A recent High Court decision by Justice Heath on the new section 30(2B) of the Receiverships Act 1993 (the Act) provides guidance as to how receivers should account for their remuneration and expenses when dealing with accounts receivable and inventory.

The key points are as follows:  

  • Receivers should keep accurate accounting systems to record what work applies to the realisation of accounts receivable and inventory (on the one hand) and general tasks (on the other).
  • The Courts will review any apportionment using a "broad brush assessment" rather than a line by line analysis of the receivers' time entries.
  • The costs of a receiver making an application for directions as to apportionment is likely to come out of the receivership fund and the receiver should inform the appointing secured creditor of this before the receiver makes the application.
  • Receivers who provide information to liquidators voluntarily and out of "courteous compliance", without requiring a section 261 notice, are not entitled to receive reasonable remuneration and travelling expenses under that section.

Section 30(2B)

Section 30 of the Act governs the priority of preferential payments in a receivership. In the absence of a liquidator, the section requires a receiver to pay preferential creditors out of accounts receivable and inventory. These were assets that were historically subject to a floating charge under which a receiver was appointed.

In 2008, section 30 was amended to include section 30(2B), which governs the way in which a receiver's remuneration or expenses is to be apportioned between two funds:  

  • Accounts receivable or inventory (on one hand); and
  • Other property secured by the security interest (on the other hand).

The judgment

In Eagle and Gothard v Petterson (HC Auckland CIV-2011-404-7387, 16 December 2011), Heath J was faced with applications by receivers and liquidators of a company as to preferential payments to be made.

The debtor company and three of its subsidiaries (Hurlstone) had given GSAs in favour of GE Finance and Insurance (GE). On 13 July 2011, GE appointed receivers to Hurlstone.

The receivers undertook an extensive review of the company's records to determine Hurlstone's true financial position. The receivers encountered difficulty as a result of complex intra-group arrangements between the companies and poor record keeping. Importantly, the receivers set up systems to identify, for the purpose of the anticipated apportionment exercise, tasks undertaken and amounts charged for work undertaken in respect of the accounts receivable and inventory.

Following the receivers' review, liquidators were appointed.

The time of the receivers was categorised as:

  • Accounts receivable and inventory;
  • General administration;
  • Responding to the liquidators' requests for information; and
  • The costs incurred by the receivers and their legal advisors for the proceedings presently before the court.

The first and second categories

His Honour held that the language of section 30(2B) enabled a receiver to claim remuneration and expenses for more than just the "salvage costs" involved in realising a debt or a part of the company's inventory.

Heath J considered that a "broad brush assessment" was required as opposed to a line by line analysis of the receivers' time entries.

His Honour reviewed the categories of certain work by the receivers and adjusted that where appropriate. For example, the receivers' dealings with employees were not an accounts receivable or inventory activity and were allocated to the general administration fund.

In respect of the "general tasks", 90% of the expenses and remuneration was to be borne by the secured creditor and 10% by the preferential fund. This adjustment was in part because the receivers were based in Sydney and their hourly rates were higher than their New Zealand counterparts, and that they were unlikely to have detailed knowledge of applicable New Zealand law.

Third and fourth categories

The third category was the receivers' costs in complying with the liquidators' requests for information. The receivers sought an order that they be paid remuneration and other expenses for providing the information to the liquidator under s261(5) of the Companies Act.

A liquidator has the power to seek certain documents and information for specified people under section 261 of the Companies Act. Here, however, no formal section 261 notice had been made by the liquidators, and the receivers had provided the documents to the liquidators in lieu of a formal requirement. In these circumstances, the Court ruled receivers were not entitled to expenses under section 261(5). This conclusion seems harsh, given that the receivers cooperated rather than standing on their rights and insisting on a formal notice.

The fourth category was the costs of the proceedings. Counsel for the receivers asserted that all costs should be borne by the fund otherwise available for the preferential creditors. The Court held that it is appropriate for the receivership fund to bear all costs and disbursements incurred by the receivers, and the fund available to the preferential creditors bear all costs and disbursements incurred by the liquidators.