A liquidator’s ‘overbearing approach’ did not pay

A “ham-fisted” response by a liquidator to an application by a director to terminate the liquidation of his company, has resulted in a substantial reduction in the liquidator’s claimed remuneration. 

 

When a person is made bankrupt by a sequestration order, or a company is ordered to be liquidated, there is sometimes a flurry of activity by the debtor to reverse the situation, in the case of bankruptcy to quickly set aside the sequestration order, in the case of a company to termination the liquidation.

While the debtor may claim that they will take action to extricate themselves, the liquidator or trustee (the practitioner) is in the position of having been formally appointed by the court with statutory duties to secure assets and investigate.  At the same time, if a reversal of the court order is imminent, the practitioner is at risk of being told they have done too much work, for which they seek to be paid, when they should have appreciated that the insolvency would only be temporary.

In a normal client-professional relationship, that can be managed.  When there is no client, as in insolvency, it comes down to the professional judgment of the practitioner.  That judgment should not be too harshly judged when a court is later assessing their remuneration for the work done.

A New Zealand decision[1] has described this dilemma in some useful detail. The lesson is that a cautious approach should be taken by practitioners, though it will always be a matter for judgment.

Facts

On 10 March 2017, Rayland Investment Ltd was ordered into liquidation. The applicants, the director and shareholders of Rayland, applied on 5 April 2017 for the liquidation to be terminated, under the equivalent of our section 482 Corporations Act 2001. At the hearing the only matter in issue was the amount of the liquidator’s remuneration.

He claimed NZ$33,000 (127 hours) including 6.7 hours for pre-liquidation tasks, at $350 per hour. He was ultimately allowed only $19,000.

Pre-liquidation work

The liquidator charged for work carried out before he was appointed.  The position may be different in New Zealand than in Australia. The Court explained the NZ approach:

“Any insolvency practitioner invited to become a liquidator of a company needs to carry out preliminary work:  if only to make sure that they are not disqualified from acting as liquidator.  That will typically mean making searches of the companies register and the personal property securities register as well as internal checks.  A consent …. needs to be prepared.  There is no reason why liquidators should not be able to recover the costs of that preliminary work if they are in fact appointed liquidator.  It is a necessary part of their work”.

Here though, the liquidator went further – he unnecessarily verified his consent by affidavit, he carried out property searches, prepared demand notices and a questionnaire. He turned up in court to see whether he was appointed liquidator.  The Court said that these steps went beyond the normal preliminary work of liquidators.

During the liquidation

On the day the liquidation order was made, he personally located and interviewed the director and took some records. He then served demand notices for further documents and proceeded to examine the records to establish whether there were any voidable transactions.

But at that early stage the director had said he wanted to have the liquidation ended by paying out the creditors, and the liquidator’s remuneration which he thought would be in the order of $10,000.

Terminations of liquidations – special considerations

Citing the basic principles of proportionality, the Court acknowledged that applications to terminate a liquidation bring special considerations. At the outset the liquidator is mainly concerned to act in the interests of creditors. Once the shareholders arrange to ensure the creditors are paid,

“the focus of the liquidator’s efforts should shift to the interests of shareholders and directors – those promoting the termination.  It may no longer be necessary or efficient for a liquidator to carry on with normal liquidation tasks, once it becomes clear that the company will be taken out of liquidation.  It is a matter of judgment when to switch attention from one group’s interest to another’s”.

Speaking of his own experience, the Associate Judge said that applications for termination of liquidations

“show varying reactions by liquidators.  Some liquidators actively co-operate with the directors in arranging a prompt termination of the liquidation.  In some cases liquidators put the liquidation on hold while they give the directors and shareholders the opportunity to raise finance to pay out all the creditors.  At the other extreme are liquidators who treat the directors and shareholders with hostility, assume the worst of them and take a “play to the whistle” approach, even when there is an application pending … These cases can generate disagreement as to liquidators’ remuneration”.

“At the same time, it must also be common experience for liquidators to be presented with fobbing-off and stalling excuses when dealing with directors and shareholders who resent the company having been put into liquidation.  Assertions that [a termination] application will be made … may not always be carried into effect.  Insolvency practitioners are entitled to take a sceptical view of such announcements”.

The Judge noted that a liquidator has statutory functions to perform including advertising, dealing with requests to call creditors’ meetings, and making a first report.

“A liquidator must, of course, attend to those matters, even if an application is pending … Beyond that, it is a matter of judgment in each case as to how seriously to take an expression of intention to apply [for a termination order]”.

An expert witness, in the nature of our ‘reviewing liquidator’, commented on the work done, and noted that Norrie had billed for more than 100 hours, being 20 hours of work a week for the five weeks.  Given that the creditor claims in the liquidation were $76,000, the liquidator’s costs of over $40,000 (including expenses) were disproportionate.  He suggested the remuneration should be no more than $15,000.

Why the liquidator’s claims for remuneration were excessive

The Court was critical of the liquidator’s handling of the matter.  An early draft settlement deed was

“ham-fisted …. a clumsy way to try to resolve matters.  It is not surprising that it did not get anywhere”.

The liquidator “took an overbearing approach” in

  • threatening to seize the director’s car in the mistaken belief it was a company vehicle;
  • directing the company’s accountant not to have anything to do with the director, “although it would be expected that a director required to hand over company documents would contact the accountants for accounting materials”; and
  • repeatedly alleging that the director had not complied with his demand notice and using that to threaten him with continuation of the liquidation and reporting him to the regulator. The liquidator was “very free with his use of [demand] notices”.

When the applicant’s lawyers advised that they held funds in their trust account to pay creditors, the liquidator demanded that they pay it to him, even though they were not company funds.

The director and his lawyers were making a genuine application but were making little headway

“because they were dealing with a liquidator who showed little interest in resolving matters …”.

Use of lawyers

It was not necessary for the liquidator to use a lawyer during this phase and the court disallowed his claim for legal fees.

“As an experienced liquidator, he should be able to deal with proposals to terminate a liquidation without obtaining legal advice.  In my experience most liquidators are able to do so”.

The reduced remuneration

The remuneration was set by reducing the amounts claimed to what a liquidator would charge if the director’s attempts to resolve matters “had been treated in a more accommodating way and there were less misdirected work”.

Much work “arose from [his] inefficiency in his hardnosed approach”; he sought approval of remuneration beyond what was reasonable and he was therefore required to pay his own legal costs. He was allowed NZ$15,560 plus NZ$3,500 for “finishing off work”.

Points to note

  • Australian authority is that no remuneration can generally be claimed for pre-appointment work: Skafcorp v Jarol [2002] NSCSC 1183; the position is a little different in bankruptcy (section 109(1)(j)(ii)). The NZ rationale however makes some sense; see also the RITANZ Code.
  • The courts are typically more strict with trustees’ remuneration in the face of a set aside application than with liquidators. One option for trustees to protect their position has been to seek directions.
  • Whether a lawyer is required or not is problematic.  The court expects the liquidator to give an account of the liquidation and the solvency of the company.  In bankruptcy, the trustee may be directed by the court to provide a report verified by affidavit, on which cross-examination may proceed.

I hope this is useful.

Michael Murray

 

 

[1] Fann v Norrie [2017] NZHC 2019. No judgment footnotes included throughout.

 

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