Mr Lock and Mr Sheahan (the liquidators) performed their roles as administrators, and then as liquidators, of three companies.
The liquidators carried out numerous tasks across four work streams: (1) investigating the identities of a creditor and shareholders of one of the companies; (2) potential claims against the companies’ directors and a bank; (3) issues arising under the Proceeds of Crime Act 2002 (Cth); and (4) applications relating to receivers that had been appointed.
The liquidators accepted that they contravened sections 449E(7) and 499(7) of the Corporations Act 2001 (Cth) (the Act) by failing to provide, or providing inadequate, remuneration reports to creditors.
At the time, section 449E(7) (administration) and section 499(7) (liquidation) of the Act required the following information to be provided in remuneration reports:
- such matters as would enable the creditors to make an informed assessment as to whether the proposed remuneration is reasonable;
- a summary description of the major tasks performed, or likely to be performed, by the administrator/liquidator; and
- the costs associated with each of those major tasks.
The liquidators sought orders under section 1322(4)(a) of the Act that the fixing of their remuneration was not invalidated by their contravention of section 449E(7) or section 499(7). In the alternative, the liquidators asked the Court to determine their remuneration under section 449E(1)(c) (for administrations) and section 511 (for liquidations).
ASIC intervened. In fact, it played a major role in the proceeding. It cross-examined witnesses, adduced evidence and made detailed submissions.
The Court considered three issues:
- Had the liquidators contravened sections 449E(7) and 499(7) of the Act?
- If so, should there be an order under section 1322(4)(a) of the Act in relation to such contraventions?
- If no to (2), in what amount should the liquidators’ remuneration be fixed?
Reasons for Judgment
1. Sections 449E(7) and section 499(7) were contravened.
Justice Besanko considered the remuneration reports and found they did not meet the requirements of section 449E(7) or section 499(7) of the Act.
As a result, the creditors’ resolutions fixing or determining the liquidators’ remuneration were invalid, subject to any relief that might be granted under section 1322(4)(a) of the Act.
2. The application under section 1322(4)(a) was refused.
Justice Besanko found that there is a residual discretion to refuse to make an order under section 1322(4)(a) of the Act.
In considering the application under section 1322(4)(a), his Honour was satisfied that while there were mistakes and deficiencies in the remuneration reports, the liquidators had acted honestly.
However, his Honour was not satisfied that no substantial injustice had been, or was likely to be, caused to any person for the purposes of section 1322(6)(c) of the Act. Justice Besanko agreed with ASIC’s submission that substantial injustice had already been caused to creditors. They were deprived of the opportunity to meaningfully examine and discuss the liquidators’ fees before the resolutions were carried. This conclusion was sufficient to dispose of the application under section 1322(4)(a).
His Honour was persuaded that in the exercise of the discretion, relief should be refused.
3. Court determined or fixed plaintiffs’ remuneration.
The consequence of not making an order under section 1322(4)(a) was that the Court determined or fixed the liquidators’ remuneration.
Justice Besanko concluded that the liquidators’ hourly charges were excessive. They fell outside the band of reasonable remuneration. Accordingly, a discount of 10% was appropriate for manager rates. A discount of 20% was appropriate for partner and senior manager rates.
Depending on the four identified work streams, Besanko J reduced the remuneration himself or was to hear further from the parties as to the extent of the reduction.
- Failure to comply with remuneration report requirements can invalidate creditors’ resolutions regarding the remuneration of administrators or liquidators.
- ASIC may intervene in any subsequent proceedings seeking approval of remuneration, and may take an active role in the proceedings.
- Despite acting honestly with respect to the contraventions, there can be substantial injustice caused to creditors deprived of the chance to meaningfully examine and discuss remuneration.
- As a result, administrators or liquidators may be refused relief under section 1322(4)(a).
- In those circumstances, the Court will then determine or fix remuneration.
- After examining the remuneration in detail, the Court may reduce unreasonable or excessive remuneration.
- Schedule 2 to the Act (the Insolvency Practice Schedule (Corporations)) contains new provisions concerning administrator and liquidator remuneration. Division 60 provides that an external administrator is entitled to receive remuneration for necessary work properly performed in relation to an external administration. See in particular, sections 60-5, 60-10 and 60-12.
*Liability limited by a scheme approved under Professional Standards Legislation.