This week’s TGIF considers a recent decision in Re HRL Limited (in liq) & Anor  VSC 693, in which the Court approved a success fee in addition to the liquidators’ remuneration calculated by the application of a time-based costing method.
- Liquidators may obtain court approval of success or uplift fees on top of time-cost remuneration where the method of calculation is reasonable.
- Percentage-based fees can help to manage the risks for liquidators in pursuing claims with limited funding to achieve a potential return for creditors.
- Approval from creditors or the committee of inspection (COI) can also be sought but it is prudent to seek court approval where a company’s only creditor is another company in liquidation or where claims will otherwise expire.
HRL Limited (in liq) and HRL Infrastructure Services Pty Ltd (in liq) (the Companies) went into liquidation in 2016, following a 2014 acquisition.
In 2020, the liquidators (Liquidators) commenced litigation against certain officers of the Companies claiming breaches of duty in relation to the acquisition.
The Companies had insufficient assets to fund the litigation and their secured creditor elected not to provide financial assistance.
Accordingly, after speaking with several litigation funders and with the limitation period for the claims about to expire, the Liquidators entered into funding agreements (with subsequent court approval).
Whilst the funding terms were confidential, they provided for:
- capping of the Liquidators’ remuneration at 60% of standard rates, with the balance (and costs in negotiating the funding) recoverable only if there was a sufficient recovery in the litigation. This aspect of the Liquidators’ remuneration was on a standard time-cost basis; and
- a success fee of 5% of property recovered, to be paid in accordance with a waterfall for priority distribution of net recoveries to the funder, solicitors, Liquidators and Companies.
The Liquidators’ remuneration prior to the funding agreements had been approved by creditors. In 2021, the Liquidators also sought approval from the COI for the success fee. The COI members abstained from voting on the aspect of the resolution dealing with the success fee but otherwise approved the Liquidators’ remuneration. Accordingly, the Liquidators were required to apply for court approval of the success fee.
The Liquidators sought approval of their remuneration under sections 60-10(1)(c), 90-15 and 90-20 of the Insolvency Practice Schedule (IPS) at Schedule 2 of the Corporations Act 2001 (Cth) (the Act). The application also sought approval of related agreements pursuant to section 477(2B) of the Act, including an acknowledgment from the Companies’ secured creditor which would involve yielding priority rights in favour of rights to recovery under the funding agreements.
The application was amended to refer to (the now repealed) section 473 of the Act because it continued to apply in this case given that the liquidation had commenced before September 2017.
Accordingly, Associate Justice Matthews was required to take into the factors listed in section 473(10), which ultimately boil down to the question whether the remuneration is reasonable.
Although the principles for approving remuneration are well established, and include approvals of percentage-based remuneration and some comparison as against time-based remuneration, the Liquidators submitted that the use of a mixture of these methods had not been finally determined in relevant case law.
The Liquidators submitted that the Court would need to resort to first principles. Counsel for the Liquidators indicated they had not found cases dealing with an application of this type, i.e. cases involving remuneration based on a percentage of recoveries on top of remuneration on a time-costed basis at liquidators’ usual hourly fees.
Her Honour was referred to ARITA’s Code of Professional Practice: Insolvency Services (Code), stating that ARITA has no preference as to the method of calculating fees. Her Honour also referred to ARITA’s practice statements, allowing for success fees.
In particular, her Honour considered paragraph 5.5 of the Code, which is geared towards avoiding any potential conflicts, providing for circumstances in which a contingent fee agreement is suitable and for disclosure with the purpose of obtaining approval from the creditors, the COI or a court.
Her Honour also considered other submissions from the Liquidators as to:
- the extent that the Liquidators’ work was critically important because without it there would be no potential recovery;
- the period of work required, being six to seven years;
- the work needing to be of high quality in order to achieve a successful outcome (noting that the relevant remuneration was only payable if successful);
- the level of risk accepted by the Liquidators, both in terms of the risk of delay and non-payment of fees beyond the 60% cap previously referred to, as well as costs in negotiating the funding; and
- the nature of the property being dealt with, given that the value of the estate could only be realised through the litigation.
In the absence of a contradictor, her Honour dealt with a number of objections that had been previously made by creditors but later withdrawn before the matter was heard after the provision of additional information.
The objections included, by analogy to class action litigation funding, reference to views of the Joint Parliamentary Committee (JPC) on the appropriate percentage of recoveries to be distributed to plaintiffs. Her Honour did not regard the majority recommendation of the JPC to be of any assistance in this case, nor the percentage of recovery distributable to the creditors to be of any significance, given that claims in the litigation were not the creditors’ claims. Her Honour rejected the class action analogy.
Her Honour described the application as unusual given the lack of reported cases awarding a success fee for liquidators on top of remuneration on a time-cost basis.
In the absence of precedent, her Honour referred to an analogous case in 2014 involving receivers and managers appointed by a court at the instigation of ASIC, where a 25% uplift on hourly rates was awarded.
Her Honour held that the remuneration in this case, including the success fee, was reasonable, having regard to a range of factors including that:
- it is not an arrangement which would place the Liquidators in conflict with their duties, including their duties to creditors;
- it is not an arrangement which would disadvantage creditors and it comes at no cost to the creditors;
- it is the only arrangement which the Liquidators would be able to enter into so as to obtain funding for the litigation;
- by commencing the litigation, the Liquidators were attempting to achieve a substantial recovery for creditors and, in some scenarios, possibly even a return to shareholders. Accordingly, if it results in a recovery at a level sufficient to invoke the payment of the success fee, then it will have been work which produced a high value outcome for the Companies, from which creditors will benefit;
- in agreeing to the funding agreements and commencing litigation, the Liquidators took on significant risk given that, even if the proceeding were successful, they may not get all of their fees paid if the level of recovery is not at an amount sufficient to cover everything;
- ASIC had the opportunity to intervene in this case and chose not to do so;
- although there had been objections raised by a number of creditors (which were later withdrawn), the objections were considered and rejected; and
- the statutory provisions and the case law do not mandate a particular method of calculating a liquidator’s remuneration but rather allow for a mixture of methods in some instances. The only requirement then is that the remuneration be reasonable.
This decision reveals that a court will be willing to approve percentage-based remuneration together with time-based remuneration for insolvency practitioners in consideration for the significant personal commercial risk taken on when commencing proceedings for the benefit of creditors.
Although this application was made under section 437 of the Act, which has now been repealed, it is anticipated that applications on similar grounds will be available under the new provisions referred to above.
The case is also useful in outlining the range of evidence that a court will require for the purposes of such an application. For example, the Liquidators provided confidential affidavit evidence to the Court setting out an estimate of the effect which a recovery of various amounts made by the Companies in the litigation would have on the success fee and the net funds available for distribution to creditors.