25 October, 2015
In the latest decision in Kao Chai-Chau Linda v Fong Wai Lyn Carolyn and others [2015] SGHC 260, the Singapore courts have taken another step toward controlling the costs involved in insolvency and restructuring situations. In Kao, an application was made to the Singapore High Court to tax the fees of court-appointed receivers and managers. The application was heard before the learned Justice Steven Chong.
It should be noted that in drafting this portion of his judgment, the learned Justice Chong invited comments from the parties, as well as input from the Insolvency Practitioners Association of Singapore, which represents the interest of insolvency professionals.
Apart from dealing with the particular issues of the application, the learned Justice Chong went further to formulate guidelines for costs scheduling for court-appointed insolvency practitioners going forward. In formulating the guidelines, the learned Justice Chong drew from legislation and case law in England, Australia and New Zealand.
To whom and what do these guidelines apply?
The guidelines are meant to apply to all court-appointed insolvency practitioners, including:
- provisional liquidators;
- liquidators;
- judicial managers; and
- receivers and managers.
Scheme managers have been exempted, as they are already required to disclose their fees to creditors and the court prior to the sanction of the scheme of arrangement (see The Royal Bank of Scotland NV (formerly known as ABN Amro Bank NV) and others v TT International Ltd and another appeal [2012] 4 SLR 1182 at paragraphs 28 and 29).
Private appointments out of court, such as the appointment of private receivers by creditors, are also exempted. This is even though some appointments may be subject to curial review. Justice Chong was of the opinion that there is less of a fiduciary character to their office, and market forces generally hold down such fees.
These guidelines apply where the estimated fees exceed $200,000, and are irrespective of whether the subject company is solvent or insolvent.
In the case of cross-border insolvencies, as long as the insolvency practitioner is appointed by a Singapore court, he will be required to submit a schedule. Conversely, an insolvency practitioner appointed by a foreign court will need to comply with the requirements of the foreign court only, even if it involves the restructuring of a Singapore subsidiary of a foreign company.
What should the costs schedule contain?
The costs schedule to be submitted should contain the following matters:
- details of the work that is likely to be undertaken;
- the anticipated time that each category of work will take;
- the anticipated size of the team, with brief descriptions of the seniority of each team member and their areas of responsibility;
- the proposed basis of remuneration (e.g., time-based, value of assets, etc.), together with the reasons why it is thought that this is the most suitable method for the calculation of remuneration in this case;
- the hourly rate or rates that the insolvency practitioner proposes to charge (if time-based costing is employed) and, if available, the rates that were charged and approved for similar appointments in the past;
- a fee estimate for the relevant period of assessment;
- a list of anticipated disbursements and the costs that will be incurred in respect of them;
- the sum of fees that have already been incurred or billed for work done for the company between the time of appointment and the submission of the costs schedule; and
- whether any other professionals (e.g., lawyers) have also been engaged by the company and the proposed division of responsibility between the insolvency practitioner and such other professionals.
The above guidelines are drawn from the Australian Restructuring Insolvency & Turnaround Association Code, as well as from the English Practice Direction (Insolvency Proceedings) 2014 [2014] BCC 502 and the English Insolvency (Amendment) Rules 2015 (SI 2015 No. 443).
The general principle is that there should be full disclosure of all relevant information, but such disclosure should be tempered by the principle of proportionality. The schedule should contain all information necessary for the court and the relevant stakeholders to make an informed decision as to whether the fee represents a fair, reasonable and proportionate value.
Any special fee arrangements (e.g., value-added fee as in TT International) must also be disclosed, regardless of whether this is paid out of the assets of the company or by a third party.
The costs schedule should cover the entire period of the engagement, if possible. If not, it should cover a meaningful period of assessment (at least six months, if not a year). Supplemental costs schedules should be submitted for approval when more information is available.
When should a costs schedule be submitted?
The costs schedule should be submitted within one month after the insolvency practitioner's appointment. An extension of time may be granted where reasonable.
To whom should the costs schedule be submitted?
The costs schedule should be submitted to whichever approving body has jurisdiction over the insolvency practitioner's fees.
In a liquidation, this will be the committee of inspection (if one is appointed) or to the body of creditors at a meeting. If no agreement can be secured, then approval will have to be sought from the court.
Otherwise, this generally will be submitted to the court through an inter partes summons supported by an affidavit annexing the costs schedule. Approval of the court may be sought to seal the court file to preserve any confidential information disclosed.
Test for whether the costs schedule ought to be approved
In determining whether to approve the costs schedule, the approving body will need to consider whether the quantum of remuneration represents a fair, reasonable and proportionate reflection of the value of the services to be rendered (the same test for retrospective reviews of bills of costs).
The court will look at the following factors:
- the time given by the practitioner and his staff to the matter;
- the complexity of the matter;
- any responsibility of an exceptional kind or degree that falls on the practitioner in consequence of the appointment;
- the effectiveness with which the practitioner appears to be carrying out, or to have carried out, his duties; and
- the value and nature of the subject matter of the appointment.
For time-based costing, the court will also look into whether there has been any over-servicing (e.g., work performed by persons at an inappropriate level of seniority) and whether there has been any duplication of work (e.g., with other professionals, such as lawyers).
Payments once the costs schedule has been approved
Once the costs schedule has been approved, it is treated as a provisional "fixing" of the insolvency practitioner's remuneration.
However, there is still a need to seek retrospective validation of all sums paid at the end of the engagement. It is only then that the remuneration is deemed to have been finally "fixed."
At the time of final review, sums claimed that fall under the fee cap will usually be approved as a matter of course. Minor deviations of less than 15 percent ordinarily will not necessitate any intrusive review, unless particular matters call out for attention.
Interim payments can be made on account on a periodic basis, provided the total sum paid out does not exceed the pre-approved cap. If the total sum paid out in interim payments exceeds the final quantum fixed by the approving body, the insolvency practitioner may be required to account for the difference.
Amendments to the costs schedule
The costs schedule is subject to amendment. Amendments should be made as soon as it is known that the remuneration claimed will exceed the pre-approved sum by more than 15 percent.
The practitioners will need to explain:
- the reason why he has exceeded, or is likely to exceed, the previous estimate;
- the additional work he intends to undertake, the time taken or expected to be taken for the additional work; and
- the persons who will be assigned to the task and the rates they will charge.
Declining the appointment
Should court approval for the initial costs schedule be withheld, the insolvency practitioner can decline the appointment.
However, should approval for an amendment to a previously approved costs schedule be declined, the insolvency practitioner may terminate his appointment only after seeking leave of court.
Potential legal effects of guidelines
At present, the guidelines have neither been adopted in legislation, nor do they form part of the Rules of Court or the Practice Directions.
However, the learned Justice Chong has indicated that he will be recommending to the Chief Justice that these guidelines should be referred to the Rules Committee for further study and, if thought fit, implementation through incorporation in the Practice Directions or the Rules of Court.
It should be noted that in drafting this portion of his judgment, the learned Justice Chong invited comments from the parties, as well as input from the Insolvency Practitioners Association of Singapore, which represents the interest of insolvency professionals.
It is therefore likely that the guidelines will be formally instituted in due course, and the courts will in the interim adopt the guidelines set out by the learned Justice Chong.
Insolvency practitioners should therefore take note of and consider adhering to these guidelines for all court-sanctioned appointments going forward.
For further information, please contact:
Tham Wei Chern, Partner, Duane Morris & Selvam
wctham@selvam.com.sg
