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Michael Murray is an Australian author and commentator on corporate and personal insolvency law and related policy and law reform, in Australia and internationally. No legal advice is offered or given.

Liquidators’ remuneration – “most businesses do not charge out that way”

A Judge apologised at the start of his judgment for the length of time he took to determine liquidators’ remuneration. 

On reading the judgment, and the tedium involved in the assessment, one can understand why he took time: six minute units of opening mail, clearing in-trays and filing paperwork, receiving payment instalments and explaining work to a co-worker, plus a heavy-handed, “throw the book at him” approach to litigation.    

The liquidation itself ran for a long time, nine years to practical completion, although it was not large or complicated; the time spent, over 700 hours, was high; and the fees – NZ$160,000 – were high though the average hourly charge-out rate was low.

Although the Judge said he was not required “to go through each item in the 63 pages of time records and allow, adjust or reject”, he gave a close scrutiny to some.

Cash management and statutory obligations

These items involved high fees. The longer a liquidation takes, here, 9 years, the more time is spent on administrative tasks, such as keeping accounts and reporting to creditors. Although these are required, they are not productive.

One of the disadvantages of a settlement with a director that requires payments over time, as was the case here, is that the liquidation cannot be completed until all payments have been received, and costs are run up in the meantime.

But the liquidation did not require extensive accounting work. The main statutory obligations involved tax matters, the initial report to creditors (there was no meeting with creditors) and reporting to creditors every six months. These reports were routine and followed a standard format, giving an update since the last report.

“Open mail”, “clear in-tray and distribute mail” …

Many of the liquidators’ claims were for steps such as “open mail”, “put file in Lundia”, “coding”, “clear in-tray and distribute mail”, “PoD” (proof of debt), “file paperwork in codafiles”, “return file to Lundia”, “approve invoice for payment”, all in six-minute units.

It is not reasonable for liquidators to charge separately for these steps. They are generally absorbed as part of the costs of running an insolvency practice and are covered by the rates approved for liquidators, associates, analysts and the like. The Judge said that

As an example, a construction contractor working on a “charge-out” basis will charge for materials and labour but will typically not charge for clerical work as part of the services provided under the contract. Instead, they are absorbed within the charge-out costs. Similarly other insolvency practitioners do not include these matters as separate charges in their remuneration claims. Such charges do not add value for creditors”.

Staff inefficiencies

A large number of staff worked on the liquidation, not surprising in view of the time it took. But there were inefficiencies – charging for time spent for one person passing the matter on to another; one person explaining to another what had happened, seeking advice and giving instructions. There would have been greater efficiencies with a smaller team. A liquidation of this size did not require so many people working on it.

Legal tactics

Some of the legal actions were queried.  The liquidators sued for breaches of director’s duties instead of for the overdrawn funds; normally it is easier to prove a claim for the latter. They made their case more complex than it needed to be in suing for breaches of three separate duties under the Companies Act, when they needed to sue for only one. This was excessive and unnecessary.

The piling on of causes of action is a heavy-handed, “throw the book at him” approach.

It is also inefficient in increasing work by the liquidators and their lawyers, as well as the defence and the court, without any commensurate benefit.

The legal fees incurred in obtaining judgment against one person came to $30,000; “with a slimmer case, the fees would be less …. $5,000 …”. In other litigation actions their charges would have been lower “if they had run a leaner claim”.

“The exercise of a judicial discretion to fix an amount on a global basis …”

Given that the law does not require a detailed assessment of the timesheets –

“the exercise of a judicial discretion to fix an amount on a global basis is preferable to the liquidator being required to provide more detailed information which is likely to increase the cost to creditors and the delay in distribution of remaining funds” Re Roslea Path Ltd –

the Judge reduced the remuneration to NZ$120,000, and took $5,000 off the legal fees.

Commissioner of Inland Revenue v Green Securities limited (in liquidation) [2020] NZHC 1371. As quoted or paraphrased.

 

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