Kao Chai-Chau Linda v Fong Wai Lyn Carolyn and others [2015] SGHC 260

INTRODUCTION

This case concerns the quantum of professional fees reflected in a bill of costs issued by the receivers and managers ("R&Ms") of Airtrust (Singapore) Pte Ltd ("Airtrust").

Having previously succeeded in objecting to three bills of costs presented to the High Court for approval by the R&Ms, and convincing the High Court to reduce the amounts charged by the R&Ms by between 38% and 42% in each instance, Jimmy Yim, SC, Erroll Ian Joseph, Daniel Soo, Mahesh Rai and Andrew Lee from Drew & Napier LLC (together with solicitors for other parties) launched another attack against this latest bill of costs presented to the High Court for approval.

In this case, the High Court was asked to determine if the quantum of professional fees charged by the receivers and managers of a company which had been placed into voluntary receivership was fair, reasonable and proportionate.

In coming to its decision, the High Court adopted the two-stage test set out by Finkelstein J in Re Stockford Ltd (subject to deed of company arrangement); Korda and Another (as joint and several deed administrators) (2004) ACSR 279.

Having considered that there was some degree of over-servicing, duplication and inefficient performance of work, and the wrongful inclusion of time charges for work done by a particular administrative staff, the High Court reduced the quantum of professional fees sought by 40% to $1.8m, but allowed the disbursements of $30,000 as charged.

Against the backdrop of several recent instances of court disputes over professional fees charged by insolvency practitioners, Justice Steven Chong proposed a new system of costs scheduling whereby insolvency practitioners submit their projected job scope and fee estimate, when they are appointed, to the Court for approval.

Pending the formal institution of such a system, Justice Chong suggested that members of the insolvency Bar should adopt the practice of submitting a costs schedule in the interim.

BACKGROUND

Airtrust was placed into voluntary receivership pending a negotiated settlement of the outstanding legal suits that it was involved in. Airtrust's receivers and managers were entrusted to manage and carry on Airtrust's business in place of its Board of Directors until further order by the Courts.

Between June 2012 and September 2013, the R&Ms filed several summonses seeking approval for their bills of costs. The High Court applied discounts of between 38% to 42% on the initial sums proposed by the R&Ms for the professional fees charged.

In August 2014, the R&Ms wrote to Airtrust, its managing director, two of its directors, and a minority shareholder (collectively, the "Respondents") to inform them that professional fees and disbursements in the sum of $3.1m had been incurred for work done between 1 January 2013 and 31 December 2013.

The R&Ms offered a discount of 30% on professional fees, bringing the final figure to $2.18m and proposed that this revised figure be presented to court for approval by agreement.

The Respondents did not agree.

The R&Ms filed an application in court to seek approval for the initial sum of $3.1m.

Jimmy Yim, SC, Erroll Ian Joseph, Daniel Soo, Mahesh Rai and Andrew Lee from Drew & Napier LLC, as well as solicitors for the other parties, replied separately to the R&M's application, taking issue both with the quantum of the fees and with the level of detail provided in support of the fees claimed.

HIGH COURT'S DECISION

After hearing the arguments presented by the parties, and after examining the facts of this case, the High Court reduced the quantum of professional fees sought by 40% to $1.8m but allowed the disbursements of $30,000 as charged.

A claim for disbursements is a claim to be reimbursed for expenses reasonably incurred in the performance of a stipulated task. As long as these disbursements were reasonably incurred, there was no reason why the R&Ms should not be reimbursed in full.

The High Court found on the evidence that there had been some degree of over-servicing. The retrieval and identification of documents could have been performed by administrative staff with the supervision of an associate instead of associates commanding substantial hourly rates.

The High Court also found that there was duplication of work, in that the R&Ms did not need to devote their resources to litigation as lawyers had been instructed and were capable of managing the cases.

The High Court took the view that work was performed inefficiently. Matters relating to discovery should have been performed by the lawyers, and not by their accountants.

The High Court also denied a claim of 189 hours of work at $250/hour submitted by an administrative staff of the R&Ms.

The High Court held that insolvency practitioners should not be allowed to include time charges for work done by administrative staff in their bills as these should be treated as part of the insolvency practitioners' overheads and cannot be the subject matter of a separate claim unless it is an exceptional case.

There was no evidence, in this case, to show that this was an exceptional case.

Purpose of curial receivership

As the main purpose of receivership is the interim preservation of disputed property pending its final resolution in the main action, the fundamental obligation of receivers is a duty to account.

The burden of proof falls on the receiver to justify the quantum of his fees. The receiver must provide full particulars (supported by proper records) to justify his entitlement to be paid the sum sought, and this involves explaining:

(a) what was done;

(b) why it had to be done; and

(c) why it had to be done in the manner as employed.

Any element of doubt as to the propriety of remuneration would be resolved by the Courts against the receivers.

Remuneration must be "proper"

Remuneration is a fair reward of "value" (which cannot be construed only in monetary terms), not an indemnity against cost.

The fact that the receivers have performed work that benefits the company is not a sufficient basis if the work done is outside the remit of the receivership.

However, in assessing whether a particular act ought to have been performed, the courts ought to take a practical approach. In the heat of urgent decision-making, insolvency practitioners may make decisions which may, in retrospect, prove to be unnecessary or ineffective. They should not be penalised for such decisions.

In assessing whether the sum claimed is fair, reasonable and proportionate, a good starting point would be the list of factors found at rule 69.7 of the English Civil Procedure Rules 1998, which the English Courts are required to take into account when determining an appropriate quantum of remuneration.

These factors include:

(a) the time properly given by the receiver and his staff to the receivership;

(b) the complexity of the receivership;

(c) any responsibility of an exceptional kind or degree which falls on the receiver in consequence of the receivership;

(d) the effectiveness with which the receiver appears to be carrying out, or to have carried out, his duties; and

(e) the value and nature of the subject matter of the receivership.

The role of the reviewing court is not to scrutinise the minutiae of the bill, but to determine if there are material flaws in the methodology of its preparation or any incorrect premises which have been adopted.

In determining the appropriate quantum to be awarded, our High Court adopted the two-stage approach set out by Finkelstein J in Re Stockford Ltd (subject to deed of company arrangement); Korda and Another (as joint and several deed administrators) (2004) ACSR 279, taking into account all relevant information that have been presented by the parties and requesting for further information (if need be).

Under this two-stage test:

(a) the Court has to first arrive at a working figure (usually calculated on a time cost basis) after making necessary adjustments to account for its assessment of whether hourly rates levied are reasonable (having regard to such information it may have on the standard industry rates or with reference to previous rates levied by the same professionals) and after determining whether the hours claimed for were reasonably spent;

(b) then consider if any quantifiable adjustments can be made (eg where specific quantified heads of claim are disallowed) before adjusting this provisional figure by applying a percentage reduction to reflect the Court's assessment of what a fair and reasonable sum ought to be.

While our Courts have the power to appoint an assessor under s10A(1) of the Supreme Court of Judicature Act, one must be mindful that the appointment of an assessor would necessarily entail another layer of costs and the decision to appoint an assessor must always be balanced against the costs which will be incurred.

Proposed system of costs scheduling for insolvency practitioners

Justice Steven Chong was of the view that the several recent instances of court disputes over professional fees charged by insolvency practitioners could have been avoided had the insolvency practitioners known exactly what was expected of them when they took up their assignments.

Justice Chong felt that it would be helpful if insolvency practitioners know exactly what matters are within their remit and what falls outside; the size of the team they ought to put on the assignment; what matters should be left to the lawyers and what matters they should take charge of.

Justice Chong took the view that the establishment of a more stable and predictable remuneration regime for insolvency practitioners is a matter of public interest and (after considering the experience of England and Wales, and New Zealand in costs scheduling) proposed a new system of costs scheduling whereby insolvency practitioners submit their projected job scope and fee estimate, when they are appointed, to the Court for approval.

Justice Chong believed that such a system of costs scheduling would instil a sense of costawareness into insolvency practice. There would be more transparency and fairness.

Justice Chong suggested that a cost schedule should contain the following matters:

(a) details of the work that is likely to be undertaken;

(b) the anticipated time that each category of work will take;

(c) the anticipated size of the team, with brief descriptions of the seniority of each team member and their areas of responsibility;

(d) the proposed basis of remuneration, together with reasons why it is thought that this is the most suitable method for the calculation of remuneration in this case;

(e) the hourly rate(s) that the insolvency practitioners propose to charge (if timebased costing is employed) and, if available, the rates which were charged and approved for similar appointments in the past;

(f) a fee estimate for the relevant period of assessment;

(g) a list of anticipated disbursements and the costs that will be incurred in respect of them;

(h) the sum of fees which 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

(i) whether any other professional (eg lawyers) has also been engaged by the company and the proposed division of responsibility between the insolvency practitioner and such other professional(s).

Justice Chong envisioned this system of costs scheduling to apply to all classes of insolvency practitioners who owe their offices to curial appointment and whose fees are subject to curial approval (eg provisional liquidators, liquidators, judicial managers, and receivers and managers) in instances where fees are expected to exceed $200,000.

The touchstone to be applied is whether the Singapore Courts have primary jurisdiction over the appointment and remuneration of the insolvency practitioner.

Justice Chong considered it reasonable to expect a costs schedule to be submitted to the Courts within a month of the appointment of the insolvency practitioner.

Once the costs schedule has been approved by the Court, the sums approved can be drawn down without further approval of the Court under the "periodic payment" model which currently exists in New Zealand in respect of payments made to court-appointed liquidators who seek to be remunerated according to the statutory rate.

Under this approach, the costs schedule is treated as an order nisi (ie the payments made out are provisional and not final). The insolvency practitioner is entitled to interim payments on account provided the total sum claimed under these periodic payments falls under the preapproved cap and adheres to the conditions set out in the costs schedule. If the total sum paid out exceeds the global sum fixed by the Court for the engagement, the insolvency practitioner may be obliged to refund the difference.

If it becomes clear that the sum of remuneration claimed will exceed the pre-approved sum by 15%, the insolvency practitioner would be expected to apply to the Court for an increase. The insolvency practitioner will need to explain:

(a) why he has exceeded, or is likely to exceed, the previous estimate;

(b) the additional work he intends to undertake, the time taken or expected to be taken for the additional work; and

(c) the person(s) who will be assigned to the task and their rates.

Justice Chong indicated that he would be recommending to the Chief Justice to refer this proposed system of costs scheduling to the Rules Committee for further study, and if thought fit, implementation. Pending the formal institution of such a system, Justice Chong suggested that members of the insolvency Bar should adopt the practice of submitting a costs schedule in the interim.

COMMENTS

This is yet another instance of the courts controlling the costs involved in the engagement of receivers and insolvency professionals.

The courts have cautioned against approaching receivership or insolvency as an "open goalpost" for the insolvency practitioners and this decision lays down concrete guidelines on the courts' approach towards scrutinizing of costs.

Notably, in arriving at his decision, Justice Chong considered submissions not just from the parties but also from the Insolvency Practitioners Association of Singapore, representing the interests of insolvency practitioners.

Whilst Justice Chong's guidelines have not been laid down in legislation, it is anticipated that these guidelines will be formally crystallised into legislation or practice directions in time.

In the meantime, insolvency practitioners would do well to follow Justice Chong's guidelines.

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