MV insovency case update

In the short space of two months, an esteemed Judge of a superior court has delivered three smacks to liquidators and their advisers for fees and costs that practically leave the creditors with nothing.

In short, just because fees and costs are incurred, including on a time basis, does not mean they are necessarily so as far as creditor and court approval goes.

Here are the highlights from each case.

Case No. 1: AAA Financial Intelligence Ltd (in liquidation) (No. 2) [2014] NSWSC 1270 – 17 September 2014

Justice Brereton considered a claim by two liquidators for approval of their remuneration and disbursements in circumstances where practically all of the funds collected by the liquidators would be applied to the remuneration and disbursements.

In the first instance, his Honour lined up the liquidators’ legal costs and cited with approval the observations of Justice Finklestein in Re Stockford Ltd; Korda [2004] FCA 1682 that an insolvency practitioner stands in a fiduciary relationship with creditors and must act with the same care as a prudent businessman would act in his own affairs at his own cost and risk. That care was said to include shopping around to obtain the best legal service at the best rate, and closely monitoring the fees as incurred.

After considering the work undertaken and fees charged by the liquidators’ lawyers, and in the light of the total funds recovered by the liquidators, Justice Brereton approved just 55% of the legal fees sought.

Next his Honour turned to the liquidators’ remuneration. Among other things, the liquidators had sought to recover outstanding debts of around $350,000 owing to AAA Financial Intelligence, but ultimately only recovered around $16,000 for a variety of reasons, including the fact that the largest debtor was actually bankrupt. In observing that only around half of the trust funds (which was around a third of the total funds) would be available to the beneficiaries, Justice Brereton said ‘one cannot escape the impression that the predominant beneficiaries of the liquidation … would be the liquidators.’ His Honour got straight to the point and said:

It must be born in mind that the fundamental rationale of a liquidation is to get in and realise the assets of the company, establish who are the creditors and contributories, and distribute the assets for the benefit of the creditors and, to the extent of any surplus, the contributories… Where the sole or dominant beneficiary of a liquidation is not the creditors but the liquidator, that fundamental purpose has not been achieved.

His Honour went on to note the shortcomings of time-based costing as the basis for a liquidator’s remuneration,and said that:

…reasonable remuneration cannot be assessed solely by the application of the liquidator’s quoted standard hourly rates to the time reasonably spent… It does not reward liquidators for value, but indemnifies them against costs. It disregards considerations of proportionality.

Proportionality in this case was the key, and Justice Brereton ultimately approved an amount of remuneration in proportion with the amount of assets realised by liquidators – in this case $36,000 being 20% of realised assets.

Case No. 2: On Q Group Ltd (in liquidation) (subject to DOCA) [2014] NSWSC 1428 – 17 October 2014

This case considered the liquidators’ request for approval of remuneration and disbursements incurred during the liquidation of a publicly listed company. In this large liquidation, the liquidators had recovered around $726,000 and incurred around $740,000 in remuneration and disbursements without scrutiny. To say that Justice Brereton was unimpressed is putting it mildly. He said:[3]

Thus the practical effect of the liquidation has been to recover in excess of $725,000 of assets and transfer it to the liquidators, their agents and advisors, with no benefit at all to those for whose benefit the liquidation is supposed to be conducted. I find this profoundly disturbing.

His Honour’s ire was further raised when reflecting how the creditor approval for remuneration and disbursements was obtained — only the liquidators with proxies were present at the meetings of creditors and the motions approving the liquidators’ remuneration and disbursements were carried on their votes – ‘insofar as this was an exercise in corporate democracy, the meeting approached a solemn farce’.

Ultimately Justice Brereton had to decide whether to terminate the winding up so that a deed of company arrangement could come into play and, in disallowing that application, his Honour saved his final kick for the incoming administrator and his report recommending the DOCA. His Honour said:

  • the explanation to creditors of the effect of the DoCA was inadequate, and did not convey the illusory nature of the apparent benefit to ordinary unsecured creditors;
  • the position of at least the priority creditors might be enhanced by a review of the liquidators’remuneration; and
  • there seemed a real possibility that a review of the liquidators’ remuneration could result in all priority creditors receiving a 100c dividend.

Case No. 3: Hellion Protection Pty Ltd (in liquidation) [2014] NSWSC 1299 – 17 October 2014

In contrast to On Q Group Ltd, this case considered an application by a liquidator to have his remuneration approved from $25,000 to $47,399 in a small creditors’-voluntary liquidation. However, like On Q Group Ltd, this amount of remuneration would leave nothing for distribution to ordinary unsecured creditors. In this case,the liquidator had collected $30,000 from settling an unfair preference claim against the Commissioner of Taxation for around $112,000.

The liquidator’s remuneration was costed on a time basis, and Justice Brereton said that ‘liquidators cannot be expected to be remunerated at the same hourly rate for small liquidations as for large liquidations’. His Honour went back to a proportionality approach and determined what the liquidator’s remuneration would be as a proportion of assets realised.

In calculating that the liquidator’s remuneration should have been no more than $20,000, Justice Brereton dismissed the application to approve remuneration greater than $25,000.

The message

Along with the earlier case of Hall v Poolman [2009] NSWCA 64, there are four clear authorities to encourage insolvency practitioners and their advisers to consider other ways of costing their work when time-based costs will consume all or the majority of funds otherwise available for creditors. But this does not mean that time-based charging cannot be used. Rather, on any appointment, an insolvency practitioner must ensure that proper consideration is given to the basis for charging and if it is to be on a time basis, why that method was preferred over other methods.

Furthermore, the benefits of full and frank disclosure to creditors about what work is being undertaken by the insolvency practitioner, for what purpose and for what cost cannot be underestimated. Nor can the benefit of ongoing cost-benefit analysis of recovery work so that it is quickly apparent when a course of action will not be fruitful. A prudent insolvency practitioner will remember the rationale of a liquidation and, in our experience, creditor engagement is key to that.

Finally, section 15.2 of the ARITA Code requires insolvency practitioners to disclose how they propose to charge for their services and to “fully explain to creditors” their reasons for selecting that particular basis. Justice Brereton’s decisions highlight the importance of considering the size of the liquidation, the work and fees involved and what amount of remuneration, in all the circumstances, is reasonable to put for creditor approval.

For more information contact:

Greg Brackenreg — Partner — Dispute Resolution Team
(02) 6279 4409

Mark Flint — Partner — Dispute Resolution Team
(02) 6279 4428

Bernice Ellis — Senior Associate — Dispute Resolution Team
(02) 6279 4385