Remuneration of liquidators: Practical guidance provided by the Privy Council

• Assessing the reasonableness of liquidators' remuneration has been a vexed issue in many jurisdictions.
• The Judicial Committee of the Privy Council (Trinidad and Tobago) (the "Privy Council") has recently distilled the legal position taken by various common law jurisdictions and has provided some practical and useful guidance on how this issue should be addressed by the courts. 
• This is a welcomed decision that would be instructive in the Cayman Islands, the British Virgin Islands and Bermuda (the "Offshore Jurisdictions"), where insolvencies are usually cross-border, complex and of high value. Liquidators and other similar office holders should therefore review this decision closely.
  
   

Overview

Background of the case

CL Financial Ltd (the "Company"), incorporated in Trinidad and Tobago, is a company that held substantial, indirect interests in a diverse range of businesses in multiple jurisdictions. The Government of Trinidad and Tobago (the "Government") became the Company's largest creditor after providing it with significant financial support to prevent the Company's collapse after 2008.

In 2017, the court wound up the Company upon a petition by the Government and appointed joint liquidators (the "Liquidators"). By the time of the winding up petition, the Company's debt to the Government was over TT$15.5 billion (~US$2.3 billion in today's exchange rate), making the Government the Company's largest creditor. 

The Liquidators subsequently sought approval of their remuneration, which was opposed by the Government. 

At first instance, the court approved the Liquidators' remuneration and was of the view that the remuneration report went into sufficient detail as to the work done. 
The Court of Appeal overturned the first instance judge's decision on a number of grounds. Relevantly, the Court of Appeal suggested that the court must undertake a line-by-line examination of the work done and expenses incurred when liquidators propose to be remunerated on a time spent basis.

Key issues and findings

 

One of the key issues before the Privy Council was whether the Liquidators had provided sufficient information to enable the court to approve their remuneration application.

After canvassing the position in England and Wales, Ireland, Australia, New Zealand, Singapore, Hong Kong and Canada, the Privy Council helpfully distilled the "largely common approach" undertaken by those jurisdictions to deal with the assessment of remuneration of insolvency officeholders (for simplicity, we refer only to liquidators in this note):

1. In large insolvencies, time spent is usually the only (or at least major component) of assessing remuneration, although this is generally subject to overriding requirements of fairness and reasonableness.
2. Liquidators are officers of the court and are usually members of a regulated profession. As a result, courts should proceed on the basis that liquidators have acted with integrity (i.e. hours claimed reflect actual work), unless there is reason to believe otherwise.
3. The onus is on liquidators to establish that the time costs were reasonably incurred. Any doubt is usually resolved against them.

The Privy Council focused primarily on the third factor (which is usually the most contentious). Whether the time costs were reasonably incurred is subject to the liquidators establishing that the work (i) was reasonably undertaken; and (ii) was performed by a person of appropriate seniority. As to these factors, the following points are relevant:

1. Liquidators must explain:
   1. the nature of the task;
   2. the considerations leading the liquidators to embark on that task; and
   3. if the task becomes more difficult or expensive than initially expected, why the liquidators are persevering with the task.
2. What is reasonable will depend on a number of factors, and the work does not necessarily need to produce a financial result (e.g. actions taken to comply with statutory / contractual obligations or unsuccessful attempts to recover assets). Liquidators retain discretion on how to manage the liquidation but:
   1. they are expected to deploy commercial judgment; and
   2. must re-examine periodically whether it remains reasonable to continue with a course of action.
3. Work must be performed at the appropriate level of seniority. Liquidators must therefore provide details of the grades of staff undertaking particular tasks. This does not however usually require identifying the particular individuals, the particular dates on which tasks were undertaken or the hours worked on each day.
4. Liquidators must provide sufficient information:
   1. to satisfy the court that the remuneration is justified – the court will not act as a rubber stamp and will always apply its own judgement, even in unopposed applications; and
   2. to show that the work undertaken was not unnecessarily duplicative by other members of staff or external advisors (e.g. lawyers) – additionally, liquidators will need to ensure that administrative staff are not separately charged out if their work is properly characterised as overhead costs.
5. The supporting evidence must be proportionate, and a greater level of detail is required in a complex liquidation. However:
   1. neither the court nor the liquidation estate should usually be burdened by voluminous evidence (including contemporaneous time records), although such evidence must be maintained and provided to meet any points made by the court or creditors as they arise; and
   2. the level of detail for supporting evidence does not need to be that of a lawyer's bill of costs, and the court should not engage in a line-by-line analysis of the claim.

As a final point of potential interest, the Privy Council also raised a query as to whether the Liquidators' expenses (e.g. legal fees) also need to be approved. This issue was not fully argued before the Privy Council and appeared to be complicated by the particular wording in the relevant court order governing the Liquidators' powers and remuneration.

The Privy Council therefore did not express a view on this issue. It did however note the general principle under English law that a liquidator does not need to seek approval of the payment of third-party expenses, but those expenses may be challenged by a creditor (or, where there may be a surplus, a shareholder).

Impact on the Offshore Jurisdictions

Decisions from Trinidad and Tobago are not strictly binding on the courts in the Cayman Islands, the British Virgin Islands or Bermuda. However, the Privy Council is also the highest appellate court for the Offshore Jurisdictions, and therefore any decisions delivered by it are highly persuasive. Accordingly, and in circumstances where the Privy Council reached its conclusion after analysing various comparable common law jurisdictions, we would expect the courts in the Offshore Jurisdictions to adopt a similar approach on liquidator remuneration applications going forward.

Liquidators and other similar office holders should therefore pay close attention to the key principles set out in the decision (as summarised above), both in terms of record-keeping and in relation to the level of detail required in the liquidators' remuneration reports.