Re Vonic (Ontario Superior Court of Justice File No. 32-1983170)

June 22, 2022

What factors are relevant to the approval of a proposal trustee’s fees in the absence of time dockets?

The trustee applied for taxation of its Statement of Receipts and Disbursements for fees of $9,973.46 plus HST. The taxation raised the issue as to how a trustee is obliged to establish its entitlement to fees where there are no time dockets kept or otherwise available to support the trustee’s claim for fees. In this case, the trustee relied exclusively on the terms of the proposal, which contained a methodology for calculating the fees to be taken by the trustee in administering the proposal.

The fixed fee formula was developed by the trustee approximately 10 years ago to provide debtors and creditors with more certainty as to the costs of administration for the Division I proposal. The formula enabled the trustee to keep up-front costs relatively low to facilitate earlier payment of dividends to creditors. Proposals with the fixed fee formula had been previously approved by the court and, therefore, the trustee did not keep time dockets.

Section 39(5) of the Bankruptcy and Insolvency Act provides the jurisdiction and discretion to increase or reduce the remuneration claimed by a trustee, and stands for the proposition that the court will not “rubber stamp” the fees claimed by the trustee merely because the fees were set forth in a proposal. The onus is on the trustee to satisfy the court that the amount claimed for remuneration is justified.

In calculating the fee for time spent, the rate charged by the trustee should be reasonable and in line with charges by other trustees in the jurisdiction in similar estates. Rates for purely routine matters will be less than those for complex protracted negotiations. Routine work should be delegated to employees with reduced hourly rates. Trustees who prefer not to delegate routine work should reduce their hourly rate to that of employees who would normally perform such routine tasks.

A trustee is expected to exercise judgment, restraint and common sense in making claims for fees; it cannot expect the court to accept overly generous charges that exhaust the estate and leave little for creditors. The court must therefore exercise some judgment as to the overall costs and gains to the estate of the trustee’s administration and may decide that, as a matter of judgment, a fee otherwise justifiable should be reduced, but this discretion must be exercised judicially and with care, especially if the fee is approved by the creditors or inspectors.

A lack of time dockets is not fatal to the approval of fees as claimed by a trustee, but it does place the court in a position where there is no corroborative evidence as to the time and effort spent in the administration of the proposal. In this case, there was no ability for the court to discern the amount of time and effort that was required to administer the estate. It was not fair and reasonable to compensate the trustee for work that was not done or not needed. The proposal was completed in 3 years, approximately half of the anticipated time that the proposal was to be performed.

The Court also questioned whether the trustee should have moved for an order annulling the proposal, which would have the effect of the debtor being deemed to have made an assignment in bankruptcy. Had this step been taken, the creditors would likely have been paid in full or would have received an improved dividend. The debtor’s real property, valued at $300,000 when sold in May/June 2018, was subject to a mortgage in the amount of $165,000 at the date of the filing of the proposal. The debtor’s equity in the property (in the range of $100,000 to $135,000) would have been more than sufficient to pay the creditors, proven at $46,988.72.

The debtor had limited income on account of a medical condition and receipt of CPP and disability pension. The net benefit of a Division I proposal over that of a consumer proposal was not entirely clear. The trustee claimed that the debtor needed one additional year to make payments that were viable. One year of such payments ($6,300) were off set by legal fees ($1,722.50) and the additional fees above the consumer proposal tariff ($1,247.95). Consequently, the net benefit of a Division 1 proposal was $3,329.55, with a one year delay in completion. It was not a foregone conclusion that a Division I proposal was more beneficial to the debtor or the creditors, given the increased costs and delay in distribution. Creditors would have been better served had the trustee annulled the proposal and placed the debtor in bankruptcy. The creditors could have been paid in full.

The Court rejected the trustee’s argument that the court’s jurisdiction to approve the SRD and the fees to be claimed by the trustee was supplanted by the approval of the creditors and the OSB that the trustee’s fees be fixed by a formula. Creditor and OSB approval are factors relevant on a taxation, but their approval is not dispositive. Similarly, the Court rejected the argument that its jurisdiction to approve the SRD and the trustee’s fees was ousted by the court’s approval of the proposal. The court’s approval of a proposal is aimed at assessing whether the terms of the proposal are reasonable and calculated to benefit the general body of creditors. The quantum of the trustee’s fees is not an issue specifically addressed on an application for court approval of a Division I proposal.

Given the above, the Court declined to fix fees on the basis of the formula contained in the Division I proposal. The more complex administration of a Division I proposal and the costs associated with the same were not warranted and were only slightly more beneficial to the creditors. The Court also declined the legal fees incurred to obtain court approval and to register the mortgage security, as these fees and steps would not have been required or be permitted disbursements in a consumer proposal.

Judge:  Associate Justice Jean

By Matilda Lici