Liquidators and trustees in bankruptcy are more accustomed to seeing their own fees come under judicial scrutiny than the fees of their lawyers. Legal fees are ‘mere’ disbursements in insolvency law, requiring neither creditor nor court approval.
Justice Steven Rares’ recent judicial comments about lawyers’ fees in a bankruptcy matter have therefore prompted some debate. These comments were made with regard to the need for efficiency in the division of work between barristers and solicitors (lawyers) in the conduct of litigation but may be extended to legal costs generally.
The Judge’s views are timely in light of the new insolvency laws commencing on 1 September 2017, under the Insolvency Law Reform Act 2016 (ILRA). They will extend the scrutiny of lawyers’ fees in insolvency matters – by the court, the creditors and by bankruptcy trustees and liquidators, while at the same time reduce the judicial scrutiny of fees of liquidators and trustees themselves.
Insolvency practitioners as clients
Lawyers have a different sort of client when acting for an insolvency practitioner. While insolvency practitioners are not expected to be model litigants, they are fiduciaries responsible for managing limited funds in the interests of creditors. That calls for them to be “frugal in incurring expenditure” and to exercise “practical commercial judgment”. Litigation should be pursued as a last resort and kept under close scrutiny. They also have broader public interest responsibilities, including to investigate and report unlawful conduct.
Lawyers acting for them, fiduciaries themselves, must have regard to these and other features, and may need to advise insolvency practitioners on these aspects, in particular as to the proportionality of expenditure against outcome in any litigious pursuit of recoveries.
That is a separate layer of advice from the legal advice on the substantial legal claim being pursued by the insolvency practitioner and will often be not necessary or different from the types of advice given by lawyers to their commercial and personal clients.
The costs of insolvency practitioners conducting an insolvency administration are a significant issue, consuming as they do moneys that might otherwise go to creditors. However, a reality is that insolvency practice is often complex factually and legally, unassisted or resisted by the parties involved, and labour intensive in matters requiring to be proved. The law has a significant impact upon the fundamental rights and the defences available are extensive. The services of experienced professionals are required often at significant cost.
As has been said, “the notion that money paid to professionals belongs to creditors is true only if the creditors could realize that value without the profession”. The concern for proportionality in fees charged in insolvencies has to acknowledge that.
Reviews of lawyers’ fees under the new insolvency laws
Under provisions in the new law, lawyers’ fees in acting for trustees in bankruptcy will continue to be subject to review by the Inspector-General in Bankruptcy, continuing the scheme under the current law. However, the new law allows the Inspector-General to exercise that power on his or her own initiative. Such a review could be prompted by a complaint or by judicial criticism in a particular matter.
Under the new provisions in corporate insolvency, lawyers’ fees in acting for external company administrators will instead be subject to scrutiny by a ‘reviewing liquidator’.
In either case, little if any statutory or specific regulatory criteria for the assessment of lawyers’ fees are offered.
But the law remains, that an insolvency practitioner must engage any third party service provider on relevant considerations, and “shop around to ensure that he obtains the services of good lawyers (solicitors and counsel) at the best possible rate. … The sole selection criteria should be the benefit to him as a litigant”. Practitioners must also give careful scrutiny to their lawyers’ fees, in particular during litigation; failure to do so can be a breach of duty.
In engaging a lawyer, a trustee must be given a costs agreement for the work to be done. The lawyer’s fees may be paid in the reasonable discretion of the trustee. Nevertheless, the trustee as client, and the creditors, may query the lawyers’ fee, as may the Inspector-General.
In proceeding to review a trustee’s remuneration claim, and among many powers, the Inspector-General may direct the trustee’s lawyer (a solicitor or a barrister, as a ‘third party’) to give an itemized bill of costs for work done for the trustee, with power given to the Inspector-General to assess it and disallow all or part of it. Reasons for that decision must be given. A right of review to the Court is then available.
If the lawyer’s fees are disallowed by the Inspector-General, the consequence is that they may not be paid out from the funds in the bankrupt estate; but the trustee may nevertheless remain personally liable to pay them, subject to any separate legal costs assessment process.
As to the trustee’s fees, or “remuneration”, these are primarily determined by creditors. If there is a dispute, the Inspector-General assumes what is a quasi-judicial role in reviewing and determining the trustee’s remuneration. The same criteria applied by the court in corporate insolvency – currently s 473(10) of the Corporations Act, (see below) are to be applied by the Inspector-General.
Liquidators are not required to be given costs agreements, suggesting that they are sophisticated clients not warranting that protection. As in bankruptcy, the lawyer’s fees may be paid in the discretion of the practitioner, the liquidator or administrator. The creditors, or ASIC, may query these fees through the appointment of an independent “reviewing liquidator” to review any costs or expenses incurred by the liquidator, including legal fees. The review may go back 12 months or more.
The question to be determined in corporate insolvency is (for some unstated reason) different from bankruptcy, being whether “the cost or expense was properly incurred” by the liquidator. The reviewing liquidator may direct the lawyers to provide, not an itemised bill, but a statement in support of their claims.
Again, if the cost or expense is found not to have been properly incurred, the liquidator may remain personally liable to pay the lawyers’ fees, subject to any cost assessment process.
Separately, both the Court and ASIC can appoint a reviewing liquidator for broader purposes, including the general conduct of the administration. This review may also include remuneration.
As to the liquidator’s remuneration, this is determined by the creditors and if there is a dispute, it is the court, not ASIC, that resolves it, according to the same criteria that are now applied in personal insolvency.
Court powers concerning costs
It should also be mentioned that the ILRA has introduced new powers of the court in relation to an insolvency practitioner’s legal costs, which, while leaving them as a matter of court discretion, direct the court to the options of making the trustee or liquidator personally liable to pay those costs.
As a concluding comment, it is apparent from this that despite the harmonisation of much of personal and corporate insolvency processes under the ILRA, the corporate remuneration process remains different. This is largely because ASIC is not given the remuneration determination powers of the Inspector-General of Bankruptcy. The corporate insolvency courts therefore have to remain more closely involved. Nevertheless, both the Inspector-General and the Court are to determine remuneration according to the same statutory criteria and the case law principles are largely the same, including as to proportionality.
The principles applicable to reviewing lawyers’ fees in acting for an insolvency practitioner client are more refined than the usual review of fees payable by a commercial client under a costs assessment. Just as a lawyer acting for a model litigant must advise on and act according to higher principles of conduct, so too must a lawyer acting for an insolvency practitioner.
Some of the more difficult issues include whether an insolvency practitioner should pursue claims with no expected return for creditors, or with litigation funders and the insolvency practitioner’s remuneration the only beneficiaries; or pursue investigations into misconduct using company funds but which are likely to lead to nil recoveries. The rule in ex parte James, the ‘ethical’ purpose of the ILRA reforms, the balance between a practical commercial outcome and one that allows misconduct to go unchallenged, the extent of public interest investigations expected of insolvency practitioners, and the extent to which insolvency practitioners remain officers of the court in light of the changes under the new law, are other issues.
Commercial proportionality remains an issue. An insolvency practitioner who finds that they have over-expended funds in their recovery litigation for little or no financial outcome, or that they have ill-advisedly continued despite new evidence, may be criticised and penalised as to costs. These aspects call for on-going legal advice throughout the conduct of any litigation.
Amount of legal fees in insolvency
Information on the legal costs in insolvency cases is limited. AFSA broadly reports annually on the amount of moneys realised in bankruptcies, and the remuneration of trustees and the costs involved, which might usefully bear closer analysis.
Where legal fees are disclosed, for example in court decisions, the details are often cursory, given that the court generally does not involve itself in reviewing insolvency practitioner’s legal fees or other “disbursements”.
Given the new insolvency laws, and given the transparency that insolvency law needs in order to monitor and maintain its integrity, consideration might be given to disclosure of the insolvency practitioner’s legal costs in any insolvency litigation either to the court or the regulators, ASIC and AFSA.
Another option would be for the standards of conduct of insolvency practitioners in engaging lawyers and in the conduct of litigation or pursuit of claims generally be the subject of a professional code or practice statement.
These standards would need to take into account the existing legal obligations under the Bankruptcy Act and the Corporations Act, and under various other laws governing parties’ conduct in court proceedings, and court rules and practice statements. Aspects of the model litigant guidelines of the Commonwealth might be considered. These already bind the Inspector-General, ASIC and the ATO, and other government agencies involved in insolvency work, and their lawyers and counsel, including as to counsels’ fees and their amount.
The alternative is that the new law under the ILRA allowing lawyers’ fees to be more readily reviewed will develop according to the views of the reviewing liquidators and the Inspector-General.
Those views need to be legally informed and transparent. There is a consequent need for publication of the written reasons for remuneration determinations of both the Inspector-General and the reviewing liquidators.
However, while under the existing law, the Inspector-General must give written reasons for any review of a lawyer’s fees, these are not made public, offering no benefit of transparency or precedent. The new law does not change this, including in relation to decisions of reviewing liquidators.
Concluding and other thoughts
How each of bankruptcy and corporate insolvency will treat lawyers’ fees awaits the commencement of the new law on 1 September 2017. We may well then see greater focus on the responsibilities of insolvency practitioners in instructing lawyers and in negotiating and monitoring their fees. There is a case for the application of new principles in anticipation of this change.
The forthcoming “safe harbour” laws, allowing directors to seek legal protection if they engage appropriately qualified advisers, should bring in other professionals and perspectives, and may provide a useful prompt for broader approaches in setting insolvency practitioners’ and lawyers’ remuneration.
More generally, competitive and client pressures are resulting in the development of new approaches to costing by the legal professions here and internationally through judicial costs management, costs budgeting and legal project management. The Jackson reforms in the UK are an aspect of that development.
There is a view that these developments have had less impact in Australia on legal costs in insolvency, lawyers perhaps being influenced by or constrained by the conservative time based approaches of their insolvency practitioner clients. The significant Stockford decision in 2004 has been described as “institutionalising” time costing in insolvencies since then. That conservatism however may also be the result of prescriptive insolvency laws, including those being introduced under the ILRA. It is also a product of unreformed laws and dysfunctional funding arrangements in corporate insolvency in Australia which serve to prompt counter-productive billing and conduct behaviours.
How much of these alternative costing concepts will be brought to bear under the new insolvency laws is questionable, with judges and regulators so far adopting traditional approaches. It would be wise however for insolvency law and practice to be open to consider other ways of billing for services provided in insolvencies, for both practitioners and lawyers. These need to balance the various issues of transparency, accountability and commerciality with the need for proper recompense for providing professional services in often unpredictable circumstances, balancing the pursuit of monetary recoveries against the costs of doing so, while at the same time complying with statutory, reporting and public interest obligations.
In depth commentary on Bankruptcy and Insolvency is available in Wolters Kluwer’s Australian Insolvency Management Practice. Order the latest Australian Bankruptcy Act 1966 book for a comprehensive consolidation of the Act.
This article was first published in CCH’s Australian Commercial Law Tracker on Monday 29 May 2017.
 Armstrong Scalisi Holdings Pty Ltd v Piscopo (Trustee), in the matter of Collins  FCA 423
 In the matter of St Gregory’s Armenian School (in liq)  NSWSC 1215 at .
 It is “unreasonable to demand that skilled professionals should perform their functions at low cost. Dispute resolution has a cost component”: Bankruptcy and Insolvency, Change, policy and the vital role of integrity and probity (2010) 22(2) A Insol J 4, Michael Kirby.
 Professor Stephen Lubben, American Bankruptcy Institute Commission to Study the Reform of Chapter 11 of the US Bankruptcy Code: Report and Recommendations 2014 footnote 211.
 Bankruptcy Act s 167; Bankruptcy Regulations Part 8 Div 4.
 Insolvency Practice Schedule (Bankruptcy) s 90-21
 Insolvency Practice Schedule (Corporations) Division 90 Subdivision C.
 Inspector-General Practice Statement (IGPS) 16 – Reviewing remuneration of trustees and costs of third party service providers says that a costs assessor may be engaged where the legal fees are high.
 Re Joe & Joe Developments Pty Ltd  NSWSC 1444 and  NSWSC 1703
 Legal Profession Uniform Law, s 170
 Section 90-65(2)(c) Insolvency Practice Rules Bankruptcy.
 Section 90-21(3) Insolvency Practice Schedule Bankruptcy
 See my article Insolvency Practitioner Remuneration under the new law and post Sakr Nominees (2017) 18(3&4) INSLB 62.
 Legal Profession Uniform Law. The distinction between trustees and liquidators is unwarranted.
 Section 90-7(3) Insolvency Practice Rules Corporations.
 Section 90-22 Insolvency Practice Rules Corporations.
 Insolvency Practice Schedules s 90-15(5); among other powers.
 Camm v Linke Nominees Pty Ltd (No 6)  FCA 95
 See Monies administered by registered trustees under Parts IV and Xi of the Bankruptcy Act [XLSX 16.73 KB], 2014-2015, at www.afsa.gov.au
 It is perhaps unwise to comment on particular cases unless the context is fully explained. But see Tamaya Resources Limited (in liq) v Claymore Capital Pty Ltd (No 2)  FCA 637 (order for repayment of a $220,000 preference with discounted legal costs of $430,000); Sanderson as Liq’r of Sakr Nominees Pty Ltd (in liq) v Sakr  NSWCA 38 (on a point of law and as amicus curiae, ARITA reportedly spent $150,000); and the estimated legal costs in the matter before Justice Rares were $240,000. As to the regulator, in ASIC v Flugge (No 2)  VSC 117, the hearing of ASIC’s claims for breach of directors’ duties took over 30 days, with a financial outcome of $50,000.
 Venetian Nominees v Conlan (1998) 20 WAR 96
 Legal Services Directions 2017.
 Explained generally in Di Benedetto v Kilton Grange Pty Ltd  VSCA 119 at .
 See Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017
 See Quick on Costs, Thomson Reuters, (2016) Roger Quick and Elizabeth Harris, “Retainers”, [50.2330]. See also the writings of Ron Baker of the Verasage Institute www.verasage.com. I am grateful to Mr Roger Quick for his views and explanations of these developments. I take responsibility for my own explanations in this article.
 Quick on Costs, [50.2330] An Australian answer to Australian problems?