Entering the Song: Queensland Supreme Court Rules on Insolvency Practitioner Remuneration and Expenses Approval
Since the landmark decision in Re Solfire Pty Ltd (In Liq) (No. 2)  2 Qd R 182, the Queensland Supreme Court has often marched to its own tune when reviewing applications for insolvency practitioner remuneration and disbursements. In two related decisions arising from the insolvency of LM Investment Management and managed investment schemes of which it is responsible entity, the Court has now turned its attention to the controversies in this area over proportionality and access to trust assets with which its counterparts in New South Wales have grappled over the last 18 months.
Key takeaways for insolvency practitioners
- Insolvency practitioners need to be aware that more creative processes may be used by the Courts to resolve remuneration and expenses disputes.
- When accepting an appointment to a trustee company, insolvency practitioners should consider seeking "Beddoe orders" before engaging in litigation. A Beddoe order is a direction that a trustee is justified in bringing or defending proceedings. It entitles the trustee to be indemnified for its costs out of the trust's assets.
- Pre-appointment breaches of trust by a corporate trustee may limit the trustee's ability, and therefore the ability of any liquidator or administrator appointed to it, to recover all their respective remuneration and expenses out of trust assets. Such a risk is real, given the frequency with which a trustee will act in breach of its duties when approaching insolvency.
Queensland Supreme Court in step with recent decisions on trusts
LM Investment Management Ltd (In Liquidation) (Receivers and Managers Appointed) (LMIM) has been the responsible entity for 6 managed investment schemes. The applicants were appointed administrators of LMIM in 2013, and subsequently became its liquidators (Liquidators) in early August 2013. Later in August 2013, the Court appointed a receiver (Receiver) to the assets of one of the schemes for the purposes of winding it up. Applications were made for the approval of remuneration ("Remuneration Application") and expenses ("Disbursement Application"), being the latest in a series of cases which have considered issues associated with those appointments.
The Liquidators applied for approval of part of their remuneration, and for orders to permit them to pay remuneration and expenses out of the assets held on trust for the managed investment schemes. The Receiver challenged the adequacy of the affidavit material of the Liquidators to show the work performed was reasonable, and the necessity of the tasks undertaken.
In resolving the issues which have most recently proved contentious in other jurisdictions, Jackson J:
- applied the principles for approval of remuneration articulated by the NSW Court of Appeal in Sanderson as liquidator of Sakr Nominees Pty Ltd (in liq) v Sakr (2017) 93 NSWLR 459. The Court endorsed those principles as being:
- the Court can fix remuneration by whatever method it considers appropriate, and a time based method may not always be appropriate;
- when assessing reasonableness regard can be had to the size of the estate, the benefit obtained (which need not be augmenting the assets), and the difficulty and importance of the tasks performed.
Whilst accepting those principles applied, as a matter of practice, Jackson J did not consider the concept of proportionality justified any reduction in the remuneration claimed.
- did not have to address directly the question of whether the priorities in section 556 of the Corporations Act 2001 (Cth) applied where a company in liquidation acted solely as trustee. However, the reasoning applied by him suggests that Queensland Courts will hold that it does not.
Novel Tunes - Reason for optimism and caution
Practitioners will welcome the judge's observation that it was not the role of the court to hypercritically review tasks undertaken on a day by day basis in a long and complex matter with the benefit of hindsight. Jackson J observed remuneration:
"should be sufficient to encourage [a liquidator] to carry out the important public function of the administration of insolvent entities for the benefit of the creditors, investors (whether company members or fund members) and the public administration of the insolvency laws in general."
Jackson J considered processes for efficiently narrowing matters requiring judicial resolution in actively contested cases. Options included:
- the appointment of a special referee under the Uniform Civil Procedure Rules to decide a question or to provide a written opinion to the Court. In the way the case was argued before him, he did not consider that this was ultimately necessary;
- a novel two stage process, which he appeared to endorse (at  and  Remuneration Application):
"… The first stage would be that … the applicants provide affidavits as they may be advised upon the question of particular disputes as to the reasonableness of the remuneration they claim. After that affidavit or those affidavits are filed and served, the objector should identify the particular areas of remaining concern, if any, by reason of which he or she seeks to challenge the applicants’ prima facie right to have the amounts of remuneration claimed determined.
After that, the hearing of a contested application could proceed using the informal process I have outlined."
The "informal process" would have involved the examination of a liquidator before the Court on the issues in dispute, assisted by his or her senior staff who could provide any necessary information. On the facts though he considered the issues were sufficiently defined after the hearing, preferring to make findings, and calling instead on the parties to consider suitable draft orders in light of the Court's conclusions.
Jackson J was critical of the Liquidators not having first obtained Beddoe orders, particularly in their pursuing an unsuccessful appeal. Having not obtained such an order, the costs of that appeal were not permitted to be paid out of trust assets.
Jackson J also considered the "clear accounts rule" in the Disbursement Application. In substance, the rule prevents a trustee from claiming its remuneration and an indemnity for its costs in circumstances where it is also liable for an offsetting claim as a result of a breach of trust. Jackson J refused to allow the Liquidators to pay certain disbursements out of trust assets whilst proceedings for claims for breach of trust, including in the pre-appointment period, brought by the Receivers against LMIM remained unresolved.
Jackson J nevertheless allowed recovery of some disbursements out of trust assets under the principle in Re Universal Distributing Company Ltd (In Liq) on the basis that they concerned getting in, realising and preserving assets of a trust. He did not permit complete recovery of all expenses.