Is hourly billing for liquidators back?

In brief

The NSW Court of Appeal has recently considered the basis on which liquidators' 'reasonable remuneration' should be determined. Partner Chris Prestwich, Senior Associate Przemek Kucharski and Lawyer Kane Kersaitis report on the decision in Sanderson as Liquidator of Sakr Nominees Pty Ltd (in liquidation) v Sakr. 

The facts

Sakr Nominees Pty Ltd (in liquidation) was wound up on 3 September 2012. After its assets were realised, its creditors were paid in full, leaving a surplus of over $500,000.

As there were no longer any creditors, the liquidator sought court approval for remuneration totalling $63,577 in finalising the liquidation.

The competing arguments

Sections 473(10) and 504 of the Corporations Act 2001 (Cth) set out a number of factors that the court should consider when approving a liquidator's remuneration, including:

• whether the work was reasonably necessary;
• the quality and complexity of the work;
• whether any extraordinary issues arose or was the liquidator required to accept a higher level of risk than is usually the case;
• the value and nature of the property to be dealt with;
• the extent the liquidator must deal with receivers and managers; and
• the time taken to complete the work.

At first instance, it was held that the liquidator's remuneration should be determined on an ad valorem basis rather than on the basis of liquidator's time costs. The primary judge allowed additional remuneration on that basis.

ASIC appeared on appeal and submitted, in line with the primary judge, that the preference should be for ad valorem remuneration in smaller liquidations. The main points of that position were that:

• time-based remuneration focuses on the liquidator's costs while ad valorem remuneration focuses on the value received by the creditors and contributors. Smaller liquidations lend themselves to greater discrepancies between costs incurred and value added which may not be reasonable;
• time-based remuneration encourages liquidators to maximise the time spent on tasks;
• there was a lower administrative and legal cost to showing that ad valorem remuneration was reasonable compared to time-based remuneration; and
• the apprehension that the liquidator's fees are likely to be determined on an ad valorem basis may guide that liquidator in deciding what work should be undertaken.

The Australian Restructuring Insolvency and Turnaround Association was also granted leave to appear and adopted the contrary position that a time-based approach was preferable as:

• many tasks which are required by legislation or the liquidator's professional obligations do not augment recovery or distribution;
• some of the criteria in s473(10) focused on the quality and difficulty of the work, and the quantum of recoveries and distributions may be unrelated to those factors; and
• uncooperative and combative creditors can increase the work required, and the wishes of creditors may influence whether certain work by the liquidator could be considered reasonable.

Court of Appeal

The Court of Appeal unanimously overturned the primary judge's decision. It was held that 'it would not… be appropriate to fix remuneration on an ad valorem basis by simply applying a percentage considered appropriate to all liquidations or to a particular class of liquidations without regard to the particular work done or required to be done in the liquidation in question'.¹

The Court of Appeal went on to find that:

• the questions of proportionality and reasonableness remain an important consideration, and the work done must be proportionate to the difficulty and importance of the task;
• evidence as to the percentage that remuneration constitutes of realisation will identify those cases in which there ought to be a real concern in that respect;
• the mere fact that particular work does not increase distributions does not mean the liquidator is not entitled to be remunerated for it; and
• similarly, costs are commonly incurred in an unsuccessful attempt to recover assets. Provided the work and amount charged were reasonable, there is no reason the liquidation should not recover that remuneration. The Court of Appeal emphasised that there is a public interest in liquidators bringing recovery proceedings.

The Court of Appeal noted that its judgment should not be taken to indicate that a time-based calculation would always be appropriate. It acknowledged that there was force to the criticism of time-based remuneration expressed in ASIC's submissions and by the primary judge, and noted there may be circumstances were ad valorem remuneration is appropriate.

The liquidator's application will now be re-heard by a single judge of the Supreme Court.

Conclusion

The Court of Appeal has confirmed that, depending on the matter, it may be appropriate to calculate remuneration on a time basis, or by a particular proportion of assets recovered or distributed. There is no single rule. The most appropriate method will need to be determined by reference to the particular work that was required in any given liquidation.

In assessing what is reasonable, questions such as whether the work was proportional and whether it was reasonable to carry out the work will be important.

There is, however, no requirement to show that the work performed led to an augmentation of the funds available for distribution nor is there a principle that an 'ad valorem' approach must be adopted for smaller liquidations.