Whether you are a liquidator, director, employee, shareholder or creditor of a company in financial distress, the experience of a corporate insolvency is usually not pleasant. Directors face the threat of being investigated for breaches of directors duties, employees become unemployed, shareholders become the owners of worthless assets and creditors are forced to come to the realisation that they will never see the money owed to them (or at least not all of it). Liquidators are there to “pick up the pieces” and salvage what little remains (albeit in exchange for a fee) and whilst the liquidator has a priority for the payment of their fees, they still have to convince those often disgruntled creditors, and if that doesn’t work, the Court, that their efforts were worth the cost. 

The painstaking work of liquidators in investigating the company’s affairs, selling off assets and dealing with creditors is usually remunerated, provided the liquidator can obtain approval in relation to his/her fees from a majority of creditors but what happens when a liquidator isn’t able to muster enough support from creditors? The liquidator will usually apply to the Court to approve the remuneration of a fixed amount.

Two recent decisions by Black J in the Supreme Court of NSW make it clear that liquidators’ fees will be scrutinised to ensure that amounts charged are “fair and reasonable” having regard to a number of factors, such as the time spent completing the work, the necessity of the work, the complexity of the issues and investigations carried out, as well as the overall net result for creditors – being the amount of funds recovered by the liquidator for the benefit of creditors.

While those factors are not new, the Supreme Court decision in Re Hunter Valley Dental Surgery Pty Ltd (in liquidation) [2017] NSWSC 691 (handed down on 2 June 2017) raises the bar in relation to the evidence required from liquidators to establish that the fees are fair and reasonable. In that case, a total of 24 staff members (including 4 partners) worked on the file over a period of about 18 months, generating $356,046.40 plus GST in fees. Assets available to creditors were estimated to be $1.4m, comprising of two properties and cash at bank.

The Court found that the amount claimed was large “for a liquidation of a proprietary company of a relatively small scale” and that the evidence relied upon by the liquidator provided “limited assistance in an assessment of its necessity and proportionality”. The Court adjourned the matter to allow the liquidator a further opportunity to submit additional evidence to justify the fees incurred.

In the matter of Re Sakr Nominees Pty Ltd [2016] NSWSC 709, the liquidator sought approval of a further $63,577.80 that was not approved by creditors (in addition to an amount of $197,657.90 that had already been approved by creditors). Brereton J fixed the additional remuneration at $20,000, being the amount that his Honour considered was proportionate to the size of the liquidation and the company’s property. His Honour found that it was more appropriate to apply principles of proportionality rather than focusing on the traditional time-based approach. The liquidator successfully appealed and the Court of Appeal remitted the matter back to the Supreme Court.

The remitted application was heard by Black J on 29 May 2017 (see Re Sakr Nominees Pty Limited [2017] NSWSC 668) who found that the liquidator’s evidence at first instance “provided assistance in determining the amounts claimed by [the liquidator] and how they were made up, but little basis for determining whether they were reasonably incurred, and, in particular, why the liquidation of a relatively small company which held three properties had resulted in claims for remuneration by [the liquidator] in the order of $260,000 inclusive of GST.” Fortunately, the liquidator was able to produce additional evidence in relation to the necessity of the work and the complexities of the liquidation. The Court approved the additional remuneration on a time basis.

These judgments make it clear that in order to obtain the Court’s approval for fees incurred and to demonstrate that those fees are fair and reasonable, liquidators will need to adduce the following evidence:

  1. An itemised account showing details of the work done, the person who did the work, the time taken and the total amount claimed for each item of work;
  2. An explanation as to why the work was necessary in the circumstances;
  3. An explanation as to why it was appropriate to use several staff members, by reference to their level of seniority;
  4. If a particular issue required substantial investigation, an explanation as to the additional time required and details of the complexity;
  5. Details in relation to the value and nature of the company’s property;
  6. Whether the liquidator was required to accept a higher level of risk or responsibility;
  7. Whether the liquidator was required to deal with other insolvency practitioners and/or difficult creditors; and
  8. The remuneration sought is proportionate to the outcome or value achieved by the work, although there are circumstances in which the Court may be convinced that work undertaken was necessary even if it does not generate any additional return for creditors.

The heightened scrutiny of fees by the Court could increase the conflict between liquidators’ duty to investigate company affairs and the risk that they may be criticised for performing “unnecessary work”, for which they may not receive payment. The recent decisions discussed above highlight, not only the need for effective systems and time-recording practices at the outset, but also the need to ensure that Court applications seeking approval for remuneration are prepared with the necessary level of detail and supporting documents.