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Remuneration And Insolvency Practitioners

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By Alicia Hill, Principal, MST Lawyers

Two cases were recently handed down by Justice Jackson of the Supreme Court of Queensland dealing with the remuneration of administrators and liquidators from the trust property of trust funds administered by the company in liquidation and also the right of indemnity of the trustee from the trust property. This article reports on the court’s decisions and the impact for insolvency practitioners.

Park & Muller (liquidators of LM Investment Management Ltd) v Whyte No 2 [2017] QSC 229
Justice Jackson was asked to determine an application for orders that the remuneration of the administrators and liquidators, and some expenses, be paid from the trust property of relevant trust funds administered by LM Investment Management Ltd (LM) and an order to determine their remuneration as liquidators of LM. Various issues arose.

As His Honour observed, this type of order is not provided for in the Corporations Act 2001 (Cth), which provides that debts and claims will be paid from the “property of the company“. However, “where a company is trustee of a private trading trust [as was the case here] the trust property is not property of the company.

The liquidators submitted that the “court’s powers, in the context of a company winding up, to order that the liquidator of a trustee company be paid remuneration and expenses from trust property“.

His Honour examined the varying views from past cases and observed; some of those formulations tied the entitlement to indemnity for remuneration to the activities of the company as trustee, “whereas others tie[d] it to costs and expenses incurred in relation to protection of the trust assets that would have been incurred in any event“.

Jackson J ultimately approved the formulation in Re Independent Contractor Services (Aust) Ply Limited (in liq) (No 2)(2016) 305 FLR 222, where Brereton J said:
The liquidators of a company which is the trustee of a trading trust and has no other activities, are entitled to be paid their costs and expenses, whether for administering the trust assets or for ‘general liquidation work’, out of the trust assets.”

Jackson J concluded:

[A]lthough there is no shortage of cases under Australian law to suggest that a liquidator may not be entitled to a complete indemnity for the general costs of the liquidation, that reasoning does not appear to apply where the only business of the company that is identified is that the company acted as trustee of the relevant trust or trusts.”

However, LM was not a trustee of just one trust, and in addition to acting as the responsible entity and trustee of other registered schemes, LM “had assets in its own right and was carrying on business as a funds’ manager on its own account“.

His Honour said in respect of LM being a trustee of more than one trust:

[T]he circumstance that the trustee is acting for more than one trust does not preclude an order for payment of the liquidators’ remuneration and expenses from trust property, but requires that the recourse be the appropriate amount attributable to each of the relevant trusts.

And in respect of LM carrying on non-trust business:

Where the trustee also carries on non-trust business, the position ordinarily requires a separation of the liquidator’s remuneration and expenses that are attributable to the trust from that part of the liquidator’s costs and expenses attributable to the company’s non-trust business.”

Justice Jackson held that “[I]t is up to the liquidators to separate the relevant tasks and remuneration and expenses.

The remuneration of the administrators and liquidators was challenged on the basis that the evidence did not sufficiently correlate the work which was proved to have been done with that which was reasonable for the purposes of a claim for remuneration.

His Honour cited Sanderson as liquidator of Sakr Nominees Pty Ltd (in liq) v Sakr noting that the “extent of the description and necessity of the task performed in the course of the administration and the liquidation [was] brief.

Nevertheless, his Honour emphasised that “it is not the function of the court to hypercritically assess the day by day activities or tasks carried out in the course of a complex administration over a lengthy period of time with the benefit of hindsight.

His Honour considered that the appropriate course was to give the parties in light of his Honour’s reasons, the opportunity to agree upon the appropriate form of orders or, failing agreement, to make directions to resolve the remaining questions.

Park & Muller (liquidators of LM Investment Management Ltd) v Whyte No 3 [2017] QSC 230.
This case consisted of an application by the liquidators of LM of that company in its personal capacity or LM as the responsible entity of the registered management investment scheme, First Mortgage Investment Fund (FMIF), to be paid amounts from the property of the FMIF.

The basis of the application was that the applicants were entitled to an indemnity from the FMIF for those amounts as expenses.

Section 72 of the Trusts Act 1973 provides that a trustee’s right of indemnity is to expenses “reasonably incurred”, Further, s 601GA(2) of the Corporations Act 2001 (Cth) provides that a responsible entity’s right to indemnity is available “only in relation to the proper performance” of the responsible entity’s duties.

The first category of expenses claimed concerned the legal costs of an unsuccessful appeal by LM against orders made by another judge of the Court. The liquidators submitted that the costs of the appeal were an expense properly incurred. In opposition, it was said that a “trustee acts at its own risk, where it starts or prosecutes a legal proceeding as trustee without an order of the court that the trustee would be justified in doing so, commonly known as a ‘Beddoe order.

His Honour was not satisfied that the circumstances “justified bringing an arguable appeal at the likely expense of the trust property, if the appeal were unsuccessful, as an expense properly incurred“.         The circumstances included:
(a) the applicants were not required to appeal the primary judge’s orders to protect their own position;
(b) the applicants did not obtain a Beddoe order; and
(c) “the thrust of the appeal consisted of many challenges made by the applicants to findings of the primary Judge that were made adversely to the first applicants’ conduct of the                            administration”, and although the applicants had an interest in the findings, the members of the FMIF did not.

His Honour also found that the second category of expenses (liability insurance premiums), the third category (legal costs related to the production of books and records of LM), and the fourth and fifth categories (costs of the assessments of the applicants’ legal fees) were properly incurred.

The Respondent argued that “no order should be made in favour of LM’s indemnity claims … because of the operation of the principle described as the ‘clear accounts rule’.

The Respondent argued that LM’s right to an indemnity was subject to a “reduction to account for a counter-liability for the amount of loss suffered by reason of breaches of trust or duty.

His Honour:
(a) rejected the view that a trustee’s obligation to make good a default is a condition precedent to the right to an indemnity
(b) approved the view that the counter-liabilities are to be applied (i.e. set-off) against each other and the trustee is entitled to any excess in its favour.

His Honour observed that this may mean that “the net amount of the right to an indemnity will not be capable of ascertainment until the amount of the loss caused by the breach of trust that is the basis of the counter-liability can be established.

His Honour found that the clear accounts rule operated to “suspend” the claimed right to payment from the assets until the resolution of the proceedings in which breaches of trust or duty were alleged.

As a means of avoiding the operation of the clear accounts rule, the liquidators also sought an order for payment of the expenses incurred by them (“as a mirror of LM’s indemnity claims”) from the property of the FMIF.

The basis of the claim was the same as that made in the first case described in this article. Justice Jackson held that there should be an order that the expenses properly incurred were to be paid from the property of the FMIF.

These cases add to the increasing number of cases dealing with remuneration issues and highlight the need for practitioners to be aware of what work they are doing, for what purpose, and ensuring that the recording and allocating of time and costs for tasks is appropriately documented. This will maximise the prospects of a Court ordering payment of such costs from trust property.

Caution and discipline in detailing costs and expenses incurred and correct claiming of such costs and expenses is required in order to successfully obtain orders for remuneration.

If you have any queries or would like to discuss any of the issues raised in this article please do not hesitate to contact Alicia Hill by email or call +61 3 8540 0200.

 

The author is indebted to the report provided by J English in the Queensland Law Reporter which assisted in the compilation of this article.