there were no assets of significance, this was surprising - given that the Administrators' s 439A Report to Creditors of 11 March 2013 had indicated that the company had or may have had non-trust assets of up to $482,966 (para 4.0, Scenario 2), and predicted a potential dividend to non-trust creditors of up to 36c in the dollar - and that evidence should be adduced to make good the assertion. 6Mr Tonks' 15 August affidavit deposes that the liquidators have realised (non-trust) assets of $139,386, and are negotiating with ASIC for the release to them of a bond of $20,308, but expect to realise no further assets of significance beyond that. Of those realisations, $98,885 has been paid to the administrators by way of remuneration and expenses; and after payment of other expenses, only $5,767 remains in the way of non-trust assets. Thus - if the bond is recovered from ASIC - there may be up to $25,000 non-trust assets available in the liquidation, which will presumably be applied, at least in substantial part, to liquidators' remuneration for general liquidation work, leaving little if anything available to fund the expenses of administering the trust funds. 7In those circumstances, and in the absence of opposition from any beneficiary, I am satisfied that the liquidators are entitled to their reasonable and proper costs and expenses from the trust assets, but only in respect of such work as is referable to administration of the trust assets. Pari Passu distribution 8In the first judgment (for reasons articulated at [15]-[16]), I expressed the view that - again, subject to affording the Advisers and Stockbrokers an opportunity to be heard - the present case was closely analogous to Re Sutherland; French Caledonia Travel Service Pty Ltd (2003) 59 NSWLR 361, in which it was held that the liquidator would be justified in distributing the balance amongst all the beneficiaries proportionately to their claims as assessed by him (at [193]), and that the same result should follow, so that the liquidators would be justified in distributing the remaining balance pari passu amongst the Advisers and Stockbrokers according to their claims as assessed by the liquidators. 9In the absence of any argument to the contrary, and for the reasons given in the first judgment, I am satisfied that the liquidators would be justified in distributing the balance of the trust funds, after payment of approved remuneration and expenses, pari passu amongst the Advisers and Stockbrokers according to their claims as assessed by the liquidators. Quantum of the remuneration and expenses claimed 10As filed, the liquidators' application sought only advice to the effect that they would be justified in distributing the trust moneys in a certain order of priorities - including payment of such remuneration, costs and expenses as may be approved by the Court - but effectively leaving to a later and separate application the question of approval of their remuneration. However, their evidence indicated that they had already paid expenses of approximately $60,000 from the trust funds, that they estimated that they would incur $36,500 costs and $18,000 disbursements in connection with the present application (a total of $54,500), and that they would claim remuneration of $58,487 plus GST in respect of administering the trust funds to date. Together, these amounts would practically exhaust the trust funds and, even making no provision for future remuneration and expenses, there would be practically nothing available for distribution to Advisers and Stockbrokers. 11In the first judgment, I expressed the view that, on the current state of the evidence, questions seemed to arise as to the reasonableness of the remuneration and expenses foreshadowed, particularly having regard to the value and nature of the property dealt with, and the circumstance that the liquidators' endeavours appeared to have resulted in a net diminution rather than enhancement of the trust funds (at [17]-[21]). Further, because further proceedings would reduce still further any amount available for distribution, it seemed desirable that the Court fix the costs of the application, and the liquidators' remuneration and expenses, in a summary way (at [22]). 12The liquidators now having been afforded an opportunity to adduce evidence in support of their claim for remuneration and to address the concerns I earlier expressed, it is plainly in the interests of all stakeholders that the Court summarily assess costs and determine remuneration, in order to save the time and expense of further applications and maximise the amount available both for satisfaction of the liquidators' claims and for distribution. 13In the meantime, the liquidators have, in response to my earlier concerns, modified their claim for remuneration and expenses. They have reduced the claim for costs of these proceedings to $26,702.18. Although they have to date expended time which at their ordinary charge rates would amount to $8,572.50 in administering the Stockbroker Funds, given the quantum of those funds ($7,427), they have generously decided not to press a claim for remuneration from them. This will leave those funds intact for distribution among Stockbrokers, which should generate a dividend of approximately 90 cents in the dollar. In addition, they no longer seek that any provision be made for future remuneration. Accordingly, they now seek approval of remuneration and expenses amounting to a total of $137,199.75, comprised of (a) expenses (already paid) of $60,582.57; (b) remuneration of $49,915; and (c) costs of these proceedings of $26,702.18. If approved in full, this would leave $43,390.98 for distribution to Advisers by way of dividend. The Expenses 14In the ordinary case, the Court's approval of a liquidator's remuneration does not include disbursements, the liquidators' right to indemnity for which depends on the general law relating to a trustee's right of indemnity [Venetian Nominees Pty Ltd v Conlan (1998) 20 WAR 96, 100; Re Stockford Ltd; Korda [2004] FCA 1682; (2004) 52 ACSR 279, 296 [59]]. As Ferris J explained in Mirror Group Newspapers plc v Maxwell (No 2) [1998] 1 BCLC 638 (at 662), there are two questions. First, the liquidators (or trustees) must first decide to what extent they are bound to pay the liabilities they have incurred, and if they accept that they are bound to pay must do so, as they are personally liable. The second question is whether and to what extent they are entitled to recoup what they have paid from the estate. That question ordinarily arises upon the taking of a trustee's accounts, or upon a misfeasance summons arising from a liquidator's accounts [Mirror Group v Maxwell, 662; Venetian Nominees v Conlan, 100]. Although the Court will generally be supportive of liquidators who have incurred disbursements and paid them out of the estate in the exercise of their commercial judgment, albeit without the prior approval of the Court - as liquidators are to be encouraged to use their commercial judgment and not to make applications for directions in respect of comparatively trivial matters - the liquidators bear the onus of justifying their disbursements, and since they can only recoup from the estate if they have acted properly in instructing and paying third parties (such as solicitors), they should subject the bills received from them to critical scrutiny [Mirror Group v Maxwell, 661-2]. The following observations of Finkelstein J in Re Stockford Ltd warrant repetition (at 296-7): [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 at 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. 15As Ferris J and Finkelstein J make clear, in this respect legal costs are no different from other liquidator's disbursements, save that the court has available to it mechanisms for itself determining legal costs between liquidators and their lawyers (the first question), as well as to what extent the liquidator may be allowed those costs out of the estate (the second question). 16This is not entirely the ordinary case, for a number of reasons. First, the liquidators are, in effect, seeking the court's approval and thus protection for the payments they have made or propose to make from the trust funds. Secondly, in order to minimise costs and expense, my determination of this application will effectively put to an end any potential objection about so much of the liquidator's disbursements as may be allowed. As the beneficiaries have been given an opportunity to object if they wish, there is no injustice to them in this course. 17To date, the liquidators have incurred and paid disbursements of $60,582.57, comprising legal costs, commission management fees and debt collection costs. 18Of that sum, $9,881 was paid to Acompli, which had been engaged by the company to manage the collection and distribution of commission payments, for work performed in identifying Advisers, their commissions and debt and clawback commission, and tracing adviser funds. It seems to me that this was at least reasonably, if not necessarily, incurred in getting in and managing the Adviser Funds. 19A total of $30,711.64 was paid to Profcoll Collection Services, for debt collection services in connection with the recovery of debts due from advisers and clawback commission. The liquidators instructed Profcoll to recover $351,601.83 of adviser debt and clawback commission. The largest debt - $192,016 - was due from one Robert Lane who, it transpired, was a bankrupt. Ultimately, only $16,080.88 in all was recovered, of which $3,537.80 was paid Profcoll as commission; in addition, Profcoll was paid $27,716 fees and disbursements, in respect of search fees, filing fees, service fees and solicitors costs. 20While the decision to refer the debt portfolio to Profcoll for recovery was entirely reasonable, the continuing unsuccessful pursuit of a number of debtors, at considerable cost, raises a question as to the commercial judgment involved. However, Mr Tonks says that from time to time during the collection process, on a case-by-case process, he would form the view that it was not commercial to continue to pursue debtors. It is easy, with the benefit of hindsight, to be critical of decisions to pursue debtors without success; it would have been just as easy to be critical of not attempting to recover debt from them. I am prepared to accept that this disbursement was reasonably incurred, in an attempt to maximise recoveries for the benefit of the trust funds. 21$19,989.13 was paid to Norton Rose Fulbright, solicitors, for legal advice in respect of the trust funds. Norton Rose rendered seven separate invoices, ranging over the period from 9 April 2013 to 28 February 2014. Those invoices provide no detail at all of the work done or the charge rates. They do not enable scrutiny by the Court, and could not have enabled the close scrutiny they should have received from the liquidators. The only evidence to justify this disbursement is Mr Tonks' assertion [Tonks, 15/8/14, para 19(c)] that the services performed by Norton Rose "relate to legal advice in respect of the Adviser Funds and Stockbroker Funds and these proceedings". However, the invoices significantly predate the current application and the costs of these proceedings are the subject of more recent invoices [Goldman, para 4, 5] and are the subject of a separate claim referred to below; although it would seem (from the liquidators' time records) that some preliminary advice was provided earlier. Notwithstanding the Court's disposition to be supportive of liquidators who have incurred disbursements in the exercise of their commercial judgment, something more than the mere incurring and payment of a disbursement is required to justify it. In the circumstances of this case, it may well have sufficed if the Norton Rose invoices included a short description or narrative of the services rendered, but there is nothing to that effect. This disbursement has not been justified. 22That said, and although on a strict view I should probably disallow this disbursement in toto, l accept that legal advice was reasonably required to enable the liquidators to determine how to deal with the trust funds, in connection with preparation of the notices to advisers and stockbrokers, and as to the making of the present application. With some reservations, I am prepared to allow $11,000 (inclusive of GST) on that account, notwithstanding the deficiency of appropriate evidence. 23Accordingly, I will allow the liquidators' expenses at $51,593. The costs of these proceedings 24As mentioned above, the liquidators now limit the claim for costs in respect of these proceedings to $26,702.18 inclusive of GST and Counsel's fees. Mr Goldman, solicitor, has confirmed that Norton Rose will cap their charges to that amount, although they might reasonably be entitled to charge more. I am satisfied that those costs have been or will be reasonably incurred, and are reasonable in amount, and will allow them. Remuneration 25The liquidators' claim $49,915 for remuneration from the Adviser Funds. 26As I sought to explain in the first judgment (at [18]), in allowing remuneration to a liquidator out of trust property, the Court treats the work done in administering the trust as an incident of the liquidation and approaches the application for remuneration as if it were one by a liquidator for approval of remuneration [Alphena Pty Ltd v PS Securities Pty Ltd [2013] NSWSC 447; (2013) 94 ACSR 160, [53], [63]-[64]]. A liquidator is entitled to "reasonable remuneration" for his or her services in winding up the company [Re Wm Rose & Co Ltd (1897) 3 ALR (CN) 65, 66; Re Stockford Ltd; Korda [2004] FCA 1682; (2004) 52 ACSR 279, [38]], and the court has a very wide discretion in allowing and fixing the level and the basis of remuneration [Re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171]. The liquidator bears the onus of establishing that the remuneration claimed is fair and reasonable, including that the work was properly performed in the due course of administration and that the amount claimed is a fair and reasonable reward for it [Re Anderson Group Pty Ltd [2002] NSWSC 764; (2002) 20 ACLC 1607]. 27Corporations Act, s 499, relevantly provides, in respect of a creditors' voluntary winding up (which the present liquidation is) as follows: (3) [How liquidator's remuneration may be fixed] The remuneration to be paid to the liquidator may be fixed: (a) if there is a committee of inspection - by that committee; or (b) by resolution of the creditors. (3A) [Where remuneration not fixed] If: (a) no remuneration has been fixed under subsection (3); and (b) a meeting of the company's creditors is convened; and (c) a resolution under paragraph (3)(b) cannot be passed because of the lack of a quorum; and (d) there has been no previous application of this subsection to the remuneration of the liquidator; the creditors are taken to have passed a resolution under paragraph (3)(b) determining that the liquidator is entitled to remuneration of: (e) whichever is the greater of the following amounts: (i) $5,000; (ii) if an amount is specified in regulations for the purposes of this subparagraph - that amount; or (f) if the liquidator determines a lesser amount - that lesser amount. 28Section 504(1) provides that the court may, at any time before the deregistration of the company, review the amount of the remuneration of the liquidator. 29At the creditors meeting which resolved that the company be wound up, the creditors by resolution approved remuneration for the administrators of $95,000, and remuneration for the liquidators at their firm's standard rates, subject to a cap of $80,000 plus GST. While Mr Tonks reiterates that the total amount claimed of $110,497 claimed for remuneration and expenses in the respect of the Adviser Funds "form part of the remuneration amount approved by creditors to date during the administration and liquidation of the Company" [Tonks, 15/8/14, para 62], as I pointed out in the first judgment, if the remuneration is to be paid from trust funds, the general creditors who participated in that meeting (to the exclusion of the trust beneficiaries) have no interest in the trust funds, and their approval is to that extent of little significance. There is no approval from the Advisers and Stockbrokers, whose interest in the trust funds will bear the burden. Thus while it is correct that the liquidators' remuneration - for the whole of their work, both general liquidation and trust-specific - has been fixed by the creditors under s 499(3) at $80,000, and there is no application before the Court for a review of that, that is of little moment in the exercise of the jurisdiction presently invoked, to authorise the application of the trust funds in payment of remuneration - save that it sets an outer limit on the total remuneration for the whole liquidation, including general liquidation work and administration of the non-trust assets as well as administration of the trust funds. 30The Liquidators' remuneration claim of $49,915 comprises (a) $4,455 for identifying all Advisers; (b) $20,485 for identifying and collecting clawback commission and adviser debt; (c) $2,617.50 for identifying and separating adviser funds from the company's general moneys; (d) $7,097.50 for issuing adviser notices; (e) $11,442.50 for liaising with advisers; and (f) $3,817.50 for liaising with Acompli and others in respect of Adviser commissions. The claim is supported by itemised records derived from the liquidators' time recording database and is calculated in accordance with their firm's standard hourly rates, as set out in the Administrators' Report to Creditors of 11 March 2013, pursuant to which they were appointed as liquidators. Mr Tonks deposes that he believes that all the work claimed was necessary to discharge the liquidators' functions, and that the time taken was reasonable having regard to the nature and complexity of the tasks involved. While one might quibble with individual items in the liquidators' claim - and I will in due course refer to some of them - that is not the real issue. 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 liquidators' 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? 31As originally framed, the liquidators' claim for remuneration and expenses would have exhausted the trust funds. Allowing it would have meant that the only beneficiaries of the liquidation would have been the liquidators. The concessions made by the liquidators, coupled with my disallowance of a component of the disbursements, have, to some extent, moderated that position, which may be summarised as follows. 32The Adviser Funds amount to $180,593. While they were the administrators of the company - before they became its liquidators - the liquidators had identified $103,943 in designated "commission accounts", representing Adviser Funds. How this was increased to $180,593 is not entirely explained; despite a direction for provision of a statement of receipts and expenditure of the trust funds, none has been provided (the only such statement provided related to the non-trust assets of the company). Only about $16,081 appears to have been recovered from debtors. (The balance might be explained by ongoing receipt of commission payments after the date of appointment of the liquidators). Of the $180,593, $60,583 has already been taken by the liquidators in satisfaction of their disbursements; my partial disallowance of the Norton Rose disbursement will effectively reduce that to $51,593. In addition, $26,702 will be payable in respect of the costs of these proceedings. If the liquidators' remuneration is allowed, as claimed, at $49,915, that will leave $52,383 for distribution to beneficiaries. 33The Adviser Funds should not however be viewed in isolation. As has been mentioned, the liquidators do not press their claim for $8,572.50 remuneration in respect of the Stockbroker Funds - which amount only to some $7,427. But in respect of the non-trust assets, of the $139,958 realised, the liquidators have, in their capacity as administrators, already received $95,000 by way of remuneration and $3,885 in expenses; they have expended a further $8,969 for debt collection costs and $2,188 for agents/valuers' fees; and unsecured creditors are unlikely to receive any dividend. 34Viewed as a whole, the administration and liquidation of trust and non-trust assets amounting to some $327,978 would result in a distribution to beneficiaries of only $59,809, while the administrators and liquidators would receive remuneration of $144,915 (plus whatever remuneration they may yet recover from the remaining non-trust assets for general liquidation work), and recoup disbursements of $90,783. Of the Adviser Funds of $180,593, over 70% would be paid to the liquidators or their agents, and less than 30% to those beneficially entitled. While this is a marked improvement on the original position, whereby by 100% would have been paid to the liquidators and none to the beneficiaries, it remains a confronting and disturbing fact that only half of the identifiable trust funds of about $104,000 received by the liquidators at the outset would be available for distribution. One cannot escape the impression that the predominant beneficiaries of the liquidation, whether viewed overall or viewed in relation to the Adviser Funds, would be the liquidators. 35Confronted with a similar, though much more extreme, situation in Mirror Group v Maxwell - where, in a very complex administration, receivers had realised net assets of $1,672,500 and claimed costs, disbursements and remuneration of $1,628,572 - Ferris J observed (at 645): Having in this way done my best to set out the figures objectively I cannot escape saying that I find them profoundly shocking. If the amounts claimed are allowed in full this receivership will have produced substantial rewards for the receivers and their lawyers and nothing at all for creditors of the estate. I find it shameful that a court receivership should produce this result in relation to an estate of more than £1.5m. 36This is, of course, a much smaller administration. But the profound concern that the liquidators appear to be the dominant beneficiaries of the administration remains. It must be born in mind that the fundamental rationale of a liquidation is to get in and realise the assets of the company, establish who are the creditors and contributories, and distribute the assets for the benefit of the creditors and, to the extent of any surplus, the contributories. Indeed, as Ferris J explained in Mirror Group v Maxwell (at 648), 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 so doing 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. While there are undoubtedly cases in which the proper pursuit of debtors and/or officers, in the apparent interest of creditors and/or the public, will prove unsuccessful or generate a return that will not exceed the liquidator's reasonable remuneration and disbursements, claims for remuneration in cases where the liquidator appears to be the main beneficiary of the liquidation call for close scrutiny. 37The justification advanced for the remuneration claimed in this case is founded on time spent, at the liquidators' standard rates. The shortcomings of time-based costing as the basis for remuneration, particularly in smaller liquidations, have been highlighted in a number of cases. As long ago as Re Carton Ltd (1923) 39 TLR 194, PO Lawrence J, after referring to the usual English practice of adopting a scale based on a percentage of realisations and distributions, said (at 197): 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. 38In Mirror Group v Maxwell, Ferris J said that while time spent was a relevant factor in fixing remuneration, it was important not to place too much emphasis on it, since it was the value of the services rendered which was to be rewarded, not the cost of rendering them. After referring to the passage cited above from Re Carton Ltd, his Honour continued (at 651-2): In more recent years the prevalence of time recording in the offices of insolvency practitioners (and, come to that, solicitors) has tended to give time an importance in the assessment of remuneration which PO Lawrence J would have denied it. But I am not aware that, in the field of remuneration for court-appointed receivers, those referred to in the Insolvency Act as 'office holders' or others in a similar position, this emphasis has received any judicial indorsement. 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 of 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. 39In Re Stockford Ltd, Finkelstein J said (at [38]-[40]) that in order to fix a reasonable fee, a balance must be struck between two competing views, one being that the object to be attained was to conserve the fund under administration, thereby maximising the return to creditors (reflected in the early English position, where fees were fixed in a specific amount or based on a percentage of the estate); and the other that the market should be allowed to operate in the normal way with insolvency practitioners being entitled to charge their usual hourly rates which, at least to a degree, are likely to be competitive (at 293-4). His Honour suggested that in small insolvencies the court should develop a rate or scale that is fair and reasonable for both insolvency practitioners and creditors, perhaps as a percentage (perhaps on a sliding scale) of the assets distributed (as Ferris J's working party had recommended), and that guidance for the appropriate percentage might be obtained from the legislation that regulates fees for trustee companies ((VIC) Trustee Companies Act 1984, s 21 - since repealed), and the fees chargeable by trustees in bankruptcy ((CTH) Bankruptcy Act 1966, s 162(2) and (CTH) Bankruptcy Regulations 1996, reg 8.07 - a sliding scale, commencing with 10% of first $30,000 of receipts). As to larger administrations, his Honour continued: [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 Re Carton Ltd (1923) 39 TLR 194 are as true today as they were in 1923. 40His Honour quoted the passages from Mirror Group v Maxwell set out above, and added: [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: Re Boston and Maine Corp v Moore 776 F 2d 2 at 7 (1st Circ 1985); Copeland v Marshall 641 F 2d 880 at 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. 41For my part, while I have found Finkelstein J's discussion and analysis of immense assistance, I would give less weight than his Honour to the ability of market forces to control liquidators' charges, for at least two reasons. The first is that, in the insolvency context, creditors are rarely in a position robustly to negotiate a liquidator's remuneration. This is accentuated by the fiduciary nature of the liquidator's relationship with creditors. The second is that, in the Court's experience, comparative cost is rarely a factor in selection of a liquidator. While, where there is a litigated dispute over the nomination, the comparative costs are often one of several relevant considerations, they are rarely the dominant consideration (independence being a far more common one), and in any event cases in which there is such a dispute represent a tiny proportion of administrations. Moreover, when there is such a comparison it is usually between hourly rates, which imposes no real constraint on the ultimate cost. I would also doubt whether the "lodestar" approach does not give excessive weight to time spent, even in larger administrations. 42In Conlan v Adams [2008] WASCA 61; (2008) 65 ACSR 521, McLure JA, while noting (at [37]) that all parties had accepted that a time-cost basis for determining remuneration was appropriate, added that time-based costing has potential drawbacks and can be abused, and after referring to Lawrence J's statement in Re Carton Ltd, continued: [39] Mindful of the disadvantages associated with time-based costing, courts in England and Australia have identified the object to be achieved and criterion to be applied in determining what is reasonable remuneration when faced with a time-cost remuneration claim: Mirror Group Newspapers plc v Maxwell (No 2) [1998] BCC 324; Re Korda; in the Matter of Stockford Ltd (2004) 140 FCR 424; 52 ACSR 279; [2004] FCA 1682. 43After citing several passages, also quoted above, from Ferris J in Mirror Group v Maxwell and from Finkelstein J in Re Stockford Ltd, her Honour referred to the notion of proportionality: [47] As to the performance of a task reasonably embarked upon, the work done must be proportionate to the difficulty or importance of the task in the context in which it needs to be performed. This is what is encompassed in assessing the value of the services rendered. Using an example from the law, the time spent by an appropriately qualified and experienced practitioner in drafting a statement of claim should be proportionate to the amount in issue. 44Since those cases were decided, statutory guidance as to relevant considerations is now provided by s 504(2) (and s 473(10)), which were introduced with effect from 31 December 2007: (2) [Factors court may consider in determining whether remuneration reasonable] In exercising its powers under subsection (1), the Court must have regard to whether the remuneration is reasonable, taking into account any or all of the following matters: (a) the extent to which the work performed by the liquidator was reasonably necessary; (b) the extent to which the work likely to be performed by the liquidator is likely to be reasonably necessary; (c) the period during which the work was, or is likely to be, performed by the liquidator; (d) the quality of the work performed, or likely to be performed, by the liquidator; (e) the complexity (or otherwise) of the work performed, or likely to be performed, by the liquidator; (f) the extent (if any) to which the liquidator was, or is likely to be, required to deal with extraordinary issues; (g) the extent (if any) to which the liquidator was, or is likely to be, required to accept a higher level of risk or responsibility than is usually the case; (h) the value and nature of any property dealt with, or likely to be dealt with, by the liquidator; (i) whether the liquidator was, or is likely to be, required to deal with: (i) one or more receivers; or (ii) one or more receivers and managers; (j) the number, attributes and behaviour, or the likely number, attributes and behaviour, of the company's creditors; (k) if the remuneration is ascertained, in whole or in part, on a time basis: (i) the time properly taken, or likely to be properly taken, by the liquidator in performing the work; and (ii) whether the total remuneration payable to the liquidator is capped; (l) any other relevant matters. 45In my view, reasonable remuneration cannot be assessed solely by the application of the liquidator's quoted standard hourly rates to the time reasonably spent. The application of a standard hourly rate to liquidations of diverse size and complexity cannot take into account a number of the factors referred to by Ferris J, Finkelstein J and McLure JA. It does not reward liquidators for value, but indemnifies them against costs. It disregards considerations of proportionality. Moreover, it cannot reflect some of the factors referred to in s 504(2), and in particular (d) the quality of the work performed, (g) the degree of risk and responsibility involved, and, above all, (h) the value and nature of the property involved. This must mean that it is wrong to assess "reasonable remuneration" by reference only to time reasonably spent at standard rates. Yet virtually every application for remuneration that the Court sees is made on that basis, regardless of the amount of property involved. In my view, while time reasonably spent at standard hourly rates is a relevant consideration, it is only one of several, should not be regarded as the default position or dominant factor, and is to be considered in the context of other factors, including the risk assumed, the value generated, and proportionality. 46The default statutory remuneration, under s 499(3A)(e)(i), is $5,000. 47While ad valorem remuneration has its own shortcomings, it seems to attract less opprobrium than time-based costing. This is probably because it is proportionate, and because it incentivizes the creation of value, rather than creating "an incentive to run up hours and to do too much work in relation to the stakes of the case" [Kirchoff v Flynn (1986) 786 F 2d 320 (Easterbrook J)]. As Finkelstein J explained in Re Stockford Ltd (at [25]-[26]), until the development of the Insolvency Practitioners Association of Australia time-based scale in the 1960s, conventionally a liquidator's fee was either a fixed amount or a percentage of the assets under administration [see also Re Universal Distributing Co]. In Re Carton Ltd, Lawrence J described remuneration on a percentage basis as the most satisfactory method. (In that case, a proposal that remuneration be 5% on realisations and 5% on distributions was described as one which would require "special circumstances which would justify the fixing of such a large commission"; about half that amount was allowed). That a commission or percentage basis of remuneration remains an appropriate one, despite the current prevalence of time-based costing, is reflected in Corporations Act, s 473(3), which provides, in respect of a Court-appointed liquidator, as follows: (3) [Remuneration of Liquidator] A liquidator is entitled to receive such remuneration by way of percentage or otherwise as is determined: (a) if there is a committee of inspection - by agreement between the liquidator and the committee of inspection; or (b) if there is no committee of inspection or the liquidator and the committee of inspection fail to agree: (i) by resolution of the creditors; or (ii) if no such resolution is passed - by the Court. 48Turning to this case, in assessing reasonable remuneration for the liquidators' work in administering the Adviser Funds, I take into account that, based solely on time spent at standard rates, the cost of the liquidators' services was $49,915. This takes into account all the work actually performed by the liquidators in administering the Adviser Funds (though not future work, for which they have foregone any claim). On Finkelstein J's approach, it would provide the "lodestar". 49Of that, $20,485 is claimed in respect of collection of adviser debt and clawback commission. But as has already been observed, this exercise generated only $16,080, at a cost of $30,711.64 in disbursements (which I have allowed in full). The exercise, far from generating value, detracted from value. As with the Profcoll disbursement, I accept that hindsight can be an unfair tool, and just because the exercise proved unsuccessful does not mean that the liquidators should be denied remuneration in respect of it. However, the outcome is relevant to its quantification, if one addresses value rather than cost. So is the circumstance that to a significant extent this function was "outsourced" to Profcoll; this reflects a transfer of risk and responsibility away from the liquidators. 50$7,097.50 is claimed for the issue of the Adviser Notices over the period 19 March 2013 to 7 February 2014. Mr Tonks deposes to having calculated the amounts owing to or by Advisers in order specifically to identify in each notice the amount owing to or by the individual adviser. The difficulty with this is not only that the Adviser Notices were issued on 28 June 2013 and advertised on 2 July 2013, but that - unlike the Stockbroker Notices - they did not in fact identify the amount owing to or by each Adviser. 51I give considerable weight to the circumstance that the value of the assets realised was $180,000 - of which $104,000 was already in hand when the liquidators were appointed; and that after disbursements and costs of this application, only $102,298 will remain to satisfy commission and pay dividend. The result - originally that the total fund was to be expended in remuneration and expenses, albeit now moderated to 70% of it - is not proportionate, even allowing that there were additional complexities in dealing with multiple adviser claimants. A different way of putting it is that, in smaller liquidations, liquidators cannot expect to be rewarded for their time at the same hourly rate as might be justifiable where more property is available. 52These considerations would dictate a discount from the "lodestar" amount, were I to adopt that approach. 53I propose to allow remuneration of $36,000, which is 20% of the assets realised. That is a significantly higher percentage than seems to have been regarded as conventional. The time consumed by the liquidation has influenced me to allow a higher rate than might ordinarily be regarded as appropriate. I have also taken into account that the liquidators will not be remunerated for work in respect of the Stockbroker Funds - while noting that, they have already recovered remuneration of $95,000 for their pre-liquidation administration work. Conclusion 54My conclusions may be summarised as follows. 55The liquidators are entitled to their reasonable and proper costs and expenses from the trust assets, but only in respect of such work as is referable to administration of the trust assets. 56The liquidators would be justified in distributing the balance of the trust funds, after payment of approved remuneration and expenses, pari passu amongst the Advisers and Stockbrokers respectively according to their claims as assessed by the liquidators. 57The disbursement of $19,989.13 paid to Norton Rose Fulbright, solicitors, has not been justified. However, notwithstanding the deficiency of appropriate evidence, I am prepared to allow $11,000 (inclusive of GST) for legal advice in respect of the trust funds. I will therefore allow the liquidators' expenses at $51,593. 58Costs of these proceedings to the extent of $26,702.18, inclusive of GST and Counsel's fees, have been reasonably incurred, and will be allowed. 59Reasonable remuneration cannot be assessed solely by the application of the liquidator's quoted standard hourly rates to the time reasonably spent. While it is a relevant consideration, it is only one of several, and neither the default position nor dominant factor. It is to be considered in the context of other factors, including the risk assumed, the value generated, and proportionality. A commission or percentage basis of remuneration remains an appropriate one. 60Having regard to the value of the assets realised ($180,000), the time spent, and the circumstance that a substantial portion of that time was spent on the ultimately value-negative exercise of attempting to recover debt, I propose to allow remuneration of $36,000, which is 20% of the assets realised. 61Accordingly, I propose to make orders to the effect that the liquidators would be justified in distributing the Stockbroker Funds pari passu among those Stockbrokers whom they are satisfied have a proprietary claim against those funds; and in distributing the Adviser Funds, as to $26,702.18, in payment of their costs of these proceedings; as to $51,593, in recoupment of their expenses; as to $36,000 (plus GST), in payment of their remuneration; and as to the balance, pari passu among those Advisers whom they are satisfied have a proprietary claim against those funds. As the liquidators have already appropriated $60,582.57 for their disbursements, that should be treated, to the extent of the overpayment of $8,989.47, as an advance on account of their remuneration of $36,000 (plus GST). 62However, before formally making orders, I will stand the matter down to enable these reasons to be considered and any submissions that arise from them to be made. Subject to any such submissions, the Court orders that: (1)In these orders, "Stockbroker Funds" means the sum of $7,427 held upon trust for Stockbrokers (and any accruals thereto), and "Adviser Funds" means the sum of $180,593 held upon trust for Advisers (and any accruals thereto); (2)Pursuant to (CTH) Corporations Act, s 511, and (NSW) Trustee Act 1925, s 63, the plaintiffs as liquidators of AAA Financial Intelligence Ltd would be justified in distributing the Stockbroker Funds, without deduction, pari passu among those Stockbroker whom the liquidators are satisfied have a proprietary claim against the Stockbroker Funds; (3)Pursuant to (CTH) Corporations Act, s 511, (NSW) Trustee Act 1925, s 63, the plaintiffs as liquidators of AAA Financial Intelligence Ltd would be justified in distributing the Adviser Funds: (a)first, as to $26,702.18, in payment of their costs of these proceedings (in conformity with order 4 below); (b)secondly, as to $51,593, in recoupment of their expenses; (c)thirdly, as to $36,000 (plus GST), in payment of their remuneration; (d)fourthly, as to the balance, pari passu among those Advisers whom the liquidators are satisfied have a proprietary claim against the Adviser Funds. (4)The costs of these proceedings assessed in the sum of $26,702.18 be paid out of the Adviser Funds. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 17 September 2014