HONG KONG SOCIETY OF ACCOUNTANTS SUPPLEMENTARY PAPER TO THE HIGH COURT REGISTRY ON OFFICE HOLDERS REMUNERATION 1. Introduction 1.1 This document is a response by the Insolvency Practitioners Committee of the Hong Kong Society of Accountants ( HKSA ) to issues raised by the High Court Registry ( HCR ) at a meeting between representatives of the IPC, the Official Receiver s Office ( ORO ) and the HCR held on 1 August 2003. It also addresses other matters arising in the context of remuneration claims. The HKSA s response to the final draft of the Procedural Guides for Taxation / Determination of Bills will be issued under separate cover. 1.2 Concerns have been expressed by the Court in relation to the use of time costs as a basis for calculating remuneration. Nonetheless, it remains the case that no practical alternatives have been suggested in Hong Kong or, to our knowledge, elsewhere, including by the Ferris Committee 1 which spent a number of years reviewing the issue of office holders remuneration in the United Kingdom ( UK ) after the Maxwell case 2 brought the issue to the fore. 1.3 We hope that the dialogue to date has made it clear that office holders (in this paper the term office holders refers to liquidators and provisional liquidators) are mindful of their role as a trustee of the company s funds on behalf of creditors (and others) following the judgements of Le Pichon J. in the Peregrine case. To address the issues raised in those judgements, office holders have been proactive in improving transparency and accountability (e.g. in the context of providing supporting documents for fee notes) and remain willing to engage in a dialogue with the Court to better understand and address the Court s concerns. 1.4 However, we believe that certain of the issues now being raised are as a consequence of the Court not fully understanding how accounting practices in general, and insolvency practices in particular, are structured or how they operate on a day-to-day basis. In this paper, and in previous submissions to the Court on this issue, we have endeavoured to put forward practical proposals based on our day-to-day experience as liquidators or provisional liquidators in Hong Kong and other jurisdictions. 1.5 An issue of particular concern to insolvency practitioners at present is the delays and uncertainties presently inherent in the taxation process. We understand that this situation has on occasions made it difficult for practitioners to obtain advice from overseas law firms on issues involving foreign laws. 1.6 It is respectfully suggested that, having identified the issues and exchanged views, the process of developing and finalising guidelines and practice would benefit from discussion by a Hong Kong equivalent of the Ferris Committee, comprising representatives of the Court (including the judiciary), the ORO and the accounting and legal professions. 1 Mr. Justice Ferris Working Party on the remuneration of officeholders and certain related matters, which reported in May 1999 2 Mirror Group Newspapers plc v Maxwell [1998] BCC 324. It is worth noting that the costs in this case were required to be taxed. The result was that the taxing master imposed a reduction of less than 5% on the amounts claimed by the office holder and his solicitors. 1
2. Issues and Background 2.1 In this follow-up paper, we deal with the issues below, which we consider need to be addressed in the context of this dialogue: - Secretarial time - Travelling time - Internal meetings - Charge-out rates - Translation costs - Benchmark for charge-out rates 2.2 Historically, where there is no Committee of Inspection or no resolution has been passed at the meeting of creditors, the fees of office holders have been fixed by the Court. In most cases, the order of appointment provides for the fees to be calculated by reference to the rates agreed between the HKSA and the ORO. In other cases they are to be calculated by reference to the internal rates of the firm of the office holder. 2.3 In the 1 August 2003 meeting, the HCR referred to a survey of a number of firms of solicitors in Hong Kong undertaken in the mid-1990s. The survey resulted in an agreement between the Law Society and the judiciary on a series of standard charges for standard tasks for the purpose of taxation. Arising from the survey, law firms do not now charge separately for work done by secretaries, instead this cost is incorporated in solicitors firms overheads recovered through the charge-out rates of other grades of staff. Accounting firms in general, and office holders in particular, were not covered by this survey. If accounting firms, or at least those which undertake insolvency work, had been included, given their different grading structure and their different charging out rates, it is likely that the results of the survey and the outcome of the negotiations with the Court would have been different. 3. Structure of Accounting Firms 3.1 The structure and allocation of resources in an accounting firm are fundamentally different from a law firm. Accountancy firms have a different staff and grading structure. In a law firm, the vast majority of chargeable work is undertaken by partners and other qualified members of staff. There is accordingly a very flat hierarchy in terms of grades of staff and of charge-out rates. 3.2 In accounting firms generally, and insolvency firms in particular, a much greater proportion of the number of hours on an assignment will invariably be undertaken by staff of lower grades, and therefore at lower charge-out rates, than is the case with a law firm. Accounting firms are organised on more of a pyramid-type structure than law firms, in which most of the work is conducted by qualified solicitors. Consequently, it is likely that the time spent by an office holder on any particular case in an accounting firm will be no more than a small proportion of the total time and the average hourly charge-out rate for a firm undertaking liquidation work will, in most if not all cases, be lower than that for a law firm. 3.3 Therefore, while we note the HCR s references to the above-mentioned survey, we believe that the objective of the survey was to assess the position of law firms and that it was not intended that the results of the survey should be applied to other types of firms, in particular accounting firms. However, it would appear that the Court may now be suggesting that such an approach be adopted. 2
4. How Accounting Firms Operate 4.1 Some firms of accountants charge directly for the time spent by secretaries and some do not. However, if a firm does not charge out its secretaries, the cost of the secretary is recovered through a higher charge-out rate for other grades of staff. If a secretarial time is treated as an overhead, it will mean that the charge-out rates of other grades of staff will necessarily be higher than they will otherwise be if secretarial time is treated as being chargeable and recoverable. 4.2 In fact, the term "secretary" may be misleading in this context. In an insolvency practice, the term is more likely to refer to a person who undertakes typing duties, photocopying etc., for a group of people involved on a particular series of insolvency assignments. Accordingly, the work is not that of, for example, a personal secretary to a partner, but relates substantially to undertaking work that arises solely from the appointment of an office holder to a particular company. The nature of this work and the time charged is then detailed in the office holder s time sheets, which are made available to the Court. 4.3 Practitioners inform us that the practice of accounting firms charging for secretarial time, when they do so, is similar to the situation in the UK and Australia, where it has been accepted by the Courts of those jurisdictions. In contrast, in both jurisdictions, as in Hong Kong, law firms do not charge for secretarial time. 5. Secretarial Time 5.1 Office holders are conscious of the need to work in as efficient a manner as possible and to ensure that work undertaken on an assignment is done by the most appropriate grade of staff. In this context, some office holders have traditionally charged out secretarial staff as a separate grade who record time contemporaneously and whose time is reported, along with that of other staff, on remuneration applications. This practice is reflected in the charge-out rates of other grades of staff. 5.2 The rates charged for secretaries are invariably the lowest rates in any firm. Accordingly, charging out work undertaken by secretaries at those lower rates would tend to give a more accurate, and therefore fairer, allocation of costs than would including secretarial costs as an overhead. 5.3 It should be noted that the practice of the charging in respect of secretarial grade staff was accepted in the context of the Panel A scheme when it was first introduced in 1996 by the ORO, with the agreement of the HKSA. If going forward the Court wishes to change this practice to one which reflects the current position of solicitors, then office holders and their firms should be prepared to accommodate this. However, we would object to this being introduced retrospectively and, where firms are currently charging secretarial time, they should be afforded the opportunity to propose changes in their rates to reflect any increases in their overheads. Furthermore, it would still be necessary to resolve what should and should not be regarded as secretarial work whoever does it. This is because at present, secretaries do far more on insolvency assignments than traditional secretarial work. 3
6. Travelling 6.1 The current position in accounting firms regarding time spent travelling wholly and exclusively (and during or straddling office hours) in relation to an appointment is that it is recoverable in full. The most recent correspondence from the Court appears to indicate that travelling time per se is not recoverable, even though it may have been specifically incurred in relation to a particular assignment. However, office holders cannot conduct their business solely from their offices. Their responsibilities as office holders compel them to visit company and other premises to undertake their functions as liquidators. We question, therefore, whether such an approach is equitable, particularly if this approach is being introduced with retrospective effect. 6.2 Office holders and/or their staff have to visit company and other premises, which could be anywhere in Hong Kong, or, increasingly, also in the Mainland. Company accounting records need to be collated and boxed up for storage, often at the company s premises. Particularly during the early days of an appointment, office holders and their staff may need to make frequent visits to the company s premises. It is difficult to understand the rationale behind the Court s view that such time should not be recoverable, given that it would seem to be an integral part of the office holders appointment and, in most cases, it means that other work cannot be undertaken. Our position is that if it can be shown that the travelling time was wholly and exclusively incurred as a result of the appointment it should in principle be recoverable. 6.3 Overseas travel generally 6.3.1 To the extent that someone is travelling overseas specifically for the purposes of working on a particular assignment, we consider that, in principle, travelling time should be chargeable, on the basis that, inter alia, if that journey were not being undertaken the person concerned would be able to work on, and charge time, to other assignments at his office. 6.3.2 However, we also accept it would generally not be justified for the whole of the travelling time incurred on an overnight journey to the United States, for example, to be charged to the job. We consider that it is not practicable to create any hard and fast rules as to the amount of time which should be chargeable, but the starting point may be to agree that the maximum amount of time which can be charged is one working day (i.e. 8 hours), with a deduction for any time spent on alternative assignments. 6.4 Regional travel 6.4.1 Office holders in Hong Kong frequently make journeys to the south of the Mainland for the specific purpose of dealing with the affairs of companies in respect of which they have been appointed. We consider that the time spent on such journeys should be fully recoverable. 6.4.2 In respect of all other work undertaken in the Mainland we believe that all travelling time should be recoverable. 6.5 Local travel 6.5.1 Within Hong Kong, we believe travelling time falls into two categories. 4
6.5.2 Travelling from home to work on an assignment away from the normal place of work should not be chargeable as travelling time. Similarly, travel home from somewhere other than the normal place of work should not be charged as travelling time. A possible exception to this is when the location of the assignment is a considerable distance away, e.g. distant parts of the New Territories or other areas well away from the office holder s normal place of work. 6.5.3 If however, a person travels from the office to a meeting e.g., with solicitors during normal office hours, the time spent on the journey and on the return journey to the office should be chargeable and recoverable. 7. Internal meetings 7.1 Office holders work on cases that are, of necessity, undertaken by a team comprising different grades of staff at different charge-out rates. In this respect they are different from solicitors who usually work for individual clients. The result of a team working on cases and charging rates which are applicable to their experience and skill is that in effect a blended charge-out rate is achieved, which is lower than if all the work were done by the office holder. 7.2 It is also important to define what constitutes a chargeable internal meeting, as we believe the phrase internal meeting is capable of different interpretations. 7.3 Generally, the purpose of the internal meetings to which we refer is to assist in the dissemination of relevant information both upwards and downwards and to facilitate efficient and effective case management, ultimately for the benefit of creditors. 7.4 Such meetings would be better described as "case management meetings" rather than "internal meetings", to make clear that they are case-specific (rather than being of a general nature). 7.5 Where an internal meeting takes place between two or more members of staff of the same firm working on the same assignment, we believe that such a meeting should be chargeable, provided that it can be seen to add value. The result of an office holder passing some of the work down to lower level staff, while still retaining control, is that, overall, a lower blended charge-out rate is achieved. These meetings do not deal with the administration of the firm but are usually intended for one member of staff, often the more senior, to give instructions to other members of staff or to receive updates in respect of ongoing areas of work. Senior staff can also, for example, suggest further areas of investigation or additional asset realisation possibilities based on their greater experience. Meetings also may be for the more junior members of staff to report back to the senior member of staff and/or to respond to queries raised by him/her. 7.6 The alternative to such meetings would be for written notes, which rarely communicate as much as face to face meetings, to be prepared and distributed, or for the liquidator to do everything himself. Both options are significantly less efficient. 7.7 We are strongly of the view that internal case management meetings are essential and valuable in the administration of almost all liquidations. As indicated above, they are also useful in that they often allow the office holder or more senior staff to further add value by ensuring that all aspects of an assignment are fully addressed in a cost effective manner. In 5
our experience, meetings are a far more efficient means of communication than memoranda and emails. We believe the Court would not object to office holders charging for necessary memoranda and emails. On that basis, we believe the Court should accept that office holders and their staff should be able to charge for reasonable time spent on case management meetings. 8. Charge-out Rates 8.1 Previously, the Court made orders for the appointment of liquidators and provisional liquidators where either the office holders actual charge-out rates were agreed, or it was ordered that the rates agreed between the HKSA and the ORO should apply. We note that the Court wishes to change the basis on which remuneration is calculated in cases where there is no Committee of Inspection or where no resolution relating to remuneration has been passed at the meeting of creditors. However, concern has been expressed by the profession that the Court is seeking to impose a new set of criteria for assessing office holders remuneration claims without a full appreciation of all the circumstances surrounding such claims and the key differences between the legal profession and the accounting profession. 8.2 At the 1 August 2003 meeting, the HCR indicated that it was unwilling to allow any charge-out rates in excess of HK$4,000 per hour. We believe that the basis for this ceiling may be the schedule of charge-out rates that has been applied to solicitors' party and party taxations from July 1997 to date. HK$4,000 per hour is the maximum rate allowable for a solicitor of at least 10 years qualification in relation to High Court work. 8.3 Where an order has been made for an office holder s remuneration to be paid on the basis of the rates previously agreed between the HKSA and the ORO that should not be changed. This should also be the case where a firm s internal charge-out rates are specified in the order. It will be appreciated that the taxation of office holders fees does not relate to adversarial proceedings and the fees are not based on an adversarial process. It is submitted that if office holders can show that time was properly incurred, wholly, necessarily and exclusively as a result of a particular appointment, they should be entitled to be remunerated using time spent as a basis. 8.4 Against this background, we would like to elaborate upon our concerns. As suggested above, it appears as if the Court may be reviewing office holders claims for remuneration by reference to rates that have been agreed between the legal profession and the Court in respect of litigation and other adversarial proceedings. If so, the rationale for adopting such an approach is unclear and we would suggest that this is not an appropriate benchmark for the determination of office holders fees. It is our understanding that party and party taxations are intended to determine the legal costs that a successful party can recover from an unsuccessful party in litigation. However, any limitation imposed upon the costs recoverable in party and party taxations does not reduce the costs that the successful party is obliged to pay to its solicitors for work reasonably undertaken by them. We understand that, typically, the taxed costs recovered by a successful party are no more than 70 per cent of the costs payable by that party to its solicitors (the discount being partly due to disallowed time and partly due to restrictions on rates). However, those instructing the solicitors will still be expected to pay the remainder of the costs, such that the solicitor s fees will be paid in full. 6
8.5 The application of party and party rates to office holders' fees, on the other hand, would reduce the amounts that office holders can recover absolutely because they have no other source of payment. 8.6 We believe it is also relevant to take account of the following factors, which distinguish accountants from solicitors. 8.7 The role of the senior accountant, usually the partner, is quite different to that of a solicitor. He has bears greater risks than a solicitor in that, as liquidator, he may incur personal liability and it is often the case that, in the absence of sufficient assets, he may not receive payment. In other words, office holders do not have a guarantee of payment of their time costs and, particularly at the initial stages of a liquidation, they may be risking their own funds for the benefit of creditors. In contrast, a solicitor acting for an office holder will be paid by the office holder, and if there are insufficient assets in the estate, the office holder will still be liable to pay the solicitor for work reasonably undertaken for the company in liquidation. 8.8 Office holders are required by statute to undertake a significant amount of work even when there is considerable doubt as to whether or not there will be sufficient assets to meet even their out-of-pocket expenses, let alone their remuneration. Even if, following his appointment, an office holder concludes that there are insufficient assets to meet his costs, he still has to undertake his statutory duties. He cannot simply cease acting. 8.9 Even where there are sufficient assets, office holders often have to wait for between 9 months and 2 years before receiving payment. 9. Other Issues 9.1 In addition to the above, we consider that there are other issues that should be addressed as part of this dialogue and we welcome the HCR s views on these matters. 10. Translation Costs 10.1 More and more liquidation assignments involve assets situated in the Mainland or other jurisdictions in Asia. Consequently, there is often a necessity to translate documents. We would suggest that the costs of translating documents should be chargeable at HK$590 per hour, as recently suggested by the Master Kwang, except where the translation is undertaken externally, when it should be charged as a cost of the administration. 11. Benchmark for Charge-out Rates 11.1 At the 1 August 2003 meeting, the HCR acknowledged the benefits of having some form of benchmark for fees in the absence of the existing Panel A rates. The HKSA, in conjunction with the Insolvency Practitioners Committee is presently reviewing this issue and will revert to the Court in due course. 1 March 2004 7