Today a 5-member panel of the NSW Court of Appeal overturned last year’s liquidator’s remuneration decision of Brereton J in the Sakr case. In an anticipated decision which will be welcomed by insolvency practitioners, their Honours held that in assessing the reasonableness of liquidators’ remuneration, the Court must have regard to the factors in s 473(10) and must have regard to the evidence. Fixing remuneration on an ad valorem basis by simply applying a percentage of realised assets considered appropriate to all liquidations, or to a particular size or class of liquidation without regard to the particular work done or required to be done, is not appropriate. To do so would pay no regard to the requirements of s 473(10) of the Corporations Act all of which, with the possible exception of s 473(10)(l), are directed to the particular liquidation under consideration by the Court. The judgment in full can be read at: Sanderson as liquidator of Sakr Nominees Pty Ltd (in liquidation) v Sakr  NSWCA 38.
The liquidation commenced in September 2012. The only significant assets were three adjacent properties in North Sylvania which the liquidator realised for $3.72million. Subsequently the secured creditors were paid out, the unsecured creditors were paid out, and there remained a surplus of about half a million dollars. The creditors of the company had approved the liquidator’s remuneration up to 3 November 2014, but no further creditor approval could be sought as the creditors had been fully paid. Following paying out the creditors, an issue had arisen as to determining the identity of the contributories entitled to the surplus, and this had occasioned further work. There was a balance of $35,413 owing for work done, and approval of a further $22,385 for future work to compete the liquidation. The total remuneration claimed was $63,577 including GST. Upon hearing the application, Brereton J had approved only $20,000.
First Instance Approach
At first instance, Brereton J had stated that liquidators would not necessarily be allowed remuneration at their firm’s standard hourly rates, particularly in smaller liquidations. He stated that in smaller liquidations, questions of proportionality, value and risk loomed large, and that liquidators could not be expected to be rewarded for their time at the same hourly rate as would be justifiable if more property was available. He further stated that ad valorem or “commission based” assessment of remuneration is inherently proportionate and incentivises the creation of value rather than the disportioncate expenditure of time. See In the matter of Sakr Nominees  NSWSC 709 at -.
The Brereton J Series of Decisions – ad valorem assessment
This is far from the first time Brereton J has taken this position on the fixing of remuneration of insolvency practitioners in NSW. Last year in David Lewis Clout in his capacity as Liquidator of Mainz Developments Pty Ltd (in liquidation)  NSWSC 1146, Robb J at  surveyed the following judgments of Brereton J over the previous 2 years, noting that the influence of a percentage-based, proportional approach suggested a level of inconsistency –
- $36,000 remuneration was allowed, or about 20% of of the value of assets realised, in AAA Financial Intelligence Pty Ltd (in liq)(No 2)  NSWSC 1270
- 10% for the first $50,000 realised and 5% thereafter was allowed in Re Hellion Protection Pty Ltd (in liq)  NSWSC 1299
- 10% of the first $100,000 realised and 5% on the balance was allowed in Re Gramarker Pty Ltd (in liq)(No 2)  NSWSC 1405
- 2% on realisations and 15% on distributions, with an uplift which resulted in approximately 14% on gross realisations was allowed in Independent Contractor Services Pty Ltd (in liq)(No 2)  NSWSC 106
However the NSW Court of Appeal has now made it clear it does not agree with the approach taken by Brereton J.
The Court of Appeal’s Judgment
Section 473(10) provides –
In exercising its power under subsection (3), (5) or (6), the Court must have regard to whether the remuneration is reasonable, taking into account any or all of the following matters –
(a) the extent to which the work performed by the liquidator was reasonably necessary;
(b) the extent to which the work likely to be performed by the liquidator is likely to be reasonably necessary;
(c) the period during which the work was, or is likely to be, performed by the liquidator;
(d) the quality of the work performed, or likely to be performed, by the liquidator;
(e) the complexity (or otherwise) of the work performed, or likely to be performed, by the liquidator;
(f) the extent (if any) to which the liquidator was, or is likely to be, required to deal with extraordinary issues;
(g) the extent (if any) to which the liquidator was, or is likely to be, required to accept a higher level of risk or responsibility than is usually the case;
(h) the value and nature of any property dealt with, or likely to be dealt with, by the liquidator;
(i) whether the liquidator was, or is likely to be, required to deal with:
(i) one or more receivers; or
(ii) one or more receivers and managers;
(j) the number, attributes and behaviour, or the likely number, attributes and behaviour, of the company’s creditors;
(k) if the remuneration is ascertained, in whole or in part, on a time basis:
(i) the time properly taken, or likely to be properly taken, by the liquidator in performing the work; and
(ii) whether the total remuneration payable to the liquidator is capped;
(l) any other relevant matters.
The NSW Court of Appeal made the following observations, in considering whether Brereton J had erred in his determination of reasonable remuneration –
- Whilst not all of the factors in s 473(10) may be relevant in a particular case, for a court not to take any of them into account would constitute error. (See )
- The onus is on the liquidator to establish that the remuneration claimed is reasonable and it is the function of the Court to determine the remuneration by considering the material provided and bringing an independent mind to bear on the relevant issues. (See )
- That is not to say that the question of proportionality has no bearing on the task to be undertaken by the Court. It is a well-recognised factor in considering the question of reasonableness and the factors in s 473(10)(d)-(e) and (g)-(h), which have as their unifying theme the concept of proportionality. (See )
- The question of proportionality in terms of work done as compared with the size of the property the subject of the insolvency administration or the benefit to be obtained from the work, is an important consideration in determining reasonableness, as was recognised by the Full Federal Court in Templeton v ASIC  FCAFC 137 at . (See )
- The work done must be proportionate to the difficulty and importance of the task in the context in which it needs to be performed; that is what is encompassed in assessing the value of the services rendered: also stated in Templeton v ASIC at . (See )
- Evidence as to the percentage that remuneration constitutes of realisation, will at least provide a measure of objective testing of the reasonableness of the remuneration claimed and will identify those cases in which there ought to be a real concern in that respect, as pointed out by Black J in Idylic Solutions Pty Ltd (in liq)  NSWSC 1292 at . (See )
- The mere fact that the work performed does not lead to augmentation of the funds available for distribution does not mean the liquidator is not entitled to be remunerated for it. The most obvious example is the work done by a liquidator in complying with his or her statutory obligations. As Farrell J pointed out in Warner, Re GTL Tradeup Pty Ltd (in liq)  FCA 323 at , it is relevant to consider whether the work was necessary to be done. If it was, there is no reason the liquidator should not be remunerated for it. (See )
- There are commonly cases where work is undertaken in an unsuccessful attempt to recover assets whether at the request of creditors or otherwise. Provided it was reasonable to carry out the work and the amount charged for it was reasonable, there is no reason a liquidator should not recover remuneration for undertaking the work. Indeed, there is a public interest in liquidators bringing recovery proceedings. However, the liquidator is obliged to make any decision to bring such proceedings with care, and negligence in the exercise of the power may lead to a liquidator being deprived of costs. (See )
- There is force in the criticisms of time based charging. However, it remains the responsibility of the Court to fix reasonable remuneration on the evidence before it, taking into account the matters referred to in s 473(10). That must include considering the work done by the liquidator, whether it was reasonable to carry it out and the appropriateness of the amount charged for it. Such an evaluative process, whilst difficult in some circumstances, does not seem to be beyond the competence of the Court. (See )
- It should not be concluded that a time based calculation will always be appropriate. The task of the Court is to fix reasonable remuneration having regard to the evidence before it and taking into account the matters in s 473(10). Thus for example the “Lodestar” approach explained by Finkelstein J in Re Korda, in the matter of Stockyard Limited (subject to DOCA)  FCA 1682 at  may, in some circumstances, be an appropriate method of undertaking the task. (See )
The Court of Appeal concluded inter alia that Brereton J did not appear to have taken the evidence presented by the liquidator into account or considered any of the factors in s 473(10) relevant to the assessment of remuneration, and erred in failing to do so. (See ) Moreover his Honour had erred in his consideration of the question of proportionality. Proportionality is a relevant factor, but Brereton J focused solely on this issue, failing to give consideration to the work actually done and whether the amount charged was proportionate to the difficulty and complexity of the tasks to be performed. (See )
The decision was unanimous, with Bathurst CJ writing the judgment and Beazley P, Gleeson JA, Barrett and Beach AJA agreeing. Barrett AJA added the observation that in his view, it was impossible to say, as a general proposition, that any given basis – whether according to time, value, extent of recoveries, size of company, nature of company or any other factor – merits any claim to precedence over any other in the matter of determination of liquidators’ remuneration. (See ) The appeal was allowed and the application for approval of remuneration was remitted to a judge of the Equity Division for rehearing.
The Ship is Righted
The past few years have been somewhat alarming for insolvency practitioners in NSW, particularly those taking appointments to smaller liquidations which later turn out to involve some unheralded complexities. This decision of the NSW Court of Appeal gives useful guidance and should provide greater certainty to insolvency practitioners as to the approach to be taken henceforth in NSW on court applications for approval of liquidators’ remuneration. Of course evidence on such applications should always be marshalled paying careful regard to the factors set out in s 473(10) and the aim of demonstrating to the Court the reasonableness of the remuneration incurred, including for certain items why a more senior staff member was required to undertake a particular task, or why a particular task took as much time as it did.
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I am proud that my colleagues at Colin Biggers and Paisley saw the merit in deciding to run this appeal on a pro bono basis. I agree that the ship is finally righted thanks to this strong appeal decision.