Creditors - Fees of insolvency practitioners
How are insolvency practitioners paid?
A liquidator, voluntary administrator or deed administrator (i.e. an ‘external administrator’) is entitled to be:
- paid reasonable fees, or remuneration, for the work they perform, once these fees have been approved by a creditors’ committee, creditors or a court, and
- reimbursed for out-of-pocket costs incurred in performing their role (these costs do not need creditors’ committee, creditor or court approval).
External administrators are only entitled to an amount of fees that is reasonable for the work that they and their staff properly perform in the external administration. What is reasonable will depend on the type of external administration and the issues that need to be resolved. Some are straightforward, while others are more complex.
External administrators must undertake some tasks that may not directly benefit creditors. These include reporting potential breaches of the law and lodging a detailed listing of receipts and payments with ASIC every six months. The external administrator is entitled to be paid for completing these statutory tasks.
For more on the tasks involved, see ASIC’s information sheets Liquidation: a guide for creditors (INFO 45) and Voluntary administration: a guide for creditors (INFO 74).
Out-of-pocket costs that are commonly reimbursed include:
- legal fees
- valuer’s, real estate agent’s and auctioneer’s fees
- stationery, photocopying, telephone and postage costs
- retrieval costs for recovering the company’s computer records, and
- storage costs for the company’s books and records.
Creditors have a direct interest in the level of fees and costs, as the external administrator will, generally, be paid from the company’s available assets before any payments to creditors. If there are not enough assets, the external administrator may have arranged for a third party to pay any shortfall. As a creditor, you should receive details of such an arrangement. If there are not enough assets to pay the fees and costs, and there is no third party payment arrangement, any shortfall is not paid.
Who may approve fees?
Who may approve fees depends on the type of external administration. The external administrator must provide sufficient information to enable the relevant decision-making body to assess whether the fees are reasonable.
Creditors’ committee approval
If there is a creditors’ committee, members are chosen by a vote of creditors as a whole. In approving the fees, the members represent the interests of all the creditors, not just their own individual interests.
There is not a creditors’ committee in every external administration. A creditors’ committee makes its decision by a majority in number of its members present at a meeting, but it can only act if a majority of its members attend.
Creditors approve fees by passing a resolution at a creditors’ meeting. Unless creditors call for a poll, the resolution is passed if a simple majority of creditors present and voting, in person or by proxy, indicate that they agree to the resolution. Unlike where acting as committee members, creditors may vote according to their individual interests.
If a poll is taken, rather than a vote being decided on the voices or by a show of hands, a majority in number and value of creditors present and voting must agree. A poll requires the votes of each creditor to be recorded.
A separate resolution of creditors is required for approving fees for an administrator in a voluntary administration and an administrator of a deed of company arrangement, even if the administrator is the same person in both administrations.
A proxy is where a creditor appoints someone else to represent them at a creditors’ meeting and to vote on their behalf. A proxy can be either a general proxy or a special proxy. A general proxy allows the person holding the proxy to vote as they wish on a resolution, while a special proxy directs the proxy holder to vote in a particular way.
A creditor will sometimes appoint the external administrator as a proxy to vote on the creditor’s behalf. An external administrator, their partners or staff must not use a general proxy to vote on approval of their fees; they must hold a special proxy in order to do this. They must vote all special proxies as directed, even those against approval of their fees.
How are fees calculated?
Fees may be calculated using one of a number of different methods, such as:
- on the basis of time spent by the external administrator and their staff
- a quoted fixed fee, based on an upfront estimate, or
- a percentage of asset realisations.
Charging on a time basis is the most common method. External administrators have a scale of hourly rates, with different rates for each category of staff working on the external administration, including the external administrator.
If the external administrator intends to charge on a time basis, you should receive a copy of these hourly rates soon after their appointment and before you are asked to approve the fees.
The external administrator and their staff will record the time taken for the various tasks involved, and a record will be kept of the nature of the work performed.
It is important to note that the hourly rates do not represent an hourly wage for the external administrator and their staff. The external administrator is running a business—an insolvency practice—and the hourly rates will be based on the cost of running the business, including overheads such as rent for business premises, utilities, wages and superannuation for staff who are not charged out at an hourly rate (such as personal assistants), information technology support, office equipment and supplies, insurances, taxes, and a profit.
External administrators are professionals who are required to have qualifications and experience, be independent and maintain up-to-date skills. Many of the costs of running an insolvency practice are fixed costs that must be paid, even if there are insufficient assets available to pay the external administrator for their services. External administrators compete for work and their rates should reflect this.
These are all matters that committee members or creditors should be aware of when considering the fees presented. However, regardless of these matters, creditors have a right to question the external administrator about the fees and whether the rates are negotiable.
It is up to the external administrator to justify why the method chosen for calculating fees is an appropriate method for the particular external administration. As a creditor, you also have a right to question the external administrator about the calculation method used and how the calculation was made.
What information should I receive about fees?
When seeking approval of fees, the external administrator must send committee members/creditors a report with the notice of meeting setting out:
- information that will enable the committee members/creditors to make an informed assessment of whether the proposed fees are reasonable
- a summary description of the major tasks performed, or to be performed, and
- the costs associated with each of these tasks.
Committee members/creditors may be asked to approve fees for work already performed or based on an estimate of work yet to be carried out.
If the work is yet to be carried out, it is advisable to set a maximum limit (‘cap’) on the amount that the external administrator may receive. For example, future fees calculated according to time spent may be approved on the basis of the number of hours worked at the rates charged (as set out in the provided rate scale) up to a cap of $X. If the work involved then exceeds this figure, the external administrator will have to ask the creditors’ committee/creditors to approve a further amount of fees, after accounting for the fees already incurred.
How will I know the fees are reasonable?
If asked to approve an amount of fees either as a committee member or by resolution at a creditors’ meeting, your task is to decide if that amount of fees is reasonable, given the work carried out in the external administration and the results of that work.
You may find the following information from the external administrator useful in deciding if the fees claimed are reasonable:
- the method used to calculate fees
- the major tasks that have been performed, or are likely to be performed, for the fees
- the fees/estimated fees (as applicable) for each of the major tasks
- the size and complexity (or otherwise) of the external administration
- the amount of fees (if any) that have previously been approved
- if the fees are calculated, in whole or in part, on a time basis:
- the period over which the work was, or is likely to be performed
- if the fees are for work that has already been carried out, the time spent by each level of staff on each of the major tasks
- if the fees are for work that is yet to be carried out, whether the fees are capped.
If you need more information about fees than is provided in the external administrator’s report, you should let them know before the meeting at which fees will be voted on.
If you do not think the fees being claimed are reasonable, you should raise your concerns with the external administrator. It is your decision whether to vote in favour of, or against, a resolution to approve fees.
Queries and complaints
You should first raise any queries or complaints with the external administrator. If this fails to resolve your concerns, including any concerns about their conduct, you can lodge a complaint with ASIC at http://www.asic.gov.au/complain, or write to:
Australian Securities and Investments Commission
GPO Box 9827
Your Capital City
ASIC will usually not become involved in matters of commercial judgement by an external administrator. Complaints against companies and their officers can also be made to ASIC. For other enquiries, contact ASIC's infoline on 1300 300 630 or www.asic.gov.au/question.