independence and remuneration of external administrators

Independence and Remunerationof External Administrators

John WardePartner, Allens Arthur Robinson

Matthew McLennanSenior Associate, Allens Arthur Robinson

Deutsche Bank PlaceCorner Hunter and Phillip Streets

Sydney NSW 2000Australia

Tel 61 2 9230 4000Fax 61 2 9230 5333

www.aar.com.au

© Copyright Allens Arthur Robinson 2006

Independence and Remuneration of External Administrators1

1. Introduction

"A man without a conflict of interests is a man without any interests"

Sir Henry Tucker, founder of the Bermuda Trust Company (attr)2

Sir Henry Tucker's saying will no doubt ring true to insolvency practitioners. In many of the cases reviewed in this paper an insolvency practitioner was appointed only because of some prior association with the company, a director, creditor or shareholder. And yet such associations are the stuff of which conflicts of interest are made. It could be lamented that an insolvency practitioner without any conflicts is an insolvency practitioner without any business.

The truth is that the law is more tolerant than that. While demanding high standards of conduct, the law distinguishes between mere associations and substantial conflicts and the Courts are careful not to allow allegations of conflict to be used by those with an interest in bullying external administrators. The challenge for an external administrator is to recognise when his or her independence is threatened and, without becoming timid, to respond appropriately. The principal aim of this paper is to provide external administrators with the information they need to meet that challenge.

The paper also reviews issues concerning the remuneration of external administrators which have given rise to problems in some recent cases.

2. External Administrators

In this paper the expression "external administrator" is used to refer to a provisional liquidator, liquidator, administrator of a company, or administrator of a deed of company arrangement. The expression is a convenient shorthand which reflects the usage in the Corporations Act 2001 (Cth) (the Act), in particular the title of Chapter 5 of the Act. It is appropriate to group these different types of officers under a common rubric because, within the confines of the subject matter of this paper, their obligations are very similar, if not the same. Nevertheless, it is important to bear in mind that the context in which those obligations apply differ. Thus, for example, a court may allow an administrator greater latitude than a liquidator because of the urgency with which an administration must be conducted.3

1 This is an updated version of a paper first presented by Michael Quinlan and Matthew McLennan at the Corporate Turnaround & Insolvency Congress, Sydney, 2 September 2005 2 R Crombie Conyers, Dill & Pearman: A History, The Walsingham Press, Bermuda, 1998, at 54. 3 Bovis Lend Lease Pty Ltd v Wily (2003) 45 ACSR 612 at 643.

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Independence and Remuneration of External Administrators

Receivers and receivers and managers may also be described as external administrators.4 In this paper, however, they have been excluded from that term because they do not share with other external administrators the obligation to be independent and impartial.5 Despite that exclusion, we address for the sake of completeness statutory provisions concerning the appointment and removal of receivers and receivers and managers.

3. Duty to be independent and impartial and to avoid conflicts of interest

3.1 Overview

In this section of the paper we consider an external administrator's duty (or duties) to be independent and impartial and to avoid conflicts of interest. The analysis is divided into three sections. First, we identify the statutory framework in which the duty is typically litigated. Secondly, we summarise the key legal principles. Finally, we articulate a taxonomy of the decided cases which demonstrates how those principles have been applied in practice.

3.2 The statutory framework: appointment and removal

The Act contains a suite of rules governing the appointment and removal of external administrators. As the principles which apply to the appointment and removal of an external administrator are the same6 it is appropriate to review those provisions together.

(a) Liquidators and provisional liquidators

There are separate rules for voluntary and compulsory windings up.

Under ss495(1) and 499(1) of the Act the members and the creditors respectively of a company in a voluntary winding up may appoint a liquidator. Section 503 of the Act gives the Court the power, on cause shown, to remove such a liquidator and appoint a replacement liquidator

Under ss472(1) and (2) of the Act the Court may appoint an official liquidator to be liquidator or provisional liquidator of a company. Section 473(1) of the Act empowers the Court, on cause shown, to remove the liquidator.

4 See, for example, the definition of externally-administered body corporate in s9 of the Act. 5 Broadly speaking, their duty is limited to a duty to act in good faith and not recklessly sacrifice the interests of the debtor: Expo International Pty Ltd (Receivers and Managers Appointed) v Chant [1979] 2 NSWLR 820 at 834. Contrary to this view, the applicants in Neo Lido Pty Limited v Perpetual Nominees Limited [2005] QSC 226 originally invoked the principles derived from cases concerning liquidators in support of an application to remove a receiver and manager. But they retreated from this position during the hearing (at [98] to [103]) and it was not necessary for the Court to decide the scope of a receiver and manager's duty of independence because undertakings were proffered which made the issue academic (at [104] to [106]). 6 Advance Housing Pty Ltd (in liq) v Newcastle Classic Developments Pty Ltd (1994) 14 ACSR 230 at 234; Domino Hire Pty Limited & Anor v Pioneer Park Pty Limited (in liquidation) (2000) 18 ACLC 13 at 20.

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Section 532(2) of the Act disqualifies certain persons from acting as liquidator of a company, whether the winding up is voluntary or compulsory, without leave of the Court. It provides that a person must not seek to be appointed, or act, as a liquidator without leave:

(a) if the person, or a body corporate in which the person has a substantial holding, is indebted in an amount exceeding $5,000 to the Company or a body corporate related to the Company; or

(b) if the person is, otherwise than in his or her capacity as liquidator, a creditor of the Company or of a related body corporate in an amount exceeding $5,000; or

(c) if:

(i) the person is an officer or employee of the Company (otherwise than by reason of being a liquidator of the Company or of a related body corporate); or

(ii) the person is an officer or employee of any body corporate that is a mortgagee of property of the Company; or

(iii) the person is an auditor of the Company; or

(iv) the person is a partner or employee of an auditor of the Company; or

(v) the person is a partner, employer or employee of an officer of the Company; or

(vi) the person is a partner or employee of an employee of an officer of the Company.

There is a deeming provision, s532(6), which provides that for the purposes of s532(2) a person is taken to be an officer, employee or auditor of a company if the person is an officer, employee or auditor of a related body corporate or, subject to an exemption from ASIC, the person has, at any time within the immediately preceding period of 2 years, been an officer, employee, auditor or promoter of the company or of a related body corporate.

There are exceptions to s532(2) which apply only to voluntary windings up. They are not addressed in this paper.

It has been held that an appointment as administrator or deed administrator in contravention of s448C(1) (see below), a provision analogous to s532(2), is not a nullity.7 That is, the appointment is effective despite the contravention. By parity of reasoning one would expect the same to be true of an appointment in contravention of s532(2).

7 Re Chilia Properties Pty Limited (administrator appointed) (1997) 73 FCR 171 at 174; Wright v Mansell (2001) 116 FCR 46 at 55-56.

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(b) Administrators and deed administrators

Section 448C(1) of the Act provides that a person must not, except with the leave of the Court, seek or consent to be appointed as, or act as, administrator of a company or of a deed of company arrangement if:

(a) the person, or a body corporate in which the person has a substantial holding, is indebted in an amount exceeding $5,000 to the Company or to a body corporate related to the Company; or

(b) the person is, otherwise than in a capacity as administrator or liquidator of, or as administrator of a debt of company arrangement executed by, the Company or a related body corporate, a creditor of the Company of a related body corporate in an amount exceeding $5,000; or

(c) the person is a director, secretary, senior manager or employee of the Company; or

(d) the person is a director, secretary, senior manager or employee of a body corporate that is a mortgagee of property of the Company; or

(e) the person is an auditor of the Company; or

(f) the person is a partner or employee of an auditor of the Company; or

(g) the person is a partner, employer or employee of an officer of the Company; or

(h) the person is a partner or employee of an employee of an officer of the Company.

Section 448C(3) contains a 2 year deeming clause similar to s532(6). It provides that a person is presumed to be a director, secretary, senior manager, employee or auditor of a company if, subject to an exemption from ASIC, the person is or has within the last 2 years held such a position.

Section 449B of the Act provides that, on the application of ASIC or of a creditor of the company concerned, the Court may remove from office the administrator of a company under administration or of a deed of company arrangement and appoint someone else as administrator of the company or deed.

(c) Receivers and other controllers

Section 418 provides that a person is not qualified to be appointed, and must not act as, receiver of property of a corporation if the person:

(a) is a mortgagee of property of the Corporation; or

(b) is an auditor or a director, secretary, senior manager or employee of the Corporation; or

(c) is a director, secretary, senior manager or employee of a body corporate that is a mortgagee of property of the Corporation; or

(d) is not a registered liquidator; or

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(e) is a director, secretary, senior manager or employee of a body corporate related to the Corporation; or

(f) unless ASIC directs in writing that this paragraph does not apply in relation to the person in relation to the Corporation – has at any time within the last 12 months been a director, secretary, senior manager, employee or promoter of the Corporation or of a related body corporate.

(d) The statutory disqualifications compared

It is to be noted that the disqualifications in s448C(1) and s532(2) are coextensive whereas the s418 disqualification is narrower in two respects. The deeming provision applies only for a period of 12 months rather than two years and the disqualification does not apply to partners of proscribed persons.

3.3 The legal principles

(a) The key principle

The key principle is that an external administrator must be, and be seen to be, independent. The authority of the principle is well established.8 In the authors' opinion, other 'tests', 'rules' and 'principles' stated in the cases are best understood as elaborations of this essentially simple proposition.

(b) The best interests test and the conflict test

In applying the key principle to the removal of external administrators Courts have used two different formulations. One, articulated by the Supreme Court of Victoria in Commissioner for Corporate Affairs v Peter William Harvey [1980] VR 669 at 696, is that an external administrator will be removed where it is in the best interests of the administration to do so. This formula has been approved in many cases.9 A variation in the language used appears in a decision of the Supreme Court of New South Wales, Re Biposo Pty Limited (1995) 17 ACSR 730. In that case, Young J held (at 734) that the

8 Re Allebart Pty Limited (in liquidation) [1971] 1 NSWLR 24 at 28-30; Re Intercontinental Properties Pty Limited (in liq) (1977) 2 ACLR 488 at 491; Re National Safety Council of Australia, Victorian Division [1990] VR 1 at 34; Re Club Superstores Australia Pty Limited (in liq) (1993) 10 ACSR 730 at 734; Pongrass Group Operations Pty Limited v Lowerpinems Pty Limited (1994) 15 ACSR 341 at 343; Re Chevron Furnishers Pty Limited (in liq) (No 2) [1995] 1 Qd R 125 at 130; Tracker Software International Inc v Smith (1997) 24 ACSR 644 at 645; Deputy Commissioner of Taxation v Barroleg Pty Limited (1997) 25 ACSR 167 at 174; Re Central Springworks Australia Pty Limited (2000) 34 ACSR 164 at 167; Domino Hire Pty Limited & Anor v Pioneer Park Pty Limited (in liquidation) (2000) 18 ACLC 13 at 19; National Australia Bank Limited v Market Holdings Pty Limited (in liquidation) (2001) 37 ACSR 629 at 658; National Australia Bank Limited v Wily [2002] NSWSC 573 at [22]; Bovis Lend Lease Pty Limited v Wily (2003) 45 ACSR 612 at 641. 9 Re Giant Resources Limited [1991] 1 Qd R 107 at 115; Network Exchange Pty Limited v MIG International Communications Pty Limited (1994) 13 ACSR 544 at 550; Dallinger v Halcha Holdings Pty Limited (administrator appointed) (1995) 60 FCR 594 at 599; City & Suburban Pty Limited v Smith (1998) 28 ASCR 328 at 336; Multi-Core Aerators v Dye (1999) 17 ACLC 1,172 at 1,179; Ultra Tune Australia Pty Limited v McCann (1999) 30 ACSR 651 at 672; Re Central Springworks Australia Pty Limited (Administrator Appointed) (2000) 34 ACSR 169 at 551. Not all of the cases refer expressly to the Harvey decision.

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question was whether in the interests of the public the removal of the liquidator would be for the general advantage of persons interested in the winding up.10

A different formula was used by the Supreme Court of New South Wales in Advance Housing Pty Limited (in Liquidation) v Newcastle Classic Developments Pty Limited (1994) 14 ACSR 230. In that case Santow J held (at 234) that the question should be whether there would be a reasonable apprehension by any creditor of lack of impartiality on the liquidator’s part in the circumstances, by reason of prior association with the company or those associated with it, including creditors, or indeed any other circumstance.11

In Dallinger v Halcha Holdings Pty Limited (administrator appointed) (1995) 60 FCR 594 at 599-600 Sundberg J proceeded on the basis that there were two separate tests. In Bovis Lend Lease Pty Limited v Wily (2003) 45 ACSR 612 at 697 Austin J expressed the view that the two tests, or formulations, were not inconsistent with each other. Warren J in Re Central Springworks Australia Pty Limited (Administrator Appointed) (2000) 34 ACSR 169 at 173 adopted a medial position, stating that it would be in the best interests of the administration to remove an external administrator where there was a reasonable apprehension that the administrator lacked independence.

The authors' opinion is that what could be dubbed the "best interests test" and the "conflicts test" are formulations which direct attention to different aspects of the problems typically faced by courts when applying the independence principle. The best interests test focuses on the practical consequences of removing an external administrator. It is prominent in decisions which emphasise the cost and inconvenience of replacing an officer. The conflicts test focuses on the position of the external administrator, the underlying assumption being that it is in the best interests of the administration that it be managed by an independent officer.

(c) Elaboration of the key principle

In the course of applying the independence principle to the particular facts of the many different cases which come before them, the Courts have expressed other 'tests', 'rules' and 'principles'. These pronouncements are not always obviously consistent with each other and their volume can obscure the essential simplicity of the independence principle. If, however, they are understood as particular applications of, rather than alternatives to, the general principle, such pronouncements can be a useful guide to how the principle will be applied in a given case. We summarise below those which we consider most helpful.

The duty of independence may be subdivided into three duties. A duty to be independent, a duty to act impartially, and a duty to avoid conflicts between one's duties and personal interests.12

10 See also National Australia Bank Limited v Market Holdings Pty Limited (in liquidation) (2001) 37 ACSR 629 at 660; National Australia Bank Limited v Wily [2002] NSWSC 573. 11 See also Hill v David Hill Electrical Discounts Pty Limited (in liquidation) (2001) 37 ACSR 617; Re St George Builders Hardware Pty Limited (1995) 18 ACSR 451. 12 National Australia Bank Limited v Market Holdings Pty Limited (in liquidation) (2001) 37 ACSR 629 at 658-9; Bovis Lend Lease Pty Limited v Wily (2003) 45 ACSR 612 at 641.

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The duty to be independent prohibits prior involvement with the company, directors, shareholders and creditors,13 unless that involvement is not likely to impede or inhibit the liquidator from acting impartially in the interests of all creditors or be such as would give rise to a reasonable apprehension on the part of a creditor that the liquidator might be so impeded or inhibited.14 It is generally accepted that an insolvency practitioner may give some pre-administration advice to a company without compromising his or her independence.15

Sometimes, prior involvement with a company will be considered an advantage.16

The duty to act impartially requires that the external administrator retain the initiative in the management of the company's affairs and not act at the direction of a third party.17

The duty to avoid conflicts between one's duties and personal interests will almost always be compromised where the external administrator is required to investigate his or her own conduct or the conduct of a partner.18

The onus is on the party seeking removal of an external administrator to prove, on a prima facie basis at least, that there is a real and not merely theoretical possibility of conflict between the administrator's duties and interests.19 Nevertheless, it must be borne in mind that the Court is concerned with perceptions as well as facts.20

The Court must be wary of allowing creditors and other interested parties to use allegations of a lack of independence to deter external administrators from doing their job.21

Insolvency practitioners presented with a possible appointment as administrator should also bear in mind the Statement of Best Practice: Independence on the Appointment of An Administrator issued by the Technical and National Committee on 31 March 2003.

13 Re Chevron Furnishers Pty Limited (in liq) (No 2) [1995] 1 Qd R 125 at 130. 14 Advance Housing Pty Limited (in Liquidation) v Newcastle Classic Developments Pty Limited (1994) 14 ACSR 230 at 234. 15 See National Australia Bank Limited v Market Holdings Pty Limited (in liquidation) (2001) 37 ACSR 629 at 658. 16 See Advance Housing Pty Limited (in Liquidation) v Newcastle Classic Developments Pty Limited (1994) 14 ACSR 230 at 234; Pongrass Group Operations Pty Limited v Lowerpinems Pty Limited (1994) 15 ACSR 341 at 344-5; Low v Performance Finance Limited [2004] WASC 80 at [58]. 17 See Re Allebart Pty Limited (in liquidation) [1971] 1 NSWLR 24 at 28; National Australia Bank Limited v Wily [2002] NSWSC 573 at [7, 14]. 18 See Re National Safety Council of Australia, Victorian Division [1990] VR 1 at 34; Advance Housing Pty Limited (in Liquidation) v Newcastle Classic Developments Pty Limited (1994) 14 ACSR 230 at 238. 19 Advance Housing Pty Limited (in Liquidation) v Newcastle Classic Developments Pty Limited (1994) 14 ACSR 230 at 232-3; Nambucca Investments Pty Limited v Star (1995) 13 ACLC 1,814 at 1,816-7; Re James Developments Pty Limited (administrator appointed) (1998) 30 ACSR 62 at 66; Tracker Software International Inc v Smith (1997) 24 ACSR 644 at 646. 20 Bovis Lend Lease Pty Limited v Wily (2003) 45 ACSR 612 at 645; Re Central Springworks Australia Pty Limited (Administrator Appointed) (2000) 34 ACSR 169 at 173. 21 Re Biposo Pty Limited (1995) 17 ACSR 730 at 734; Re Ross Wood & Sons Pty Limited (in liquidation) (1997) 23 ACSR 291 at 299; Domino Hire Pty Limited & Anor v Pioneer Park Pty Limited (in liquidation) (2000) 18 ACLC 13 at 21; National Australia Bank Limited v Wily [2002] NSWSC 573.

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3.4 A taxonomy of the case law

Despite the simplicity of the independence principle it is not always easy to gauge how it will be applied by the Courts in fact. The best guides are past decisions. We have classified and summarise below a sample of past decisions using the structure represented in the table set out in the Schedule to this paper. The cases are divided into three categories: cases concerned with conduct before the external administrator's appointment, cases concerned with conduct after the appointment, and cases identifying particular remedies.

3.5 Conduct before appointment

(a) Investigating accountants

Cases in which the crux of the allegation against the external administrator was that he or she (or his or her firm) had previously acted as investigating accountants.

The liquidator in Re National Safety Council of Australia, Victorian Division [1990] VR 1 was a partner in the accounting firm which had conducted a long investigation into the financial position of the company. The firm had been paid $40,000 for its work. It was alleged that this could constitute a preference. That potential conflict was cured by the firm undertaking to repay the money. In addition, however, major creditors pointed to the circumstance that, during the investigation, the company's indebtedness to them had increased by $44 million. They asserted a claim against the accountants for failing to detect the company's financial problems sooner. The Court considered that the existence of a potential claim was sufficient to undermine the liquidator's independence.

In Advance Housing Pty Limited (in Liquidation) v Newcastle Classic Developments Pty Limited (1994) 14 ACSR 230 the fact that a liquidator's firm had been involved in an investigation of the company's affairs was not itself a problem. The problem, which led to the resignation of the liquidator, was that the company may have had a claim against the firm for recovery of payments made to it in connection with the investigation.

The liquidator in Pongrass Group Operations Pty Limited v Lowerpinems Pty Limited (1994) 15 ACSR 341 was a member of a firm which had conducted an investigation into the company's affairs before its winding up commenced. In addition, it was alleged that a partner in that firm was a personal friend of one of the directors. The Court refused an application for the removal of the liquidator. The liquidator had not been personally involved in the investigation and there was no evidence that the firm's conduct of the investigation needed to be probed by the liquidator. Further, the liquidator had already been appointed to administer other companies in the same corporate group. It was desirable to take advantage of his knowledge of the group's affairs.

Similarly, in Domino Hire Pty Limited & Anor v Pioneer Park Pty Limited (in liquidation) (2000) 18 ACLC 13 the liquidator's prior role as investigating accountant was not fatal to his independence. He was removed, however, because his management of the winding up, including a number of irregularities, gave rise to a reasonable apprehension that he was biased in favour of the bank which had appointed him as investigating accountant.

In SKAFCorp Limited (administrator appointed) v Jarol Pty Limited (2002) 44 ACSR 138 the administrator sought payment of fees for work undertaken prior to his appointment. A

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creditor objected to his appointment on the basis that he was a creditor for more than $5,000. By the time of the hearing the administrator had disavowed any claim that he was legally entitled to payment of his fees. The Court considered that, assuming the administrator had a claim for payment of his fees, the waiver of that claim cured the potential conflict of interest. Leave to act under s448C(1) of the Act was granted.

(b) Insolvency advice

Cases in which the crux of the allegation against the external administrator was that he or she had given insolvency advice to an interested party.

Thomas J gave careful consideration to the effect of pre-appointment insolvency advice in Re Club Superstores Australia Pty Limited (in liq) (1993) 10 ACSR 730. In that case the liquidator had met with and advised the directors/shareholders prior to his appointment. They provided him with personal information. He gave written advice. The directors/shareholders later challenged his appointment. Thomas J concluded that the liquidator had to be removed. He observed (at 735-6):

It seems to me that there probably was a species of retainer, in some respects the converse of a solicitor's speculative retainer. In the solicitor's case he or she is paid if the client wins, and is unpaid if the client loses. In the accountant's case he or she is paid (ie the emoluments of the liquidator are obtained) if the client succumbs, but nothing is received if the client trades out of the difficulty. In the end it does not greatly matter whether this is characterised as a retainer or a contingent arrangement. The accountant accepts an obligation to give advice in circumstances that considerably increase his chances of being appointed liquidator of the company. The prospect that no fees will be recovered for the advice is commercially acceptable when balanced against the strong probability of significant remuneration in the liquidation.

Arrangements will vary from case to case, but under the Queensland system in which a nomination of liquidator may be made by the applicant creditor or the applicant company (as the case may be) it seems plain that one of the purposes of a pre-appointment conference is to engender the expectation or promise of a nomination in the event that the company goes into liquidation. I'm advised that such conferences occur in more than 90% of liquidations. I have no desire unduly to restrict the ability of prospective liquidators to keep their place in what is undoubtedly a competitive and lucrative industry. Howsoever, it seems to me that where there is a prospect that a liquidator may be required to investigate a possible impropriety on the part of directors or pursue the directors for debt preference or breach of duty, or rule upon proofs of debt submitted by directors, or otherwise take action potentially adverse to their interests, they must avoid giving the impression in pre-appointment conferences that they are giving personal advice to such persons.

In Dallinger v Halcha Holdings Pty Limited (administrator appointed) (1995) 60 FCR 594 the Court declined to remove an administrator simply because he had advised the directors to place the company into administration.

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(c) Prior appointments

Cases in which the crux of the allegation against the external administrator was that he or she had previously held office as external administrator of the company.

In Re ACN NPD 008 144 536 Limited (2004) 49 ACSR 527 an external administrator of a parent company was granted leave to act as administrator of its subsidiaries. The external administrator was a creditor of the subsidiaries but only in his capacity as trustee of certain debts under a deed of company arrangement.

A receiver was allowed to become administrator in Re Central Springworks Australia Pty Limited (2000) 34 ACSR 164 (subject to certain undertakings being given). A creditor later challenged the appointment. One of the grounds relied on was that the administrator's duties as receiver were inconsistent with the administrator's duties to the creditors generally. The Court held that the mere existence of the concurrent appointment did not warrant removal (Re Central Springworks Australia Pty Limited (Administrator Appointed) (2000) 34 ACSR 169). Nevertheless, in Nambucca Investments Pty Limited v Star (1995) 13 ACLC 1,814 leave to act as administrator was declined because the candidate's role as receiver and manager compromised the candidate's independence.22

In Dean-Willcocks v Yeshiva Properties No 1 Pty Limited (provisional liquidator appointed) (2003) 48 ACSR 525 a provisional liquidator sought leave to appoint himself and a partner as administrators in order to implement a restructuring plan. The Court granted leave, explicitly recognising the advantages flowing from the officer's prior involvement in the company's affairs.

The facts in Deputy Commissioner of Taxation v Barroleg Pty Limited (1997) 25 ACSR 167 were unusual. A company was placed into liquidation. The winding up was later declared invalid. In the meantime the liquidator had earned fees in excess of $5,000. The company was placed into liquidation a second time. The liquidator sought re-appointment but required leave. The Court granted leave, observing that (at 174) [w]here the debt owed to the liquidator is a debt in connection with the administration of the company in insolvency and the court can see that there will be a general saving to the creditors by appointing a person who has already spent hours in investigating the affairs of the company, the advantages of appointing the same person as liquidator outweigh the detriment caused by any possible conflict.

Hill v David Hill Electrical Discounts Pty Limited (in liquidation) (2001) 37 ACSR 617 concerned an allegation that the liquidator, in his prior role as deed administrator, had acted as a shadow director and may have breached his duties as a director. The liquidator was removed from office.

In contrast, in Jenner v Selmoore Pty Limited (1997) 74 FCR 526 the Court held that a receiver whose appointment was invalid was not an officer and did not, therefore, require leave to be (re-)appointed as receiver.

22 Despite the Court's ruling, the parties later reached a compromise and filed short minutes which authorised the appointment on condition that the appointee refrain from acting wherever there was a conflict of interest.

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In Sutherland v Take Seven Group Pty Limited (1998) 29 ACSR 201 an administrator's appointment was declared invalid. The appointee then claimed payment of his fees as an ordinary creditor and filed a winding up petition. He also applied to have himself appointed as provisional liquidator. The Court granted the application. There was evidence that records of the company had been or would be removed from Australia. A provisional liquidator was necessary to prevent that from occurring. The appointee was familiar with the company's affairs and well-placed to perform the role.

In Low v Performance Finance Limited [2004] WASC 80 the Supreme Court of Western Australia considered the effect of consecutive appointments. The officer in question had been a receiver, then provisional liquidator, and finally a liquidator. The Court held that the appointments as provisional liquidator and liquidator did not invalidate the appointment as receiver. Section 418 of the Act applied only to the initial appointment as receiver, not subsequent changes in the officer's status.

(d) Prior association

Cases in which the crux of the allegation against the external administrator was that he or she had some prior association with an interested party.

The Court in In the matter of Cobar Mines Pty Limited (in liquidation) (unreported, Supreme Court of NSW, 22 June 1998) recognised that the need to investigate a potential claim against a partner of the liquidator required the appointment of an additional liquidator.

The liquidator in Re Intercontinental Properties Pty Limited (in liq) (1977) 2 ACLR 488 had an overdraft with the bank which the company had a major claim against. The Court concluded that this did not give rise to a conflict of interest and duty. Likewise, in Re Nardell Coal Corporation Pty Limited (Receivers and Managers appointed) (in liquidation) (2003) 47 ACSR 122 the fact that four years previously the liquidator had been an employee of the firm concurrently acting as receivers and managers was considered immaterial.

The prior associations in Re Ross Wood & Sons Pty Limited (in liquidation) (1997) 23 ACSR 291 which warranted the liquidator's resignation were that the liquidator was the brother-in-law of a director, he held shares in a related body corporate of the company, he had been appointed auditor of the company and continued in that office until he assumed the role of liquidator, he was involved in the preparation of resolutions by which dividends were declared, and he was the accountant to one of the directors. Interestingly, however, the mere existence of these associations did not cause the liquidator's removal. The critical additional ingredient was an allegation that the liquidator should investigate the conduct of the directors in declaring certain dividends and investigate the acquisition, use and ultimate disposal of two properties on the Gold Coast. It was the need for an impartial investigation into those matters which made the other associations problematic.

In Re James Developments Pty Limited (administrator appointed) (1998) 30 ACSR 62 there were two administrators. The Court concluded that one of them was in a position of conflict and should be removed. The other administrator was a member of a different firm but both firms were affiliated and traded under the same business name or banner. An issue was whether the Court should remove both administrators. The Court declined to do

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so, ruling that there was insufficient evidence to conclude that the second administrator had a conflict by virtue of his association with the first.

Nicou v Ngan (2005) 53 ACSR 529 illustrates how the significance of a prior association may vary according to the state of an administration. In that case a liquidator had been removed from an appointment involving substantial disputes between interested parties. A replacement was required. The Court rejected the first candidate for the appointment simply because he had held a proxy on behalf of one of the creditors at a meeting. In the circumstances, the Court considered that any prior association with an interested party was undesirable.

3.6 Conduct after appointment

(a) Corporate groups

In Low v Performance Finance Limited [2004] WASC 80 the fact that the affairs of a corporate group were intertwined was a factor in favour of the appointment of a single person as external administrator of each of the companies within the group. A similar consideration told in favour of the appointment in Pongrass Group Operations Pty Limited v Lowerpinems Pty Limited (1994) 15 ACSR 341.

In Re HIH Insurance Limited & Ors [2006] NSWSC 385 two members of a corporate group which were in liquidation were plaintiffs in proceedings which could result in the making of cross claims against other members of the corporate group. The same persons were liquidators of the plaintiff companies and the potential cross-defendants. The Court considered that it was "obvious that the existing liquidators could not deal with the possible cross-claims" (at [5]) and acceded to the liquidators' application for the appointment of an additional, independent, liquidator for that purpose.

(b) Over-familiarity

Cases in which the crux of the allegation against the external administrator was that he or she was too close to an interested party.

In Re Allebart Pty Limited (in liquidation) [1971] 1 NSWLR 24 Street J suggested that a liquidator who had been over-familiar with the petitioning creditor in correspondence should resign. That conduct undermined the liquidator's position because there was a bitter dispute between the creditor and the directors of the company.

A liquidator who became too close to a major creditor, and wrote a note suggesting he was helping the creditor force a competitor out of business, was removed in Re Biposo Pty Limited (1995) 17 ACSR 730. In National Australia Bank Limited v Market Holdings Pty Limited (in liquidation) (2001) 37 ACSR 629 the Court considered that the fact that a liquidator had engaged in sharp practice (attempting to examine under Part 5.9 of the Act witnesses who had sworn affidavits for use in proceedings to which the company was party) undermined his independence.

In contrast, in Re Chevron Furnishers Pty Limited (in liq) (No 2) [1995] 1 Qd R 125 a liquidator who was alleged to have said that he was "going to get the bastard" (referring to a creditor named in a summons for examination) was allowed to remain in office. The Court emphasised that, in performing investigative functions, a liquidator was not obliged to

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act judicially. And in Re Bettertiles Projects Pty Ltd [2005] NSWSC 717 the liquidator was not removed even though he was close to and had received funding from the petitioning creditor who was engaged in a relatively fierce dispute with the directors of the company. It appears that the critical factor in the decision to allow the liquidator to remain in office was the fact that there were very few creditors (which was relevant because it meant that the administration almost inevitably took the form of a fight between the creditors) (see [37] to [39]).

(c) Litigation funding

Cases in which the crux of the allegation against the external administrator was that his or her independence was compromised by litigation funding.

In Re Allebart Pty Limited (in liquidation) [1971] 1 NSWLR 24 Street J observed (at 28):

Where a company is being wound up and it has no assets, or insufficient assets, to enable the due processes of the liquidation to be carried through, a creditor is to be encouraged, rather than criticised, in making funds available to the liquidator. Nor need a liquidator be diffident in accepting funds or indemnities from creditors so as to enable a winding up to proceed … arrangements such as these are commonplace, and, if anything, they are to be encouraged, as very frequently some such arrangement enables the liquidator to carry out his duties more thoroughly or comprehensively than would otherwise be the case.

In Re Nardell Coal Corporation Pty Limited (Receivers and Managers appointed) (in liquidation) (2003) 47 ACSR 122 a liquidator's independence was challenged because, as administrator, the liquidator's work had been funded by a creditor. That creditor later made another proposal to fund the company's business. The Court rejected the allegation that the liquidator's independence had been undermined by the prior association with the funder.

Litigation funding was approached differently in National Australia Bank Limited v Market Holdings Pty Limited (in liquidation) (2001) 37 ACSR 629. In that case the liquidator had, originally, been eligible for payment of a success fee for arranging the funding. The liquidator later waived his entitlement to the fee. Nevertheless, this became one of the factors which caused the Court to remove the liquidator.

Ultra Tune Australia Pty Limited v McCann (1999) 30 ACSR 651 also involved what was alleged to be a success fee. A term of the litigation funding was that the liquidators defer payment of 30% of their fees until the conclusion of the litigation. A creditor alleged that this created an incentive to act in the interests of the litigation funder rather than the creditors as a whole. The Court rejected the allegation. It considered that the deferral of fees was an integral part of a funding arrangement which was in the best interests of the company. Further, payment of the 30% was contingent on an event which could be beneficial to all of the creditors.

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(d) Puppets

Cases in which the crux of the allegation against the external administrator was that he or she was a puppet for an interested party.

In Re Allebart Pty Limited (in liquidation) [1971] 1 NSWLR 24 Street J emphasised the need for the liquidator to retain his independence, saying that, while it was quite proper for a creditor to urge the liquidator on, the liquidator had (at 28):

to be on guard lest he compromise his position of independence and impartiality in all respects … not only is it his prerogative to decide what steps should be taken, but it is his duty to exercise himself, according to the dictates of his own opinions, what should and what should not be done in the course of any given winding up. … Where he draws upon financial assistance from a creditor, it is incumbent upon him to ensure that he does not place in jeopardy his independence and the discharge of his duties.

Thus, in National Australia Bank Limited v Wily [2002] NSWSC 573 a critical factor in the Court's decision not to remove a liquidator appeared to be that the liquidator had made an independent decision to examine certain bank personnel.

(e) Dissatisfied creditors

Cases in which the allegation against the external administrator was based primarily on a creditor's dissatisfaction with the conduct of the administration.

The views of creditors will be taken into account by the Court, especially where there is a dispute between different classes of creditor and the allegation is that the external administrator was partial to one of those classes (Re Giant Resources Limited [1991] 1 Qd R 107). Nevertheless, a liquidator will not be removed simply because a creditor, even the major creditor, was dissatisfied with the administration: Multi-Core Aerators v Dye (1999) 17 ACLC 1,172 and Network Exchange Pty Limited v MIG International Communications Pty Limited (1994) 13 ACSR 544.

In Re Central Springworks Australia Pty Limited (Administrator Appointed) (2000) 34 ACSR 169 a creditor alleged many minor defects in the conduct of the administration. The Court considered that these allegations called for a pedantic approach to reviewing the administrator's conduct. It declined to analyse such claims.

(f) Potential breaches of duty

Cases in which the crux of the allegation against the external administrator was that his or her own conduct had to be investigated.

A liquidator who may have breached his duties as liquidator was removed. There was an unavoidable conflict of interest between the duty to investigate the breaches and the liquidator's personal interests: City & Suburban Pty Limited v Smith (1998) 28 ASCR 328.

Similarly, in Tracker Software International Inc v Smith (1997) 24 ACSR 644 the liquidator, when administrator, had sold the company's major asset. A creditor alleged that the sale had not been conducted properly and the company may have had a claim against the liquidator. The Court removed the liquidator on the basis that there was a real and not theoretical possibility of conflict between his duty and personal interest. The Court

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remarked (at 649) that the costs of replacing the liquidator were outweighed by the conflict arising from the duty of the liquidator to investigate his own conduct. If the liquidator had acted properly, and his commercial judgement was reasonable, he had nothing to fear from another liquidator investigating the matter. The matter had to be investigated, however, by someone independent.

(g) Employees and advisers

Cases in which the crux of the allegation against the external administrator was that his or her independence was compromised by the connection between an employee or adviser and an interested party.

The liquidator in Re Allebart Pty Limited (in liquidation) [1971] 1 NSWLR 24 had retained the solicitor who had acted for the petitioning creditor. Street J considered such a retainer innocuous and, indeed, commonplace (at 29). In that case, however, it contributed to a perception that the liquidator was partial to the creditor.

In Bovis Lend Lease Pty Limited v Wily (2003) 45 ACSR 612 an employee of the deed administrator had previously acted for a director of the company (including in the preparation of the director's Report As To Affairs). The employee played a significant role in preparing the report to creditors which resulted in a deed of company arrangement being entered into. The Court removed the deed administrator from office.

The solicitor initially retained by the liquidator in National Australia Bank Limited v Wily [2002] NSWSC 573 had acted for the directors of the company prior to its liquidation and made the initial offer of appointment to the liquidator (the Original Solicitor). The liquidator sought to examine officers of a bank. The Original Solicitor acted in respect of the examinations and the directors funded them. The bank applied to have the liquidator removed from office, alleging that the liquidator's independence had been tainted by the retainer of the Original Solicitor. It later emerged that the bank alleged fraud against the directors. There was no evidence, however, that the liquidator was aware of that allegation when the decision to conduct public examinations was made. Most importantly, the Court found that the decision to conduct the examinations had been made by the liquidator himself. In the circumstances, there was no warrant to remove the liquidator.

(h) The significance of incumbency

Cases in which the Court considered the practical disadvantages of replacing the external administrator.

In Domino Hire Pty Limited & Anor v Pioneer Park Pty Limited (in liquidation) (2000) 18 ACLC 13 the Court removed a liquidator even though the administration had only $60,000 in funds and there was very little work left to do before the winding up could be terminated.

In National Australia Bank Limited v Market Holdings Pty Limited (in liquidation) (2001) 37 ACSR 629 one of the reasons given by the Court for removing the liquidator was that the liquidator had failed to demonstrate any personal knowledge or expertise of the company's sole asset, a piece of litigation. This meant that there was little or no downside in replacing the liquidator.

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A liquidator was removed in Re Ross Wood & Sons Pty Limited (in liquidation) (1997) 23 ACSR 291 even though the administration was nearly complete and there was no proof that an investigation of the outstanding issues (which were alleged to give rise to a conflict) would result in a substantial return to the company.

3.7 Remedies

(a) Resignation

The simplest, most economical, remedy available to an external administrator who believes that his or her independence has been compromised is resignation. It is easy to overlook this remedy because, for obvious reasons, straightforward resignations are rarely mentioned in the law reports. Nevertheless, it is probably the most common solution to conflict problems.

(b) Directions

In Re Currabubula Holdings Pty Limited (in liq) (2004) 48 ACSR 734 the Court gave a liquidator directions permitting the admission to proof of fees earned by the liquidator in his earlier capacity as administrator.

The facts in Re Pasminco Limited (subject to deed of company arrangement) (2004) 49 ACSR 470 were somewhat unusual. Deed administrators were responsible for the sale of certain assets. They concluded that the sale of one of those assets gave rise to a conflict of interest because different companies within the corporate group had different interests in the outcome of the sale. In order to deal with the conflict the deed administrators applied for directions under s447D(2) on the price at which they should sell the asset. The Court considered that the conflict which concerned the deed administrators was probably more apparent than real, noting that the need to balance competing interests was not the same as having a conflict of interest. Nevertheless, the directions sought were given. It appears that the Court was not convinced that an application for directions was the ideal method for dealing with the deed administrators' conflict: the Court recommended the practice of appointing additional administrators.

(c) Additional external administrators

The Supreme Court of Queensland ruled in Obie Pty Limited (in liq) (No. 4) (1984) 8 ACLR 967 that the Court had power to appoint an additional liquidator. In that case the additional liquidator was appointed to investigate a claim against the original liquidator's firm. The same approach was taken by the Supreme Court of New South Wales in Re Spedley Securities Limited (in liq) (1991) 4 ACSR 555.

The Court in Re National Safety Council of Australia, Victorian Division [1990] VR 1 rejected a proposal that an additional liquidator be appointed to investigate a potential claim against the firm of which the incumbent was a partner. The Court considered that an additional liquidator would complicate the administration, increase the cost, and result in duplication of effort.

In City & Suburban Pty Limited v Smith (1998) 28 ASCR 328 the Court also refused to appoint an additional liquidator. It had not been demonstrated that the removal of the incumbent would have an adverse effect on the conduct of the winding up. On the other

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hand, In the matter of Cobar Mines Pty Limited (in liquidation) (unreported, Supreme Court of NSW, 22 June 1998) the Court accepted that an additional liquidator was required to investigate a claim against a partner of the liquidator. The liquidation was well advanced and it was important to preserve the knowledge and expertise of the incumbent at the same time as ensuring that the investigation was independent. It may also have been significant that the application in the Cobar Mines case was initiated by the liquidator rather than being made in defence to an application for removal.

Proposed examinees drew the liquidator's attention to a potential conflict in OneFone Australia Pty Limited v One.Tel Limited (in liq) (2003) 48 ACSR 562. The liquidator's response was to apply to the Court for the appointment of an additional liquidator to conduct the public examinations.

In Re HIH Insurance Limited [2006] NSWSC 385 the Court appointed an additional liquidator to deal with a piece of litigation. The Court noted that the alternative, the removal of the incumbent liquidators, "would be highly counterproductive in a case such as the present where application and experience over a period of more than five years has put the existing liquidators in a position of special knowledge that would be very expensive to replicate in the mind of some new liquidator, assuming that replication were possible at all. The much preferable course is that there be an additional liquidator who can take charge of and administer the separate aspect of the winding up giving rise to the conflict difficulty (at [11]).

(d) Undertakings and conditions

In Re ACN NPD 008 144 536 Limited (2004) 49 ACSR 527 and Re St George Builders Hardware Pty Limited (1995) 18 ACSR 451 an administrator was granted leave to act provided that, among other things, he undertook to inform creditors of his position and to approach the Court should a conflict arise.

Similar undertakings were accepted in Re Central Springworks Australia Pty Limited (2000) 34 ACSR 164. In that case the administrator had been receiver and manager of the company. The Court also required that the appointor refrain from voting on any resolution to remove the administrator.

The Court in Sutherland v Take Seven Group Pty Limited (1998) 29 ACSR 201 took what, at first blush, looks like the unusual step of appointing a creditor as provisional liquidator. The peculiar facts which warranted that order are summarised above. It should be noted that the Court limited the provisional liquidator's powers to those set out in ss477(2)(a) and (b) of the Act (essentially, the power to get in books and records). The limitations on the provisional liquidator's powers mitigated the risks arising from what was otherwise a clear conflict position.

(e) Remedial orders

An administrator appointed in contravention of s448C(1) of the Act was granted leave to act on a nunc pro tunc basis in Re Chilia Properties Pty Limited (administrator appointed) (1997) 73 FCR 171. Nunc pro tunc translates as "now for then". It means that the Court's order operates from a date earlier than the date on which the order was actually made.

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In Low v Performance Finance Limited [2004] WASC 80 the Court granted leave to act as a liquidator nunc pro tunc under s532(2) of the Act. The Court also made an order under s1322(4)(a) of the Act validating the appointment.

A creditor in SKAFCorp Limited (administrator appointed) v Jarol Pty Limited (2002) 44 ACSR 138 argued that leave under s448C(1) of the Act should be granted on a prospective basis only. That is, past acts would remain the acts of an invalidly appointed administrator. The Court refused that application for two reasons. First, it was misconceived. An appointment in contravention of s448C(1) did not render the acts of the appointee invalid. Secondly, under s448C(1) the Court could only grant or refuse leave, it could not qualify the relief it gave. The granting of leave at one point in time was good for all time.

In Wright v Mansell (2001) 116 FCR 46 the Federal Court of Australia expressed a willingness to make an order under s447A of the Act to cure any adverse effects of an appointment made in contravention of s448C(1). In the event, however, no such order was necessary.

(f) Court expert

The Court in Hill v David Hill Electrical Discounts Pty Limited (in liquidation) (2001) 37 ACSR 617 appointed a Court expert to investigate the claim that the liquidator may have acted as a shadow director before the commencement of the winding up. The expert's finding that there was a potential claim against the liquidator was accepted by the Court.

(g) Removal

As noted above, the Court may remove a liquidator, provisional liquidator, administrator or deed administrator from office. Removal was the remedy in many of the cases referred to in this paper.

(h) "Forced" resignation

Re Allebart Pty Limited (in liquidation) [1971] 1 NSWLR 24 Street J presumed the liquidator would want to retire in light of the Court's findings. In Advance Housing Pty Limited (in Liquidation) v Newcastle Classic Developments Pty Limited (1994) 14 ACSR 230 the Court allowed a liquidator to resign rather than make an order removing him.

In City & Suburban Pty Limited v Smith (1998) 28 ASCR 328 the Court refused to allow a liquidator an opportunity to resign because he had unsuccessfully contested the factual basis of the application against him.

(i) Costs

In Nicou v Ngan (2005) 53 ACSR 529 the Court ordered that the liquidator pay the costs of an application to remove him because the liquidator had contested the factual basis of the case against him and lost. In that case the liquidator resigned at the eleventh hour. The resignation was not enough, however, to spare him from the adverse costs order.

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4. Remuneration

4.1 Overview

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address

ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.

Adam Smith An Inquiry into the Nature and Causes of the Wealth of Nations23

One could trace a line from Adam Smith's proclamation of the role of self-interest in economic affairs more or less directly to Justice Finkelstein's recognition in 2004 of the vexed issues that concern the fees of insolvency practitioners, particularly registered liquidators, receivers and administrators. There is a widespread belief, not confined to Australia, that there is overcharging and that overcharging is rife.24 Of course, Smith's point is that everyone in business is motivated by self-interest, not just insolvency practitioners. The self-interest of an external administrator, however, gives rise to special problems. The reason is suggested by the sentences from Smith's Wealth of Nations immediately following those quoted above: Nobody but a beggar chuses to depend chiefly upon the benevolence of his fellow-citizens. Even a beggar does not depend upon it entirely. A company which is insolvent or near-insolvent is similar to a beggar. But unlike a beggar it can expect little benevolence. It must pay its way. That fact and the company's weak position combine to make it specially vulnerable. Much of the law discussed in the balance of this paper can be understood as an attempt to make up for this vulnerability.

We address first the statutory framework in which remuneration issues are litigated and then review some of the recent developments in the case law. Our focus is on the remuneration of administrators.

4.2 The statutory framework: fixing and review of remuneration

(a) Liquidators and provisional liquidators

Section 473(2) of the Act provides that a provisional liquidator is entitled to receive such remuneration by way of percentage or otherwise as is determined by the Court.

Section 473(3) of the Act provides that 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 a resolution of the creditors; or

23 5th ed (E Cannan ed), Methuen & Co Ltd, London, 1904, Book 1, Chapter 2, Paragraph I.2.2. 24 Re Stockford Ltd (subject to deed of company arrangement) (2004) 52 ACSR 279 at 280.

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(ii) if no such resolution is passed – by the Court.

The Court may review remuneration set by the committee of inspection or the creditors (ss473(5) and (6)).

Rules 9.3 and 9.4 of the Federal Court (Corporations) Rules 2000 (Cth)25 prescribe the procedure which must be followed by a provisional liquidator or liquidator respectively when seeking approval of remuneration by the Court.

Sections 472(2) and 532(9) of the Act provide that a provisional liquidator and liquidator respectively must consent to appointment by the Court. Rules 5.5(2) and 6.1(2) of the Federal Court (Corporations) Rules 2000 (Cth) provide that the consent must be in accordance with Form 8. Form 8 requires that the provisional liquidator or liquidator provide with the consent particulars of the hourly rates charged in respect of work done as provisional liquidator or liquidator and by that officer's partners and employees.

Section 504 of the Act provides that, on the application of a member, creditor or liquidator, the Court may view the amount of the remuneration of the liquidator in a voluntary winding up.

(b) Administrators and deed administrators

Section 449E(1) of the Act provides that 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.

Section 449E(2) of the Act provides that where remuneration has been fixed by the Company’s creditors, the Court may on the application of the administrator or of an officer, member or creditor of the Company, review the remuneration and confirm, increase or reduce it. Rule 9.2 of the Federal Court (Corporations) Rules 2000 (Cth) prescribes the procedure which must be followed by an administrator of a company under administration or of a deed of company arrangement when applying for court approval of remuneration under s449E(1).

(c) Receivers and other controllers

Section 425(1) of the Act provides that the Court may fix the amount to be paid by way of remuneration to any person who, under a power contained in an instrument, has been appointed as receiver of property of a corporation. Rule 9.1 of the Federal Court (Corporations) Rules 2000 (Cth) prescribes a procedure which must be followed by a receiver who seeks approval of his or her remuneration under s425(1) of the Act.

25 The corresponding rules in force in the States and mainland Territories are substantially the same. For the sake of brevity we refer only to the Commonwealth rules.

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4.3 Fixing remuneration

Naturally, most remuneration cases concern external administrators who have been validly appointed. It is, however, worth recognising invalid appointments as a distinct category of case which pose some special problems.

(a) Invalid appointments

In Sherred v McDonald [2005] QSC 153 the appointment of the administrators was invalid because only one of the company's two directors had voted on the resolution. The company was later wound up and the administrators became the liquidators. The liquidators sought an order that such of their costs when acting as administrators as were of incontrovertible benefit to the company be assessed and paid as liquidator's costs in the winding up and the balance of their costs be assessed and paid by the director who was responsible for their invalid appointment.

The Court held that an invalidly appointed administrator could recover reasonable remuneration for work which was of at least incontrovertible benefit to the company. In this case, however, the administrators conceded that only $8,000 out of a total of $59,000 in fees fell into that category. The balance could not be recovered from the director who wrongly appointed them, however, because from at least one day after their appointment the administrators were on notice that there was a real question as to whether their appointment was valid. In the absence of a pressing need for them to continue to act (for example, because the assets of the company were in danger) it was imprudent of the administrators to carry on working.

A case which bears some similarity to the "incontrovertible benefit" aspect of the decision in Sherred v McDonald is Re Application of Sutherland (2004) 50 ACSR 297. In that case the company was a trustee of certain funds. The liquidator administered trust funds and sought remuneration for his efforts. The Court held that the liquidator, as liquidator, was not entitled to be paid out of the trust funds. In its inherent jurisdiction, however, it could allow a trustee remuneration where the trust duties were extensive and could only be performed by a person who sacrificed his own interests for the sake of the trust. The liquidator was remunerated on that basis.

(b) Valid appointments

Two major issues have arisen in the context of valid appointments: the procedure for "fixing" remuneration and what constitutes the "fixing" of remuneration. We address each in turn.

The decision in Re Stockford Limited (subject to deed of company arrangement) (2004) 52 ACSR 279 focussed attention on the process of fixing remuneration. Briefly, in that case the resolutions fixing the administrators' remuneration were invalid. Further, the resolutions purported to delegate the power to fix remuneration to a committee of creditors. Finkelstein J held that under s449E(1) of the Act an administrator's remuneration could be fixed only at the first or second meeting of creditors. Even a valid resolution, however, could not delegate the power to fix remuneration to a committee. The Act did not confer any power of delegation on the creditors.

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A number of cases have recognised the validity of a device to circumvent the problems posed by the need to have remuneration fixed by the creditors in general meeting. In AFG Insurances Limited [2002] NSWSC 845 the Supreme Court of New South Wales made an order under s447A of the Act to the effect that Part 5.3 of the Act was to operate as if s449E(1)(a) provided that the administrator's remuneration could be fixed by a committee of creditors, subject to the committee receiving timely and adequate notice of the remuneration claim. Orders in substantially the same form have been made by the Federal Court of Australia in Re Ansett Australia Limited (2002) 40 ACSR 409, Re Bosnjak Holdings Pty Limited (administrators appointed) (2005) 53 ACSR 8, and Henry Walker Eltin Group Limited (administrators appointed) [2005] FCA 994.

It would be a mistake to assume that the Court will always allow s447A to be used in this way. A passage from the judgment of Gyles J in Re Bosnjak Holdings Pty Limited (administrators appointed) (2005) 53 ACSR 8 is a fair statement of the threshold test which an administrator seeking such relief must pass. Having referred to the decision in Re Stockford Limited and the need to fix remuneration at one of the two creditors' meetings, Gyles J observed (at 9):26

That may be practical in a small scale administration where what is at stake in substance is the time of the administrator or in an administration which is completed within time limits. It is not practical in an administration on this scale where, in effect, the resources of a large firm of chartered accountants are required to be employed and the expenditure of considerable sums of money is required to fund those resources.

It will be necessary to demonstrate on the facts of the particular case that the Court should assist the administrator by making an order under s447A. The key factual element is likely to be the making of an order extending the time for convening the second meeting of creditors.

Section 447A of the Act has been used to fashion three different mechanisms for the fixing of remuneration. The first, most straightforward, approach is simply to provide that the power to fix remuneration be delegated to the committee of creditors. A variation on that approach where a corporate group is in administration is for the power to be delegated to the committee associated with one particular company within the group. Gyles J adopted that approach in Re Bosnjak Holdings Pty Limited (administrators appointed) (2005) 53 ACSR 8 because there were cross-guarantees among members of the group, 97% of the total claims against the group were against the company in question, the largest single creditor across the group was a member of the committee, employees were represented on the committee, and the administrators' work was effectively for the benefit of the group as a whole.

A further variation was adopted in Re Clynton Court Pty Limited (subject to a deed of company arrangement) (2005) 53 ACSR 432. In light of a bitter dispute between some of the creditors and between a creditor and the administrators, the Court concluded that it was not appropriate for remuneration to be fixed by a committee. Instead, the Court

26 See also AFG Insurances Limited [2002] NSWSC 845 at [4] and Ansett Australia Limited (2002) 40 ACSR 409 at 416.

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ordered that it be fixed by a Registrar of the Court who would be obliged to give written reasons for decision and from whose decision the parties had rights of appeal.

In Re Carlovers Carwash Limited (2005) 54 ACSR 696 Barrett J adopted features of the orders made in Bosnjak Holdings and Clynton Court. In that case the creditors had resolved, among other things, that the deed administrator's remuneration be approved in accordance with the administrators' standard charge out rates by the creditors or by a committee of inspection if appointed. Subsequently, the committee of inspection purported to approve various tranches of the administrators' fees. As a result of the publication of the decision in Re Stockford Limited, the administrator became aware that the delegation to the committee of creditors of the power to fix his remuneration was ineffective. On the particular facts and circumstances before him, Barrett J was persuaded to make an order pursuant to s447A of the Act that Part 5.3A of the Act was to operate as if the administrator's remuneration had been fixed pursuant to s449E(1) of the Act. His Honour was prepared to make this order having regard to the fact that creditors who accounted for some 90% of the relevant debts did not oppose the making of such an order. Nevertheless, the orders reflected the approach taken in Bosnjak Holdings of requiring approval by a majority in number and value of committee members. In the event that the committee of inspection did not approve the administrators fees, Barrett J was of the view that, as was decided in Clynton Court, a Registrar of the Court (rather than an independent assessor) would be the appropriate person to exercise the Court's power under s449E(1)(b) to approve the administrator's fees.

In addition to the strictly procedural aspects of fixing remuneration, in Re Stockford Limited (subject to deed of company arrangement) (2004) 52 ACSR 279 Finkelstein J also considered what constituted the "fixing" of remuneration. His Honour held (at 288) that the fixing of remuneration required that the remuneration be stated as a money sum or be based on a formula which was capable of being applied according to some objective standard so that the sum could be calculated or ascertained definitely. A resolution which referred only to a scale of hourly rates was probably deficient; one that referred to a scale where different hourly rates could be charged for work by the same person was definitely deficient (at 290).

The uncertainty resulting from this decision appears to have been of considerable concern to insolvency practitioners. In 2005 the Insolvency Practitioners Association of Australia and the Australian Securities and Investments Commission brought a "test case" on the issue: Aliance Motor Body Pty Limited (subject to deed of company arrangement) (2006) 56 ACSR 463. In that case Justice Gyles stated the question before him in these terms (at 464):

…whether the remuneration of an administrator, or of an administrator under a DOCA, can be fixed at a meeting held under s439A prospectively, by reference to a scale of hourly rates, subject to a monetary cap.

The creditors in that case passed three resolutions that related to remuneration. The first approved remuneration for past work in a fixed amount. The second and third approved the remuneration of the administrators and deed administrators prospectively "on a time basis at the hourly rates" outlined in a document published by the firm of which the

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administrators and deed administrators were members (at 466). There was a monetary cap on the amount of remuneration covered by this prospective approval.

The plaintiff administrators argued that where there is one hourly rate fixed for each person who does any work in connection with the administration and the time spent by each person is known, a rates guide such as the one used in the present case could be arithmetically applied to arrive at the amount of remuneration. The plaintiff administrators also pointed to the fact that their remuneration was subject to a specific cap (at 469).

The Australian Securities and Investments Commission made several submissions as to why this approach did not amount to the "fixing" of remuneration as required by s449E. The gist of the Commission's argument was that discretionary elements such as the need to determine which tasks should be done, who should do them, and the amount of time which should be spent on each meant that "in effect, the actual fixing of the amount is left to the administrators rather than to the creditors or the court" (at 469).

Justice Gyles preferred the construction of the Act propounded by the plaintiff administrators. He concluded that "if remuneration is to be fixed prospectively, it may be fixed by reference to a formula based upon time, provided that the formula is objective enough to satisfy the tests laid down by the High Court in the wartime line of authority" (at 471). The effect of that "wartime line of authority" was that 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" (see 468). The Court acknowledged the potential for overcharging by administrators but considered that the existence of other safeguards to deal with that problem made it unnecessary to constrain the meaning of the concept of "fixing" remuneration (at 471). Justice Gyles thought that, while the existence of a monetary cap may be relevant to the determination of the reasonableness of remuneration, it was not relevant to the issue of whether the remuneration was fixed (at 471).

4.4 Reasonable remuneration

In addition to having it properly fixed under s449E(1), an administrator must be able to demonstrate that his or her remuneration is reasonable. In Re Stockford Limited (subject to deed of company arrangement) (2004) 52 ACSR 279 Finkelstein J reviewed a considerable body of literature on the issue of how to determine whether or not remuneration was reasonable. He concluded that the best approach was one adopted in the United States (at 295):

… 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… 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 practitioner's 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

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complexity of such work, the novelty and difficulty of the issues that confronted the administrator as well as the ultimate result obtained by him.

For this approach to work it is clear that the creditors (or the committee or the Court) must be provided with a reasonable amount of information. One of the cases referred to by Finkelstein J in that connection (at 296) was the decision of the Full Court of the Supreme Court of Western Australia in Venetian Nominees Pty Limited v Conlan (1998) 20 WAR 96. The Full Court ruled that the onus was on the provisional liquidator to establish that the remuneration claimed was fair and reasonable (at 102). In order to do so, the liquidator should provide the Court with a statement of account in an appropriate itemised form containing details of the work done, the identity of the persons who did the work, the time taken for doing the work, and the remuneration claimed accordingly. Sufficient details should be provided to enable the Court to determine whether the disbursements were reasonably incurred and that the amounts claimed were reasonable (at 103).

It is useful to compare that approach with Supreme Court of New South Wales Practice Note SC Eq 4 Supreme Court Equity Division – Corporations List and the Insolvency Practitioners Association of Australia's Statement of Best Practice – Remuneration.

Practice Note SC Eq 4 replaced Practice Note No. 126 (issued by the Chief Justice of the Supreme Court of New South Wales on 17 December 2003 - see (2003) 58 NSWLR 99). The practice note makes it clear that Form 8 (referred to above) does not represent a standard of disclosure of fees to be charged which the Court might regard as appropriate in any situation in which it may be relevant for the Court to take into account whether an insolvency practitioner has followed a practice of making adequate disclosure of such fees. The practice note does contain some guidelines for disclosure of fees. It provides:

36. All external administrators (including persons appointed as liquidators or as liquidators provisionally) should, in their first report to creditors:

• disclose the hourly rates of fees which are being charged by them and by any of their partners and employees who may work in the administration; and

• give their best estimate of the cost of the administration to completion or to a specific milestone identified in the report.

37. If, at any time after an external administrator has reported in accordance with paragraph 36, the hourly rates are to change, or the administrator has reason to believe that the estimate given to creditors is no longer reliable, he or she should report to creditors, disclosing the new hourly rates and giving a revised estimate.

The Practice Note's requirement for a best estimate of the cost to completion or to a specific milestone goes beyond the express holding in Venetian Nominees. It is also, in a sense, more onerous than the approach taken in Re Stockford Limited because it operates prospectively. It is not concerned solely with claiming remuneration after the work is done.

The Statement of Best Practice – Remuneration was published by the National Executive of the IPAA on 25 October 2000. The statement provides, relevantly, as follows:

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Where an Appointee or the Firm seeks to take remuneration calculated by reference to an hourly or time unit rate creditors should be provided with details of the: • Type of work to be undertaken by the Appointee and the Firm's staff • Estimated breakdown of the broad activity phases • Relevant experience of each person • Number of hours charged by each person • Hourly rate charged for each person • Total remuneration claimed • Basis of recovering disbursements

Where a range of services is offered by the Firm, that might be regarded by some as ancillary to the core insolvency process, the Appointee should ensure that creditors understand and approve these ancilliary services offered and utilised. The most common are assistance in bringing Records up to date, computation of Employee Entitlements, GST if in arrears and assisting in the preparation of a preliminary Statement of Affairs or Report as to Affairs notwithstanding the contents of which remains the responsibility of the bankruptcy or debtor or the directors.

The Appointee must be able to demonstrate that a task was necessary to be undertaken for the proper conduct of the administration and that the time charged was reasonable for the task concerned.

Creditors are to be kept informed as to progress in the administration and that will include advice as to the level of remuneration and disbursements incurred or paid.

The Appointee should take special care to have regard to the understanding and views of creditors in determining the extent of work undertaken in an administration. This applies particularly where further enquiries and investigation in relation to the recovery of property undertaken by the Appointee could have the possible effect of reducing the amount of a dividend payable to creditors from funds held in the administration if unsuccessful.

The IPAA's recommendation that practitioners provide an Estimated breakdown of the broad activity phases is similar to but arguably not as stringent as the Supreme Court Practice Note's requirement for a best estimate of the cost to completion or to a specific milestone. Further, the IPAA statement does not reflect the requirement in the Practice Note requirement for revised estimates in the event of a change in circumstances. External administrators should take care to ensure that they satisfy both standards.

The IPAA's emphasis on the need to demonstrate the necessity of work is appropriate. In Venetian Nominees Pty Limited v Conlan (1998) 20 WAR 96, for example, the Court disallowed a claim for remuneration for work performed in preparing reports because such work was outside the provisional liquidator's responsibilities.27

27 See also the related decision in ASIC v Rowena Nominees Pty Limited (in liquidation) (2006) 56 ACSR 673.

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Two cases concerning the liquidation of One.Tel Limited illustrate the practical problems which may face liquidators seeking to demonstrate the reasonableness of their remuneration. The first case was Re Walker & Anor (as liquidators of One.Tel Limited) (2005) 54 ACSR 11. The creditors of One.Tel Limited had passed a resolution that the company be placed in liquidation and accordingly the administrators became the liquidators of the company. Hence, the winding up was a creditors' voluntary winding up rather than a court-initiated compulsory winding up. Section 499(3) of the Act provides that in a creditors' voluntary winding up "the committee of inspection, or, if there is no such committee, the creditors, may fix the remuneration to be paid to the liquidator". However, agreement was not reached among the members of the committee to fix the remuneration to be paid to the liquidators. Accordingly, the liquidators applied to the court for orders that, if the committee of inspection failed to fix the liquidators' remuneration, the creditors could by a resolution passed at a duly convened meeting determine the remuneration to be paid to the liquidators. In addition the liquidators applied under s511(1)(a) for an order that, if the creditors failed to pass such a resolution, the Court could determine such remuneration pursuant to s473(3) of the Act (a provision which applies in relation to compulsory windings up, not creditors' voluntary windings up).

Barrett J dismissed the application. He noted that pursuant to s499(3), the creditors could only fix the liquidators' remuneration if there was no committee of inspection. Here there was a committee but it was not willing to approve the remuneration. In addition, s511(1)(a) of the Act (which allows the court to "determine any question arising in the winding up of the company"), did not authorise the court to order a meeting of creditors in circumstances where there already existed a committee of inspection. Barrett J noted that the liquidators might think it appropriate to consult with the general body of creditors with a view either to ascertaining their wishes concerning possible reconstitution of the committee of inspection or obtaining some indication of the creditors' attitude to the matters causing the impasse between the liquidators and the committee.

His Honour added that if the statutory means of fixing the liquidators' remuneration prescribed by s499(3) were ultimately shown to be unworkable, the court would be in a position where it could, upon an appropriate application being made, itself determine the quantum of remuneration. In that circumstance, the question of the quantum would be in need of determination and its determination will be "just and beneficial" within the meaning of s511(2) of the Act.

In due course the liquidators made a further application. It was heard by Windeyer J. The reasons for decision are reported in Re One.Tel Limited (in liquidation) (2005) 55 ACSR 558. Windeyer J found that, as contemplated by the decision of Barrett J, the statutory means of fixing the liquidators' remuneration had proved to be unworkable: there was a deadlock which prevented the committee of inspection from approving the liquidator's remuneration (at 561). Nevertheless, while it had become appropriate for the Court to fix the liquidator's remuneration, Windeyer J concluded that there was insufficient evidence before him to do so, saying "The information required for the present determination includes not only a general description of the work done, but details of the work actually performed by each person whose charges and hourly rates are included in the account" (at 562).

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It is worth noting that it was suggested to the Court that it might be appropriate for the liquidators' remuneration to be reviewed and approved by a costs consultant rather than a Registrar of the Court. Windeyer J declined to adopt that suggestion. His Honour was satisfied with the traditional approach (at 562) and did not want to support the setting up of a new profession of liquidators' costs consultants who would work at the expense of creditors (at 563).

Practical hurdles such as those which faced the liquidators in the One.Tel cases may have prompted the particular approach taken by the receiver in Australian Securities and Investments Commission v Australian Foods Company Pty Limited [2006] WASC 62. Briefly, in that case the receiver (who had been appointed on the application of ASIC under s1323 of the Act) claimed to be entitled to remuneration in excess of $325,000 but indicated that he was willing to accept $300,000 if his claim for remuneration could be dealt with expeditiously and without the necessity for any further work on his part" (at [7]). The company was also in liquidation and the liquidator accepted the receiver's proposal. Master Sanderson held that the test articulated by the Full Court in Venetian Nominees should be applied and that, on that basis, the receiver's remuneration should be approved (at [15], [24]). In reaching that conclusion the Master took into account the discount volunteered by the receiver. It is interesting to note that the Master acknowledged that he was taking a "broad-brush" approach to determining the reasonableness of the receiver's remuneration and conceded that his approach might not accord with the Venetian Nominees decision (at [25]). In the circumstances, the Master questioned, without expressing a view, whether the rigour of the Venetian Nominees was the best way to assess remuneration.

5. Conclusion

5.1 Independence

While the independence principle is easily stated the outcome of decided cases suggests that predicting the outcome if a Court is asked to rule on the issue is not always easy. The particular judge or judges presiding will form a view on what he or she considers best having regard to the facts before the Court. This paper should at least provide readers with an easy method of locating potentially relevant cases on a range of key fact situations.

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5.2 Remuneration

The Aliance Motor Body Pty Limited (subject to deed of company arrangement) (2006) 56 ACSR 463 test case appears to have resolved the issue of what constitutes the "fixing" of an administrator's remuneration. Nevertheless, other recent cases demonstrate the need for practitioners to abide strictly by the rules set out in the Act, especially Part 5.3A. It is necessary to apply to the Court for an order under s447A if a practitioner wishes to adopt a procedure for fixing remuneration which is different from that set out in the Act. What remains a bit more difficult to pin down at this stage is establishing the reasonableness of the practitioner's fees. On that issue again this paper sets out what the authors consider to be the key authorities and guides which readers should refer to in attempting to deal with that issue in relation to particular fact situations.

John Warde & Matthew McLennan 24 July 2006

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Schedule – A Taxonomy of Cases on External Administrator Independence

The table divides the decided cases between those concerned with conduct before the external administrator's appointment, conduct after the appointment, and remedies. Within the first two of those categories the cases are sub-divided into classes according to the facts which represented the crux of the alleged contravention of the duty to be independent. The remedies category is divided into two main groups: remedies sought by or available to external administrators and remedies sought against them.

Category Crux of the alleged contravention/type of remedy Cross reference

Investigating accountants 3.5(a)

Insolvency advice 3.5(b)

Prior appointments 3.5(c)

Conduct before appointment

Prior association 3.5(d)

Corporate groups 3.6(a)

Over-familiarity 3.6(b)

Litigation funding 3.6(c)Fraternisation

Puppets 3.6(d)

Dissatisfied creditors 3.6(e)Conduct of administration Potential breaches of duty 3.6(f)

Employees and advisers 3.6(g)

Conduct after appointment

The significance of incumbency 3.6(h)

Resignation 3.7(a)

Directions 3.7(b)

Additional external administrators

3.7(c)

Undertakings and conditions 3.7(d)

Initiated by external administrator

Remedial orders 3.7(e)

Court expert 3.7(f)

Removal 3.7(g)

Forced resignation 3.7(h)

Remedies

Initiated by other interested persons

Costs 3.7(i)

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independence and remuneration of external administrators

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