- Prior to the passage of the 2016-2017 insolvency reforms, creditors had limited powers to review or question the activities or fees of liquidators
- One important insolvency reform has been the introduction of a new power for creditors, ASIC, or the Court, to appoint a Reviewing Liquidator. The Reviewing Liquidator has broad powers to look into the basis for a liquidator’s remuneration and expenses
- While it appears to be an under-utilised tool, the costs of appointing a Reviewing Liquidator means that creditors should also consider other options that they have available to them.
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Liquidators don’t come cheap. In many cases, after paying liquidator remuneration and expenses, nothing is left for the general pool of unsecured creditors. This means that, when faced with a possible winding up, creditors have a significant interest in ensuring that there are not excessive charges for the liquidator’s services.
In the recent case of Lock, in the matter of Cedenco JV Australia Pty Ltd (in liq) (No 2), the Federal Court objected to the charging rates as unreasonable (for example, $700 per hour for partners), when they were clearly out of step with market rates. Is there any justification for such high rates? In the past, some liquidators have argued that the high fees constitute a cross-subsidy for those liquidations where nothing remains to pay liquidator remuneration and expenses.
There must be approval from either creditors, a committee of inspection or the court, for liquidator remuneration and expenses. Nevertheless, creditors may be concerned about remuneration and costs, after approval. Or, an individual creditor may have concerns with the amount finally charged. There is also the consideration that, because of the massive power imbalance between creditors and liquidators as a group, creditors have no option but to take the prices set liquidators, even if they are over-inflated. For these reasons, the appointment of a Reviewing Liquidator should be considered. For more information on how liquidators set their remuneration and costs see How do liquidators charge fees?
Up until 2017, the only practical method of reviewing liquidator remuneration and expenses was to apply to the Court. However, like any court process this was an expensive and time-consuming option. In this article, we look at the new option of appointing a Reviewing Liquidator.
How is a Reviewing Liquidator appointed?
A Reviewing Liquidator can be appointed (with the consent of that Reviewing Liquidator) in three different ways:
- By the creditors themselves through resolution. Where appointed by resolution, that resolution must specify the particular remuneration or expenses to be reviewed and how the cost of the review itself is to be determined;
- By the Australian Securities and Investments Commission (ASIC). Given resource constraints, it appears that ASIC is limiting its appointment of Reviewing Liquidators to suspected ‘phoenix activity’ cases.
- By the Court;
- By an individual creditor, with the agreement of the existing liquidator.
How will the Reviewing Liquidator carry out their review?
In considering appropriate remuneration, the review may (but need not) include an assessment of whether the remuneration is ‘reasonable’. In considering whether the expenses are appropriate, the review must include an assessment of whether the cost or expense was properly incurred by the external administrator.
The liquidator and their staff are required to cooperate with the Reviewing Liquidator and the Reviewing Liquidator may look into:
- approved remuneration over the previous six months;
- costs or expenses incurred during the previous 12 months.
The Reviewing Liquidator has a range of powers to permit them to carry out their job effectively including engaging experts to assist or directing the liquidator or company to produce certain information. The Reviewing Liquidator publishes the results of their review in a final report to creditors.
The Court has an oversight function with respect to the Reviewing Liquidator. The Reviewing Liquidator can apply to the Court for orders directing the liquidator to act. In addition, anyone with a financial interest (such as creditors) can apply to the Court directing the Reviewing Liquidator to carry out the review in a certain way or to remove the Reviewing Liquidator.
What other options should be considered?
Thus far, appointing a Reviewing Liquidator is a tool that has not been heavily used by creditors. One reason for this may be that the costs of the Reviewing Liquidator are borne by the creditors, just like the costs of the existing liquidator. In light of this, when considering whether to appoint a Reviewing Liquidator, the creditors need to consider the effect this could have on their own returns. In light of this, other options should also be considered, such as:
- the right to request information from liquidators that can shed light on the costs they are incurring;
- exercising the right to replace an existing liquidator with a new one;
- appointing a committee of inspection that can carry out an ongoing review of the liquidator’s activities;
For further information on these options see How to Review the Conduct of a Liquidator.