On 9 March 2017 the NSW Court of Appeal handed down its decision in Sanderson as Liquidator of Sakr Nominees Pty Ltd (in liquidation) v Sakr [2017] NSWCA 38, unanimously allowing the liquidator’s appeal against a decision of Brereton J applying principles of proportionality and ad valorum to reduce the liquidator’s outstanding remuneration from the $63,000 claimed by the liquidator to $20,000.

Prior to this decision the NSW Supreme Court was the only jurisdiction where the court was taking the approach of assessing a liquidators’ remuneration with an overriding consideration of whether the remuneration was proportionate to the realisations in the external administration. The NSW Court of Appeal’s decision brings NSW back into step with the Federal Court and the other interstate superior courts as to how courts should assess the reasonableness of liquidators’ remuneration.

This decision is of particular relevance to liquidators dealing with smaller liquidations and allows insolvency practitioners more scope to be remunerated for the work they consider reasonable and necessary in the conduct of a liquidation, having regard to their statutory obligations, professional duties and experience, rather than necessarily being tied to an assessment of the “value add” outcomes of each step they take. The NSW Court of Appeal stated in this regard that “the mere fact that the work performed does not lead to augmentation of the funds available for distribution does not mean the liquidator is not entitled to be remunerated for it… Provided it was reasonable to carry out the work and the amount charged for it was reasonable, there is no reason a liquidator should not recover remuneration for undertaking the work.”

The NSW Court of Appeal confirmed that when the court is assessing a liquidator’s claim for remuneration, “the task of the Court is to fix reasonable remuneration having regard to the evidence before it and taking into account the matters in s 473(10)” ([2017] NSWCA 38 at [60]). The Court noted that while the court should not apply a proportionality or ad valorum approach by simply applying a percentage without regard to the particular work required in the liquidation, there may be cases where it is not appropriate to determine a liquidator’s remuneration by reference to time based calculation using standard hourly rates, and that applying a rate or scale to a liquidator’s remuneration such as that applied by Finkelstein J in RE Korda; in the matter of Stockford Ltd (2004) 140 FCR 424, may be appropriate in certain circumstances.

Background

Proportionality has been one of the key issues for the insolvency profession in recent times. In previous articles, McCabes has examined the trend arising in cases determined by Brereton J in the NSW Supreme Court which increasingly emphasised the importance of liquidator remuneration being proportionate to the realisations in the external administration over remuneration assessed on a time basis by reference to an insolvency practitioner’s standard hourly rates. Previous articles regarding proportionality and IP remuneration can be found here and here.

Creditors can approve external administrator’s remuneration. However, in applications to the court for approval of an IP’s remuneration (under sections 473 and 504 of the Corporations Act 2001 (Cth), the court is required to take into account various matters including the extent to which the work performed by the insolvency practitioner (IP) was reasonably necessary, the quality of the work performed, the complexity of the work performed and the value and nature of any property dealt with by the IP. The overriding concern of these provisions is that the remuneration must be “reasonable”.

In contrast, in recent cases in the NSW Supreme Court Brereton J determined the question of the costs incurred by external administrators by reference to the fact that ultimately external administrators are custodians of a limited pool of resources which are to be administered for the benefit of an entity’s creditors.

In the NSW Court of Appeal 

Recognising the importance of these issues to the insolvency profession, the NSW Court of Appeal considered submissions from the liquidator, the Australian Securities and Investments Commission (ASIC) and the Australian Restructuring Insolvency and Turnaround Association (ARITA) on the questions arising on the appeal from the decision of Brereton J in Re Sakr Nominees Pty Ltd [2016] NSWSC 709.

ASIC submitted that the decision of Brereton J should be upheld and that “in the context of smaller liquidations questions of proportionality and value loomed large and the contrast between the interests of the liquidator and those of the creditors and contributories is often brought into sharp relief” ([2017] NSWCA 38 at [35]). ASIC’s position was that the ordinary course for determining remuneration in smaller liquidations should be on an ad valorum basis, that is, by reference to how much value the insolvency practitioner’s work had brought to the liquidation. ASIC focused on the primary purpose of the liquidation process which is to transfer the assets of the company to the creditors and contributories.

ARITA’s submissions focused on the fact that many tasks liquidators are required to undertake consistent with their professional obligations pursuant to statute do not increase recoveries or progress distribution to creditors and contributories. ARITA noted that the value added by tasks that do not have these direct outcomes cannot be assessed by a percentage based assessment of the recoveries in the liquidation. The crux of ARITA’s submissions was that “percentage based methods based on monetary outcomes do not provide proportionality in the true sense of the reward for reasonably necessary work properly performed” ([2017] NSWCA 38 at [44]).

The NSW Court of Appeal accepted the arguments of the liquidator and ARITA, in overturning Brereton J’s decision, and remitted the matter back to the NSW Supreme Court for another judge to determine the appropriate remuneration for the liquidator.

The NSW Court of Appeal confirmed that when the court is assessing a liquidator’s claim for remuneration, “the task of the Court is to fix reasonable remuneration having regard to the evidence before it and taking into account the matters in s 473(10)” ([2017] NSWCA 38 at [60]). The Court noted that while the court should not apply a proportionality or ad valorum approach by simply applying a percentage without regard to the particular work required in the liquidation, there may be cases where it is not appropriate to determine a liquidator’s remuneration by reference to time based calculation using standard hourly rates, and that applying a rate or scale to a liquidator’s remuneration such as that applied by Finkelstein J in RE Korda; in the matter of Stockford Ltd (2004) 140 FCR 424, may be appropriate in certain circumstances.