Groundbreaking Case On Administrator’s Pay

On 16 February 2006, the Federal Court of Australia handed down an eagerly anticipated judgment, which addressed controversial issues in relation to the fixing of remuneration of an administrator under a Deed of Company Arrangement (DOCA).

Administrators were appointed to Aliance Motor Body Pty Limited.

The second meeting of creditors voted in favour of a DOCA. In addition, resolutions were passed purporting to fix the remuneration of the administrators according to an hourly rate and subject to a limit of $30,000.

The deed administrator sought a direction that he was justified in acting as administrator of the DOCA on the basis that his remuneration was properly fixed by the resolution of the creditors of the company.

The critical question to be determined in this case was whether the remuneration of an administrator under a DOCA could be fixed prospectively by a resolution at the second meeting of creditors where the remuneration was expressed:

1. by reference to a scale of hourly rates to be applied to the time to be spent on the administration; and
2. subject to a monetary limit or cap.

The remuneration of an administrator under a DOCA can be fixed prospectively by a resolution at the second meeting of creditors as long as:

1. the person doing the work;
2. that person’s category; and
3. the period spent doing the work;

have been provided to the creditors, and the amount of the remuneration can be calculated definitely.

Remuneration may be fixed prospectively by reference to a sufficiently "objective" formula based on time. Whether a formula is objective must be assessed in light of established High Court authorities.

There are certain safeguards in place which counter the potential for abuse by the administrator in relation to charging time.

1. Remuneration can only be fixed by a resolution of creditors or by the Court, not by the administrator.
2. An officer, member of creditor of the company may apply to the Court for a full review of the remuneration.

The provision of a cap was not considered relevant by the judge in determining whether the remuneration was fixed.

Despite this, a monetary cap may be taken into account when determining whether remuneration is "reasonable" in response to a challenge by an officer, member or creditor of the company to which remuneration is fixed.
By Martin Hirst & Samantha Lau

This publication is provided to clients and correspondents for their information on a complimentary basis. It represents a brief summary of the law applicable as at the date of publication and should not be relied on as a definitive or complete statement of the relevant laws.