In Australian Securities and Investments Commission v Marco (No 15) [2024] FCA 347, the Court addressed the factors to be considered when approving the fees of administrators.
Cameron Shaw, Richard Albarran and Marcus Watters from Hall Chadwick sought a determination of their remuneration disbursements and costs for work performed over a 10-week period in late 2020 as administrators of AMS Holdings (WA) Pty Ltd (AMS). The administrators sought court approval for approximately $1 million in remuneration along with substantial disbursements and costs.
Background
AMS and the alleged managed investment scheme
AMS conducted no business of its own but operated solely as the trustee of the AMS Holdings Trust. All assets owned by AMS were held on trust for the AMS Holding Trust.
In about 2019, the Australian Securities & Investments Commission (ASIC) was investigating claims that AMS and its director, Chris Marco, were operating an unregistered management investment scheme (Scheme).
In late 2019, ASIC brought winding-up proceedings against AMS.
In September 2020, Cameron Shaw, Richard Albarran and Marcus Watters were appointed to act as voluntary administrators of AMS. Upon their appointment, AMS automatically ceased to be the trustee of the AMS Holdings Trust. There was therefore a risk that a new trustee would be appointed to the AMS Holdings Trust and the trust assets use or disbursed by the new trustee.
In these circumstances, the Court made property protection orders in respect of all assets held by AMS, both in its own right and as trustee, to protect the status quo while the proceedings brought by ASIC were still on foot. The Court also appointed McGrathNicol as interim receivers of AMS' assets. McGrathNicol were ultimately appointed liquidators of AMS and the Scheme.
The property protection orders and the appointment of McGrathNicol as liquidators meant that administrators never controlled any of the property of AMS. Accordingly, there were no funds or assets readily available to pay the administrators' remuneration, disbursements or costs.
DOCA proposals
After the administrators' appointment, Mr Marco made several proposals for AMS to enter into a Deed of Company Arrangement (DOCA).
The DOCA proposals generally contained, among other the following terms:
- a deed fund comprising assets of Mr Marco, AMS as trustee, and members of Mr Marco's family, which were assets derived from funds that investors in the Scheme had provided to Mr Marco; and;
- the completion of DOCA was conditional upon:
- ASIC failing to obtain the relief it sought in the proceedings; and
- the court dissolving or varying the asset preservation orders and otherwise making orders to give effect to the transfer of the assets the subject of the proposed deed fund.
After Mr Marco made each proposal, the administrators spent considerable time and money investigating the merits of the DOCA proposals, seeking advice, reporting to creditors and convening and holding creditors' meetings to vote on the DOCA proposals.
Ultimately, the creditors rejected the DOCA proposals put by Mr Marco and resolved that AMS be wound up.
Issue
The issue in the case was whether the Court would approve the remuneration, disbursements and costs of the administrators for work done in relation to Mr Marco's DOCA proposals under sections 60-10 and 90-15 of the Insolvency Practice Schedule (IPS).
In answering that question, the three principal issues for determination were:
- whether the administrators' investigations into the business, property and affairs of Mr Marco and AMS were necessary in the performance of their functions and duties under Pt 5.3A of the Corporations Act (Cth) 2001 (Act);
- whether fulfilment of the conditions for completion of any of the DOCA proposals was speculative and unlikely to eventuate; and
- having regard to the resolution of issues (a) and (b), whether the actual work performed by the administrators was necessary and reasonable.
Consideration
Were the administrators' investigations into the business, property and affairs of Mr Marco and AMS necessary in the performance of their functions and duties?
No. The Court held the administrators' investigations were not necessary in the performance of their functions and duties.
The Court found that the statutory duties and functions of the administrators included investigating the business, property, affairs and financial circumstances of AMS and, amongst other things, forming an opinion about whether it would be in the interests of the creditors for AMS to execute a DOCA. However, that duty did not include investigating the business, property, affairs and financial circumstances of the Scheme or forming an opinion about whether the proposed DOCA would result in a better return to creditors than the return creditors would receive on a winding up of the Scheme.
After reviewing the administrators' reports to creditors, the Court found that the majority of the administrator's reports were dedicated to:
- an assessment and estimation of the value of Mr Marco's assets in circumstances where Mr Marco's assets were likely to be assets of the Scheme and not AMS; and
- an investigation of the Scheme's business, property, affairs and financial circumstances.
The Court held that it ought to have been clear to the administrators shortly after they commenced their investigations that the business, property, affairs and financial circumstances of Mr Marco and the Scheme were separate from AMS. These assets were not available for distribution to creditors of AMS.
In addition, the administrators misconceived the extent of their statutory duties and functions under Part 5.3A of the Act when the administrators performed work aimed at providing creditors with their opinion as to the likely return under a winding up of the Scheme. The Court held that forming an opinion on the likely return under the Scheme is a different matter to the object of a DOCA under Part 5.3A of the Act, which is to achieve a better return for the company's creditors and members than would result from an immediate winding up.
The Court concluded that the administrators were not performing necessary work within the scope of their statutory duties or functions under section 438A of the Act.
Was fulfilment of the conditions for completion of any of the DOCA proposals speculative?
Yes. The Court held that the fulfilment of the conditions for completion of any of the DOCA proposals was speculative.
First, the proposals in substance were for an arrangement between Mr Marco and/or AMS and investors in the Scheme. As the DOCA proposals involved the contribution of assets AMS held on trust for the AMS Holdings Trust, AMS was not able to deal with those assets as property of AMS for the purpose of a DOCA given AMS was automatically removed from office as trustee of the AMS Holdings Trust upon the appointment of the administrators. The beneficiaries of the AMS Holdings Trust were not bound by the terms of DOCA made between the former trustee and its creditors.
Secondly, at the time of the DOCA proposals, ASIC's proceedings against Mr Marco, AMS and AMS as the trustee were still on foot. ASIC sought orders to wind up AMS and to appoint receivers over the assets of Mr Marco (which were subject to freezing orders). Although the winding up application was uncertain, based on the information available there was a very good prospect that the application would be successful. Therefore, there was a significant risk that if creditors voted in favour of DOCA that the conditions of the DOCA would never be fulfilled. The administrators' report failed to address the improbability of meeting the conditions in the DOCA.
Based on the facts, the Court formed the view that the continuation or completion of any of the DOCA proposals was speculative in the sense of far-fetched or fanciful because there were limited prospects that ASIC's application would fail. As a result, the conditions of the DOCA were unlikely to ever be met and the DOCA would fail.
Was the actual work performed by the administrators was necessary and reasonable?
No. The Court held that the actual work performed by the administrators was not reasonable and, in fact, was excessive.
The Court acknowledged that it was necessary and reasonable for administrators to convene a creditors meeting and prepare reports to meet their obligations under section 438A of the Act and rule 75-225 of the Insolvency Practice Rules (Corporations) 2016 (Cth). However, these sections do not imply that all works undertaken by the administrators was necessary and reasonable.
The Court found that the administrator failed to demonstrate the "value" of the services rendered to the creditors in its circumstance of the administration of AMS. It was clear that AMS was a trustee company with no business and no assets and that AMS had no property to satisfy any liability to those investors/creditors. In these circumstances, there was no explanation as to why the administrators considered it necessary and reasonable to undertake separate and extensive investigations.
The Court held that the determination of the administrator's remuneration should reward value, not indemnify against cost. By "value", the Court meant the services rendered should provide value to creditors in the circumstances of the administration. The Court observed that no prudent business person spending his or her own money would have embarked on work of the nature and extent the administrators performed.
Furthermore, the Court also held that the administrators was excessive and unreasonable given the evident lack of proportionality between the cost of the work relative to the value of the services provided.
The Court ultimately allowed the administrators $100,192.26 (incl GST) in remuneration. This was substantially less than the $$982,885.53 requested by the administrators.
Key takeaway
When claiming for remuneration, administrators are only entitled to reasonable remuneration for the services provided. Whether the remuneration is reasonable will be contingent upon the administrators demonstrating that the work performed is necessary to meet their duties under the relevant legislation and that their work completed provides value to creditors.
This case illustrates a number of dangers insolvency practitioners need to be aware of before undertaking extensive amounts of work. This includes:
- keeping in mind the difference between being appointed over a company and a corporate trustee;
- the need to exercise critical judgement and not blindly follow what is told to them by directors or deed proponents. Administrators should always critically consider whether a DOCA has realistic prospects of being accepted before considerable work is done analysing and preparing the DOCA; and
- be cautious before undertaking large amounts of work on contentious insolvency appointments without an indemnity nor certainty that there will be sufficient assets available in the insolvent estate to pay remuneration and expenses.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.