In February 2019 the Federal Court delivered its decision in Lock, in the matter of Cedenco JV Australia Pty Ltd (in liq) (No 2). The proceedings were commenced by the liquidators of three companies, SK Foods Australia Pty Ltd (in liquidation), Cedenco JV Australia Pty Ltd (in liquidation) and SS Farms Australia Pty Ltd (in liquidation). The liquidators were seeking an order from the Court to validate the defects in the liquidators’ remuneration reports and hence get an order approving their remuneration. Orders can be granted if:
- the defect is of a procedural nature;
- the liquidators acted honestly; or
- it is just and equitable to make such an order.
ASIC intervened in the proceedings alleging that the liquidators had failed to comply with their duties under the then sections 449E and 499(7) of the Corporations Act 2001, on the basis that the remuneration reports were inadequate and insufficient.
The Federal Court rejected the liquidators’ application to validate the creditors’ resolutions which purported to support the liquidators’ charge of $5m in remuneration fees. Justice Besanko took issue with the liquidators’ charge out rates of $700 per hour, finding that the hourly charges were “excessive,” and beyond the realm of reasonable remuneration. His Honour also found that the remuneration reports provided to the creditors were inadequate as they described the work done with such a ‘high level of generality’ such that it could not be said that the creditors were given sufficient information to make an informed assessment about the reasonableness of the proposed remuneration. This, he reasoned, would have caused, or would likely cause, substantial injustice to the creditors of the liquidated companies. Ultimately, Justice Besanko held that these failures amounted to contraventions of the then sections 449E and 499(7) of the Corporations Act 2001.
The Federal Court dealt its final blow to the liquidators in June this year, when it ordered that the liquidators repay approximately $1.9 million (or 30% of the remuneration they were paid) as administrators of the three companies. Justice Besanko ordered that the liquidators also pay interest on the repayment sum, in addition to paying ASIC’s costs as intervener.
The outcome of this case yields important lessons for liquidators, including that:
- Courts are likely to take issue with overly general and scantily detailed remuneration reports, as it may lead to substantial injustice for creditors;
- Liquidators should be able to justify their hourly rates and should take care not to charge excessive remuneration fees, as the rendering of excessive hourly fees is unlikely to go unchecked by Courts;
- Courts have wide powers to make orders in relation to liquidator conduct. As in this case, Courts may undertake, what is in effect, an inquiry into a liquidators’ conduct without the parties having made an application for such an inquiry to be conducted; and
- Practitioners should note that ASIC is taking an increasingly active role in investigating and intervening in financial misconduct proceedings.