The first plaintiff, Mr David Lewis Clout, is the liquidator of Mainz Developments Pty Ltd (in liquidation) (Mainz). Mainz is the second plaintiff.
On 5 December 2014, Mr Clout was appointed voluntary administrator of Mainz.
Mr Clout was then also appointed liquidator of Mainz pursuant to a resolution of its creditors passed under s 439C(c) of the Corporations Act 2001 (Cth) (the Act), on 21 January 2015.
At the time of his appointment, Mainz was the registered owner of Suite 401, 161 Walker Street, North Sydney, New South Wales (the Property), being the property described as Lot 15 in Strata Plan 52656.
Mr Clout obtained a title search of the Property on 11 December 2014. The search showed that the Property was mortgaged to Bendigo and Adelaide Bank Ltd (the Bank). No caveats were recorded as being lodged against the title to the property.
The Bank was apparently content to allow Mr Clout to sell the Property, and after a marketing programme, on or about 6 February 2015, Mr Clout accepted an offer to purchase the Property for $240,000 made by Golden Dragon Australia Pty Ltd (the Purchaser).
Mr Clout instructed his solicitors to prepare a contract for sale in respect of the Property and, on about 11 March 2015, the Purchaser's solicitors and Mr Clout's solicitors exchanged signed contracts for sale.
Mr Clout, as liquidator of Mainz, was described as the vendor. By signing the contract for sale, Mr Clout subjected himself to a number of contractual risks as a vendor under the contract. The contract for sale provided for completion 42 days from the date of the contract, which was 27 April 2015.
Shortly before the date fixed for completion, on 31 March 2015, Mr Clout's solicitors obtained another title search that showed that four caveats had been lodged against the title to the Property by Stoddart (SE Queensland) Pty Ltd (Stoddart), Adbri Masonry Pty Ltd (Adbri), Bunnings Group Limited (Bunnings), and National Masonry Pty Ltd (National Masonry). Subsequently, Mr Clout became aware of two additional caveats being lodged against the title, by PACR Pty Ltd (PACR), and by Bulldog Developments Pty Ltd (Bulldog).
Relevantly for present purposes, each of the caveats was lodged to protect a charge over the Property said to have been granted by Mainz in favour of the caveator under an agreement to provide credit to Mainz, as follows:
1. Stoddart: caveat dated 29 January 2015 to secure a debt of $18,614.32, under a credit application dated 4 March 2009.
2. Adbri: caveat dated 29 January 2015 to secure a debt of $27,269.55, under an application for credit account dated 28 May 2014.
3. Bunnings: caveat dated 21 January 2015 to secure a debt of $47,081.05, under a commercial credit trading account agreement dated 20 December 2011.
4. National Masonry: caveat dated 2 March 2015 to secure the amount of indebtedness from time to time, under a credit account application dated 25 January 2013.
5. (It is not necessary to give details of the caveats that have lapsed).
Each of the six caveats had the effect of preventing Mr Clout from completing the contract for sale.
Eventually, after considerable correspondence, arrangements were made with the first four caveators mentioned above that they would provide withdrawals of caveat at settlement of the contract for sale, upon the basis of an agreement with Mr Clout that he would retain the balance of the proceeds of sale, after payment of the debt owed by Mainz to the Bank, and other costs of sale, as a fund pending the determination of competing claims to the fund.
Mr Clout served lapsing notices on PACR and Bulldog, and those caveators allowed their caveats to lapse.
Settlement of the contract for sale took place on 23 October 2015. In accordance with the agreement reached with the four caveators, after settlement Mr Clout retained a fund of $47,151.44.
There is some evidence that, at the time of the commencement of its winding up, Mainz owned a second property, and it appears that the winding up of Mainz will involve more than the realisation of the Property. Mr Clout will be entitled to more remuneration and expenses than are dealt with in the present application. The evidence discloses very little about the winding up; other than the realisation of the Property, and the dispute between Mr Clout and the caveators.
[3]
The proceedings
On 12 February 2016, the plaintiffs filed a summons seeking an order under Uniform Civil Procedure Rules 2005 (NSW) (UCPR) Part 41 that the amount retained by Mr Clout, represented by two bank cheques for the amounts of $30,081.44 and $17,070, be paid into court.
On 16 February 2016, the plaintiffs filed a notice of motion under UCPR r 41.3, for an order that the $47,151.44 paid into court by Mr Clout be paid out to him on account of his remuneration and expenses.
The amount that Mr Clout claimed in his 28 January 2016 affidavit was $16,553.40 as liquidator's remuneration, and $43,124.54 for liquidator's expenses, being agents' fees, searches and amounts invoiced by Mr Clout's solicitors. The total amount claimed was $59,677.99, which plainly exceeds the amount of the net proceeds of sale of the Property that has been paid into court.
The plaintiffs' notice of motion was heard on 8 June 2016. Mr Clout had not by that time obtained an order for the money to be paid into court. I made an order that the money be paid into court.
At the hearing, four of the caveators appeared by the same counsel to resist the orders sought by the plaintiffs on their notice of motion. They were Stoddart, Adbri, Bunnings and National Masonry.
The present proceedings are not an application by Mr Clout for relief in the nature of a declaration of his entitlement to the amount of the remuneration and expenses claimed by him, or an order fixing the amount of his remuneration.
Instead, Mr Clout claims that he is entitled to a lien over the balance of the proceeds of sale that has now been paid into court in respect of his remuneration and expenses for effecting the sale of the Property, and that that lien takes priority over all of the charges claimed by the caveators, on the principle laid down by Dixon J (as his Honour then was) in Re Universal Distributing Co Ltd (in liq) [1933] HCA 2; (1933) 48 CLR 171 at 174. In effect, Mr Clout says that his remuneration and expenses total $59,677.99, which is more than the amount that has been paid into court, so the latter amount should simply be paid out to him.
The claims made by each of the caveators proceed on the assumption that those caveators have a valid charge as claimed in the respective caveats. The issue of whether the charges claimed by the four caveators are valid has not yet been admitted by Mr Clout, or determined by the court.
As it has happened, no directions were made in these proceedings, before the notice of motion was set down for hearing, for the purpose of enabling the court to determine the amount of the remuneration and expenses protected by Mr Clout's lien. Nor were any directions made for the purpose of enabling the court to decide the validity of the charges claimed by the caveators; and if valid, the amounts secured by each charge.
Accordingly, I listed a directions hearing for 20 April 2016. The parties were content to proceed upon the basis that the four caveators had a prima facie case for the validity of the charges claimed by them, so that the court should determine Mr Clout's claim on the assumption that the charges were valid. If any part of the money paid into court remains outstanding after the payment to Mr Clout of any remuneration and expenses protected by his lien, then it may be necessary for the court to give directions for the purpose of resolving the competing claims of the caveators, and Mr Clout on behalf of the unsecured creditors.
I made orders in chambers on 28 April 2016, following the directions hearing. The plaintiffs were required to provide to the caveators details of Mr Clout's claim for remuneration, and the tax invoices received from his solicitors, in a schedule in an itemised form. The caveators were directed to provide a response, including objections to any specific items of work performed, together with reasons, and if it was claimed that a particular claim was unreasonable, then the amount that the caveators suggested would be reasonable.
The directions that I made were not necessarily equivalent to those that would be appropriate if the application before the court was to fix the amount of Mr Clout's remuneration, or to determine his entitlement to be reimbursed for his expenses out of the assets of the company. The purpose of the directions was to permit the parties to identify the issues between them concerning Mr Clout's entitlement to the remuneration and expenses that he has claimed.
The caveators have made extensive objections, on a line by line basis, to the remuneration and expenses claim made by Mr Clout. The objections were made on the assumption that Mr Clout and his solicitors were entitled to be paid on the basis of hourly rates for time spent. However, the primary submission of the caveators was that Mr Clout should only be entitled for both remuneration and expenses to a specific percentage of the realised value of the Property. A detailed comparison between Mr Clout's claim and the amounts challenged by the caveators is contained in a spread sheet prepared by Mr Clout (see court book 1/118). In respect of Mr Clout's claim for remuneration, the caveators have allowed $3,096 out of a claim of $19,370.90. (The amount of this claim is greater than the $16,553.40 referred to in Mr Clout's affidavit. The excess relates to remuneration for the period after 23 October 2015, when the contract for sale of the property was settled, and is not claimed by Mr Clout in this application). The amount of the legal fees incurred by Mr Clout that is not disputed by the caveators is a mere $1,009.26. The amount in dispute is comprised of many individual disputed line items, and also, as counsel for the caveators explained, they have taken the view that many of the brief descriptions of the purpose for work done in the detailed work in progress schedule provided by Mr Clout to the caveators are not, so the caveators say, sufficient to establish that the work done was secured by Mr Clout's lien.
As the issues for hearing had not been identified in any formal way, after discussion with counsel, I determined that it would be appropriate for the court to decide any legal questions that were in dispute, and also any necessary issues of fact that could properly be determined in the one day that had been set aside for the hearing. If it is necessary for the validity and reasonableness of any of the claims to be determined on a line by line basis, in response to the specific objections made by the caveators, I will make appropriate orders for the cost-efficient and convenient determination of those claims.
[4]
Mr Clout's claim
As I have said, Mr Clout claims a lien over the net proceeds of sale, which takes priority over all of the charges claimed by the caveators, on the principle laid down in Re Universal Distributing Co Ltd (in liq), as explained by the High Court in Stewart v Atco Controls Pty Ltd (in liq) [2014] HCA 15; (2014) 252 CLR 307.
Mr Clout says that the latter case is authority for the proposition that his lien takes priority over the charges claimed by the caveators for all his remuneration and expenses of scrutinising the caveats and the charges sought to be protected by the caveats; including in determining the validity of the caveats and the charges, the amounts secured by them, and the relative priorities of the charges.
Mr Clout relied upon the fact that, at the second meeting of creditors of Mainz, held on 21 January 2015, at which the creditors resolved under s 439C of the Act that Mainz be wound up, and under s 499(2A) of the Act that Mr Clout be confirmed as liquidator of Mainz, the creditors also made the following resolution:
That the remuneration of the Liquidator and his staff be fixed on a time basis for the period from 21 January 2015 to finalisation be approved in the amount of $100,000 (excluding GST) in accordance with the David Clout & Associates Schedule of Hourly Rates and that the Liquidator be empowered to draw those fees to a ceiling limit of $100,000 (excluding GST) from available funds.
The creditors also passed a resolution by which they fixed Mr Clout's entitlement to remuneration as administrator, for the period 5 December 2014 to 20 January 2015, at a total of $54,000; also in accordance with Mr Clout's firm's Schedule of Hourly Rates.
Mr Clout submitted that the resolutions of the creditors fixed the basis of his remuneration, and that in this dispute with the caveators his remuneration should be determined on a time basis in accordance with the schedule of hourly rates agreed by the creditors.
Mr Clout prepared a remuneration report regarding the care and preservation and realisation of the property dated 18 December 2015. His remuneration was calculated on an hourly basis in accordance with his firm's standard rates. Mr Clout claimed $18,208.74 as remuneration for the period 5 December 2014 to 18 December 2015. Mr Clout now only maintains a claim for $16,553.40, as I have noted above.
Mr Clout's description of work completed and calculation of remuneration appears in par 2.3 of his remuneration report. The description is in the form of a table that is set out in less than a single page. It includes six types of work under the heading "General Description"; a statement of the total time spent on each type of work expressed in hours; a statement of the total amount of remuneration claimed; and a broad description of the work done expressed on an inclusive basis in bullet points. The calculation of the remuneration claimed bears no resemblance to a lawyer's bill of costs, and does not explain how the work was done by the different classifications of worker, with different levels of experience and different charge out rates described in par 1.4.
The largest component of Mr Clout's remuneration claim is $14,693.14, in respect of: "Attending the legal matters including property sale, security claims, negotiations, conveyancing, sale, Court application etc". The individual cost items included:
Liaise with secured creditors, caveators and Russells re security claims; assess claims
Provide instructions and consider issues with caveators
Attend the negotiations, conveyancing matters including numerous extensions, disputes, lapsing notices and settlement.
Of Mr Clout's claim for payment of disbursements of $44,998.45, $43,124.54 related to externally provided professional services. I understand that the major part of these professional services is constituted by the services provided by Mr Clout's solicitors. Mr Clout annexed copies of his solicitors' tax invoices. These tax invoices were supported by documents containing account details, which itemised the solicitors' claims by date, description of work, author, units (in 6 minute intervals), hours and amounts. The description of the work done and the author were redacted in the remuneration report. The evidence on the application included the account details in an unredacted form.
As I understand Mr Clout's evidence, his remuneration report dated 18 December 2015 was prepared on a basis that is consistent with the resolutions made by the creditors on 21 January 2015; but the creditors have not made further resolutions under ss 449E(1)(b) or 499(3)(b) of the Act to fix Mr Clout's remuneration in respect of the care, preservation and realisation of the Property, in the amount claimed by Mr Clout in the remuneration report. Accordingly, the reality is that Mr Clout has used the schedule of rates approved by the creditors to make his own determination of what work was done in the care, preservation and realisation of the Property; by which workers; and that the work done was appropriate for the level of expertise of each class of work. The creditors have not in any real sense fixed Mr Clout's remuneration for this aspect of the winding up of Mainz.
[5]
The caveators' response
The caveators accept that Mr Clout has a lien to secure his remuneration and expenses, which takes priority over the charges claimed by the caveators. However, they dispute that Mr Clout is entitled to the full amount claimed by him.
The caveators submit that Mr Clout's lien only takes priority over the charges that they claim to the extent that Mr Clout's remuneration and expenses reasonably relate to the care, preservation and realisation of the Property, and that much of the remuneration and expenses claimed by Mr Clout falls outside the protection of the lien, because it relates to work done that was not necessary for the realisation of the property, because it concerned communications and investigations about the validity and priority of the charges, and the amounts secured, which was not necessary to enable the contract for sale to be completed.
The caveators did not attend and vote at the creditors meeting, and they say that they should not be bound by the resolutions made by the creditors in relation to the basis of Mr Clout's entitlement to remuneration.
The caveators delivered a number of General Objections to Mr Clout's claim (court book 1/90 to 92). General Objection No1 concerns Mr Clout's claim for remuneration and expenses. The caveators submitted that the reasonable amount allowed for the realisation of the property should be limited to 2% of the $240,000 sale price of the Property, which is an amount of $4,800. The caveators relied upon the considerations recently discussed by Brereton J in In the matter of Independent Contractor Services (Aust) Pty Ltd ACN 119 186 971 (in liq) (No 2) [2016] NSWSC 106, especially at [47], where his Honour said (footnotes omitted):
[47] Indicatively, I would be inclined to allow 2% on realisations ($4,236), reflecting the very limited work done by the Liquidator in respect of realisations; but 15% on distributions ($16,647), an unusually high rate mainly to reflect the complicating feature of the two applications for directions, in which respect there are analogies with AAA Financial Intelligence and Gramarkerr. This approach would result in a total remuneration of $20,883. However, I am also conscious that the Court ought not to discourage liquidators from undertaking small but difficult liquidations. In my view, having regard to the size of the fund, the totality of work undertaken and time expended by the Liquidator and his staff (including that for which he has not specifically claimed, or has written off), the challenges presented, and the extent to which others (including lawyers and debt collectors) were engaged and remunerated for associated work, the Liquidator should be allowed remuneration of $30,000 (which equates to about 14% of gross realisations).
The caveators have seized upon the 2% that Brereton J "indicatively" would have allowed on realisations, and applied that percentage to the gross sale value of the Property, to derive a total for Mr Clout's remuneration and expenses.
I assume that the caveators would seek to justify the choice of 2% because Mr Clout's claim relates to the realisation of the Property, and not the distribution of any sum realised, to the unsecured creditors. Brereton J was, of course, concerned with the liquidator's remuneration for the whole of the winding up, and for the reasons given, he allowed an amount of remuneration of $37,000, which equated to about 14% of gross realisations. The caveators did not seek to explain how the 2% figure they selected fitted in to the whole of Brereton J's reasoning in the Independent Contractor Services case. Furthermore, the caveators did not address other cases that have recently been decided, in which various different percentages have been adopted, as a guide to determining the amount of the remuneration that should be allowed to liquidators in the particular cases.
General Objection No 2 related to the possibility that Mr Clout had included in his claim for remuneration and expenses work done in the general administration of the winding up; and General Objections Nos 3, 4 and 7 to 9 concerned Mr Clout's expenses constituted by his solicitors' tax invoices. The remaining General Objections need not separately be considered.
[6]
Priority of liquidator's lien
The first question that arises for consideration involves the identification of the principle governing the nature and extent of the liquidator's lien, when the liquidator has realised property of the company in liquidation, which is the subject of charges in favour of secured creditors.
As I have said, Mr Clout and the caveators agreed that the relevant principle is that stated by Dixon J in the Universal Distributing Co case, which can conveniently be set out by means of the following extract from the judgment of Crennan, Kiefel, Bell, Gageler and Keane JJ in Stewart v Atco Controls Pty Ltd (in liq) (footnotes omitted):
[11] The issue in this matter is whether the liquidator was entitled to an equitable lien over the fund constituted by the settlement sum with respect to the costs and expenses incurred in the litigation against both Atco and the receivers. The liquidator submits that what was said by Dixon J in Re Universal Distributing Co Ltd (in liq) resolves that issue. Arguments advanced by Atco on the appeal necessitate that the relevant passage be set out in full:
If a creditor whose debt is secured over the assets of the company come in and have his rights decided in the winding up, he is entitled to be paid principal and interest out of the fund produced by the assets encumbered by his debt after the deduction of the costs, charges and expenses incidental to the realization of such assets (Re Marine Mansions Co). The security is paramount to the general costs and expenses of the liquidation, but the expenses attendant upon the realization of the fund affected by the security must be borne by it (Re Oriental Hotels Co; Perry v Oriental Hotels Co). The debenture-holders are creditors who have a specific right to the property for the purpose of paying their debts. But if it is realized in the winding up, a proceeding to which they are thus parties, the proceeds must bear the cost of the realization just as if they had begun a suit for its realization or had themselves realized it without suit (cf Re Regent's Canal Ironworks Co; Ex parte Grissell; and see Batten v Wedgwood Coal and Iron Co).
[12] Dixon J was stating a general principle to be applied in the circumstances there identified. His Honour went on to say that, in applying this principle, expenses reasonably incurred in the care, preservation and realisation of the property of the company in liquidation would be "thrown against" the fund created by the liquidator's efforts. His Honour concluded that the liquidator's remuneration for work done for the purpose of raising the fund should be charged against it. (Emphasis added)
Their Honours stated the relevant principle more shortly as follows:
[22] The principle in Universal Distributing is stated at some length, no doubt because Dixon J was concerned to identify its sources. It may be more shortly stated as: a secured creditor may not have the benefit of a fund created by a liquidator's efforts in the winding up without the liquidator's costs and expenses, including remuneration, of creating that fund being first met. To that end, equity will create a charge over the fund in priority to that of the secured creditor.
[23] The circumstances in which the principle will apply are where: there is an insolvent company in liquidation; the liquidator has incurred expenses and rendered services in the realisation of an asset; the resulting fund is insufficient to meet both the liquidator's costs and expenses of realisation and the debt due to a secured creditor; and the creditor claims the fund. In these circumstances, it is just that the liquidator be recompensed…
The question therefore is whether the remuneration and expenses claimed by Mr Clout have been reasonably incurred in the care, preservation and realisation of the property.
The requirement that the remuneration and expenses be reasonably incurred will naturally limit the entitlement of the liquidator for which his or her lien has priority to the remuneration and expenses that relate to the cost-efficient realisation of the Property; in the sense that the work done is directly necessary to effect the realisation, and is not done for extraneous reasons that are not necessary for the realisation of the property. As Dixon J said in the Universal Distributing Co case at 175: "I see no reason why remuneration for work done for the exclusive purpose of raising the fund should not be charged upon it" (emphasis added).
[7]
Costs of scrutinising validity and priority of charges
Mr Clout based his submission that his fees and expenses of scrutinising and determining the validity of the charges, the amount secured, and their relative priority, are protected by his liquidator's lien, on an aspect of the decision of the High Court in Stewart v Atco Controls Ltd. The part of the judgment upon which Mr Clout appears to have relied is set out below, particularly at [60] (footnotes omitted):
[57] Atco's principal argument concerned the nature and purpose of the action brought against it and the fact that it did not stand to benefit from that action. These considerations were necessitated by the test of unconscientiousness which the Court of Appeal applied and which it concluded in Atco's favour.
[58] It is no part of a liquidator's duty to ensure that litigation conducted in the course of the realisation of assets is for the benefit of a secured creditor, or any particular creditor. A liquidator's duty is owed to the body of creditors as a whole and to the court. The relevant benefit is that which is sought by the realisation of assets, namely the augmentation of assets available for distribution. A liquidator is to do what he or she can to augment the disposable assets of the company.
[59] It is the duty of a liquidator to realise assets and, to that end, a liquidator has the power to bring proceedings. While a liquidator must exercise care in determining whether to commence litigation, in this case the liquidator had received advice from counsel and there is no suggestion that the liquidator was reckless in bringing the actions or that the actions had no prospects of success. The liquidator acted with propriety in bringing them.
[60] It is also part of a liquidator's duties to "carefully scrutinise" charges existing over company property and, in certain circumstances, to attack them and have them declared void. Challenges by liquidators to the securities held by creditors are not uncommon. It would appear that in Universal Distributing, for example, there had been a question about the validity of the debenture holder's security.
[61] The nub of Atco's argument, which is reflected in the judgments in the Court of Appeal, is that the action was in Seeley's interests. So much may be accepted, but it does not affect the question whether an equitable lien arose.
In my view, in these passages, the High Court did not decide that, in a case such as the present, the liquidator has a duty to carefully scrutinise charges existing over company property, and in appropriate circumstances to attack them, and that the cost of doing so will necessarily fall within the cost of realising the property and so be covered by the liquidator's lien in priority to the claims of chargees.
The situation before the High Court was somewhat special, because the property of the company in liquidation realised by the liquidator was a fund created by the liquidator settling a claim that he had made against receivers, who a secured creditor had appointed under a charge over the company's assets. The liquidator attacked the validity of the charge, and also the appointment of the receivers under the charge. The receivers settled the claim, by paying a sum to the liquidator. The creditor did not settle the claim made by the liquidator, and ultimately the charge was found by the courts to be valid. The creditor then claimed that the fund created by the settlement with the receivers was itself covered by the charge over the company's assets, and called for the fund to be paid to the creditor. The liquidator refused. Ultimately, the High Court held that the liquidator was right, because the fund was created by the efforts of the liquidator in suing the receivers, and then settling the claim.
Accordingly, the costs incurred by the liquidator in scrutinising and attacking the validity of the charge occurred in relation to the charge that was the basis of the claim which the liquidator settled, thus creating the fund. The costs of creating the fund are equivalent to the costs incurred in the care, preservation and realisation of an existing property, for the purpose of the rule concerning the priority of the liquidator's lien. They were not costs of scrutinising and attacking charges claimed by creditors in equivalent positions to the caveators in the present case. In that case, the liquidator's costs of scrutinising and attacking the validity of an existing charge over the existing assets of the company created the relevant fund, which was constituted by the proceeds of the settlement of the liquidator's claim against the receivers. The costs in that case of scrutinising, and attacking a particular charge would take priority over all pre-existing charges over the company's assets. In the present case, Mr Clout's costs of scrutinising and possibly challenging the validity of existing charges over the property owned by Mainz did not create any fund, but may in part have been justified by the need to realise the Property.
The comments made by the Justices about the liquidator's duties to scrutinise, and in appropriate circumstances, to attack charges over the company's property, were made in the general context that they are part of a liquidator's duties, for the purpose of maximising the fund available for distribution to unsecured creditors. The creditor, in the case before the High Court, had argued that the lien claimed by the liquidator should not exist over the fund, because the lender did "not stand to benefit" from those actions by the liquidator. That submission arose in the context of a wider submission that the lender should only be deprived of the right to execute its charge against the fund, if it would be unconscientious of the lender to do so. The lender submitted that it would not be conscientious, because the work undertaken by the liquidator was never in the creditor's interests. The High Court simply found this argument to be irrelevant, for the reasons set out above in the extract from the judgment.
It follows, in my view, that Mr Clout's lien for his fees and expenses will not necessarily take priority over any pre-existing charges over the property of Mainz, just because the costs and expenses were incurred in scrutinising and attacking the validity of those charges. It is necessary to distinguish between fees and expenses of that nature that were reasonably incurred in realising the Property and those that were not.
[8]
Fees and expenses incurred in care, preservation and realisation of property
It is now appropriate to consider whether Mr Clout has substantiated his claim that his lien takes priority over the charges claimed by the caveators for the whole of the fees and expenses claimed by him.
As I have said above, I will not attempt in these reasons to identify in a precise way the costs and expenses incurred by Mr Clout, for which his lien takes priority over any of the charges claimed by the caveators, which are subsequently shown to be valid. It is not feasible for the court to attempt that exercise in the present case. Mr Clout has, as a practical matter, simply claimed that all of the fees and expenses that he has claimed in the present case are covered by his lien, and were incurred in the care, preservation and realisation of the Property. The individual components of his fees and expenses have not been explained in a way that permits the exercise to be undertaken.
A number of approaches were available to Mr Clout to secure the removal of the caveats that he discovered had been lodged against the title to the Property:
1. Mr Clout could have invited the Bank to adopt the contract for sale and sell the Property without regard to the caveats, which did not prevent the registration of a transfer following such a sale.
2. Mr Clout could have negotiated an agreement with the caveators that they would provide withdrawals of caveat on settlement of the contract for sale, in return for Mr Clout setting aside the net proceeds of sale as a fund pending the determination of the priority of all competing valid claims. Ultimately, Mr Clout entered into an agreement of this form with the four caveators represented on the application.
3. Mr Clout could have used the lapsing notice procedure provided by s 74J of the Real Property Act 1900 (NSW). Mr Clout secured the lapsing of the caveats lodged by PACR and Bulldog by this means.
4. If a caveator upon whom a lapsing notice was served applied to the court for an extension of the caveat, Mr Clout could have sought to negotiate an agreement of the type referred to in (2). If that failed, he could have sought to persuade the court that the balance of convenience favoured the court not extending the caveat, provided that the net proceeds of sale were retained as a fund pending the determination of competing claims. It would only be if the court made an order extending the caveat that Mr Clout would have to prosecute proceedings in court for the removal of the caveat.
5. Mr Clout may reasonably have sought one of these solutions, and then varied his approach by seeking an alternative solution, in response to events as they occurred.
None of the caveators suggested that Mr Clout should have adopted approach (1) in this case.
I infer that Mr Clout's solicitors sent letters to the solicitors for the caveators on 9 April 2015, advising that the contract for sale was due to be completed on 27 April 2015; advising that there would be no surplus funds at completion of the contract for sale; and requesting the caveators to withdraw their caveats. Letters in reply complained that Mr Clout's solicitors had not explained how the sale proceeds were being disbursed, and why there would be no surplus.
Mr Clout's solicitors responded with a statement from Mr Clout outlining how the funds would be distributed. The statement showed a sale price of $240,000; a payment of $160,000 to the Bank; various other small payments, and a total of $169,400 for "administrator/liquidator fees (Approved by creditors)". This would leave a shortfall of $101,917.
It appears that Mr Clout's solicitors advised at least some of the solicitors for the caveators that Mr Clout would soon "commence lapsing the caveats", if the caveats were not withdrawn.
Various solicitors for caveators then required that further information be provided, including a breakdown of Mr Clout's claim for fees and expenses, as well as an explanation of why Mr Clout's claim took priority over the charges claimed by the caveators.
On 17 April 2015, the solicitors for National Masonry wrote to Mr Clout's solicitors, and asserted that Mr Clout's priority was limited to his costs associated with the sale of the Property; relying on Stewart v Atco Controls. Those solicitors stated that their client was willing to withdraw the caveat at settlement in exchange for a bank cheque for $12,061.27, being the amount secured by the charge claimed by that caveator.
Correspondence then ensued between Mr Clout's solicitors and the solicitors for a number of the caveators, in which the latter provided evidence to support their clients' charges, and there was discussion about the validity of the charges.
On 21 April 2015, the solicitors for National Masonry advised Mr Clout's solicitors that his costs of unsuccessfully disputing the caveator's equitable interest could not be drawn from the sale proceeds in priority to the caveator's claim.
On 24 April 2015, Mr Clout's solicitors wrote a letter to the solicitors for the caveators who are now before the court, to advise them that the sale of the Property was scheduled to complete at noon on the following Monday, 27 April 2015. They said:
So as not to prejudice the imminent completion of the sale of the Property, please confirm that your respective clients will withdraw any caveats and permit the sale to complete on the basis that the surplus proceeds (after payment of statutory liabilities, the mortgagee and solicitors costs) are to be deposited into Russells' trust account and held by us subject to our client's determination of your respective clients' claims to the Property".
This letter followed the second course that I have outlined above, of attempting to obtain the agreement of the caveators to withdraw their caveats at settlement, on the basis that the net proceeds of sale would be retained as a separate fund. However, it proceeded on the basis that Mr Clout would be the one who determined the validity of the caveators' claims, which was not his proper function in relation to any valid, pre-existing charges over the property.
On 27 April 2015, the Purchaser called off settlement, until Mr Clout could provide confirmation that he could provide a clear title at settlement; which apparently was a reference to the need for Mr Clout to have caused the withdrawal of all caveats at the time of settlement of the contract.
There is evidence that at least Bunnings had decided, in response to the 24 April 2015 letter, that it would agree to a withdrawal of caveat being provided at settlement, provided that the net proceeds of sale were retained by Mr Clout's solicitors, before they learned that the Purchaser had called off settlement. I infer from a comment in an email dated 24 April 2015, between the solicitors for Bunnings and its New South Wales agents, that Mr Clout's solicitors had been informed of Bunnings' willingness to withdraw its caveat, and that Mr Clout's solicitors would "get back to us shortly".
An issue arose, as between the solicitors for Mr Clout and the solicitors for some of the caveators, as to whether the former had been sufficiently expeditious in providing information sought by the caveators: see for instance the emails dated 27 April 2015 and 4 June 2015 from the solicitors for Stoddart.
Also on 27 April 2015, the solicitors for National Masonry wrote a letter to Mr Clout's solicitors in which they said:
Our client is amenable to the surplus funds being held in your firm's trust account on the basis that the funds are only to be released upon the written consent of all interested parties and should that consent not be forthcoming, the funds are to be paid into the Supreme Court of NSW.
Upon your confirmation of the above and provision of the settlement statement confirming the dispersal of the funds, pending our client's approval of the settlement statement, our client is willing to provide an executed withdrawal of caveat at settlement.
It appears from the terms of the letter that it was written before the noon appointment for settlement of the contract for sale on that date.
Mr Clout's solicitors responded to National Masonry's solicitors' 27 April 2015 letter on 16 June 2015. The letter observed that, while National Masonry had an arguable claim to be a secured creditor, its claim would rank behind prior existing security interests, and National Masonry would not receive any proceeds from the sale. It further stated that, on Mr Clout's solicitors' estimates, a total of $34,983 would be available to secured creditors, and that claims ranking above National Masonry's alleged claim totalled $65,695.37. On that basis, Mr Clout's solicitors required confirmation that National Masonry would withdraw its caveat immediately, and confirm the withdrawal by no later than 5 PM on Thursday, 18 June 2015, failing which Mr Clout would serve the lapsing notice that was apparently enclosed with the letter.
Mr Clout's solicitors also wrote a letter to the solicitors for Stoddart on 16 June 2015. The letter stated that Mr Clout's "costs and expenses of preserving, securing and realising the Property" were then $38,000, and that the current estimated surplus was $34,983. The letter observed that the surplus "may be sufficient to pay your client the full amount claimed". It include the following offer:
So as not to further prejudice the completion of the sale of the Property, our client proposes that your client withdraw the caveat it placed on the Property and permit the sale to complete on the basis that the liquidator will:
1. promptly adjudicate your client's claim on receipt of all supporting information reasonably requested; and
2. will not make any determination or distribution without giving your client 14 days' notice of his intention to do so.
The letter asked for Stoddart's confirmation that it would withdraw its caveat by no later than 18 June 2015.
A letter was written by Mr Clout's solicitors on 16 June 2015 to the solicitors for Bunnings in substantially the same terms as the letter to the solicitors for Stoddart. The letter observed that "after payment of the claim of a prior ranking secured creditor your client may recover $16,368.68". The letter contained the same offer as the earlier letter.
By letter written by Mr Clout's solicitors on 16 June 2015 to the solicitors for Adbri, Mr Clout acknowledged that Adbri may have a caveatable interest in the property, but stated that claims ranking ahead of its security totalled $65,695.37, in relation to a total of $34,983 available to secured creditors. The letter did not make the same offer as was made to the other caveators, but demanded that the caveat be withdrawn immediately, failing which Mr Clout would serve the lapsing notice that was enclosed with the letter.
The correspondence written on behalf of Mr Clout appears to have prompted a response from some caveators whereby they sought information concerning the claims made by caveators that were said to have priority: see the emails written on behalf of Bunnings dated 17 June 2015, and National Masonry of the same date. For example, the latter email asserted that the document upon which Bunnings based its claim to be a secured creditor did not bear stamp duty.
The solicitors for Stoddart also sought further information by email from Mr Clout's solicitors on 25 June 2015. This email stated in two places that Stoddart did not intend to hold up settlement.
The solicitors for Stoddart appear also to have been the solicitors for Adbri, and they sent an almost identical email to Mr Clout's solicitors the same day, also on 25 June 2015.
By two emails dated 30 June 2015, Mr Clout's solicitors advised the solicitors for Stoddart and Adbri that Mr Clout would not be in a position to adjudicate and pay caveators' claims until after the sale of the Property, and would require withdrawal of the caveats prior to or at "exchange" (meaning settlement). The letter asserted that Mr Clout's current and future costs, charges and expenses incurred in scrutinising caveats, issuing lapsing notices, and defending any applications to have lapsing notices set aside, would be secured by the liquidator's equitable lien over the Property, and would rank in priority to the caveators' claims.
The solicitors for Stoddart and Adbri replied on 2 July 2015. Among other things, they said that their clients could not properly consider the request for the withdrawal of the caveats, unless and until they were provided with satisfactory information and supporting documents, which demonstrated that there would not be any net surplus proceeds of sale available at settlement. Further, the letters also offered that the caveators were willing to provide a withdrawal of caveat at settlement if Mr Clout provided a bank cheque for the amounts claimed by the caveators; or Mr Clout satisfied the caveators that there was no net surplus proceeds of sale available to them; or the caveators as a whole agreed with Mr Clout as to the preservation of the disputed proceeds, such as payment of the monies into court. The third part of this offer was sufficient to permit Mr Clout to achieve settlement of the contract for sale, provided he achieved an equivalent agreement from the other caveators.
Mr Clout's solicitors served a lapsing notice on the solicitors for Bunnings on 15 July 2015.
This step prompted further correspondence between the solicitors for Mr Clout and Bunnings. In the first of its letters, on 24 July 2015, Bunnings' solicitors expressed concern that the costs and expenses claimed by Mr Clout were already approximately 16% of the total sale price for the property "in circumstances where the Company in liquidation could not receive any benefit at all from the sale of this property as the security interests over the property quite obviously mean that there would never be any equity to go back to the Company in liquidation". The solicitors asserted that the course taken "can only be seen as an opportunistic cost generation exercise by your client". The solicitors offered that Bunnings would allow settlement to go ahead and withdraw its caveat, provided that Mr Clout's solicitors undertook in writing that all proceeds of the sale, after paying out of the first mortgagee and certain costs, would be paid into the firm's trust account on the basis that they would only be paid out by agreement of the parties or order of a competent court.
Mr Clout's solicitors replied by email dated 27 July 2015, and asserted that none of the documentation provided by Bunnings established its claim, and accordingly, that it was reasonable and proper for Mr Clout to file a lapsing notice.
That email prompted a further lengthy response from Bunnings' solicitors, on 29 July 2015. The letter stated that Bunnings conceded that Mr Clout was entitled to an equitable lien in respect of his "reasonable costs and expenses directly related to the preserving, securing and realisation of the Property", but asserted that any amount more than $10,000 was not justifiable.
Mr Clout's solicitors gave notice to the solicitors for Stoddart, National Masonry, Bunnings and Adbri, by letter dated 26 August 2015, that Mr Clout intended to complete the contract for sale on 1 September 2015.
The letter advised that the amounts claimed by the caveators were Stoddart ($18,614.32), National Masonry ($12,061.27), Bunnings ($47,081.05) and Adbri ($27,269.55). It asserted that the charges claimed by the caveators took priority in the order listed, so that Stoddart would receive the full amount of its claim; National Masonry would receive most, if not all, of its claim; Bunnings would receive a small amount; and Adbri would not receive anything.
It thus appears that Mr Clout took on the role of deciding the amounts claimed by the caveators and their relative priorities.
The letter did not accept any offer for settlement of the contract for sale to take place on the basis that the caveats would be withdrawn; and a fund would be preserved out of the balance of the proceeds of sale pending determination of the validity and priority of the claims of the caveators. Instead, the letter said that the caveators would be adequately protected by Mr Clout adjudicating the claims after settlement; and if the caveators were not satisfied with how Mr Clout proposed to distribute the balance of the proceeds of sale, they could take action under s 1321 of the Act.
The letter advised that, if the caveators were not prepared to permit settlement to proceed, Mr Clout would consider inviting the mortgagee to sell the property notwithstanding the lodgement of the caveats.
The letter also advised that: "Two patently unsustainable caveats have been lapsed by operation of notice". I assume that this is a reference to the caveats lodged by PACR and Bulldog. This is a convenient place to record that the court book does not appear to include the correspondence between Mr Clout and his solicitors, and these two caveators, or their solicitors. That is likely to be for the reason that the two caveators did not seek to support their caveats, so they lapsed, and they were not represented at the hearing. I am, accordingly, not able to make any observations concerning the reasonableness or necessity for the steps taken by Mr Clout in relation to the caveats lodged by those caveators, for the purpose of realising the Property.
On 26 August 2015, the solicitors for National Masonry responded by advising Mr Clout's solicitors that, as National Masonry was a secured creditor, Mr Clout had no power of adjudication or decision-making on the subject of who holds equitable interests in the property. They asserted that Mr Clout's lien was limited to fees directly attributable to his caring for, preserving and selling the Property, and that he was not entitled to priority in respect of his costs "for 'adjudicating' priorities as the equitable priorities are a matter either for the Court or the parties to privately settle between themselves".
Mr Clout's solicitors asserted in reply on 26 August 2015, that Mr Clout, as liquidator, was obliged to determine whether there were valid secured claims over the assets that he controlled, and that obligation would not be discharged were he simply to assume that the claims of the caveators were valid, and left it to the caveators to work out how to divide up the surplus.
The solicitors for Stoddart replied to the 26 August 2015 letter the following day on 27 August 2015. The solicitors again sought detailed information from Mr Clout, and also offered to provide a withdrawal of caveat at settlement, provided that Mr Clout agreed to pay the balance of the proceeds of sale into court.
Further correspondence then ensued between the solicitors for the various parties, concerning the demands for information from the caveators. On 31 August 2015, Mr Clout's solicitors again advised that settlement of the contract for sale had been deferred. It is difficult to summarise the effect of this correspondence, but it included a number of the solicitors for the caveators providing information to Mr Clout to substantiate their claims.
Mr Clout's solicitors advised the solicitors for the four caveators on 9 October 2015, that settlement of the sale of the Property had been scheduled for 15 October 2015. The email attached a schedule containing Mr Clout's adjudication of the claims made by the caveators. Mr Clout rejected Stoddart's claim; he accepted National Masonry's claim in a reduced amount; he rejected Bunnings' claim; and he accepted Adbri's claim, but only to the extent that the amount of the claim had been substantiated. The schedule also records the rejection of the claims by PACR and Bulldog.
On 14 October 2015, Mr Clout's solicitors provided to a number of the solicitors for the caveators a schedule described as "an updated version of the document sent last week and excludes what we understand to be the contentious legal fees (being those that relate to dealing with the caveators)", which had apparently been omitted from an email sent the previous day. The schedule is described as "Scenario 1 Liquidator claims only conveyancing legals". The liquidator's remuneration claimed is $16,108.95. The legal expenses claimed are fees of $8,882.94, disbursements of $1,068.21; and cost to completion of $1,320 plus disbursements of $330.
The email prompted further detailed correspondence between the solicitors for Mr Clout and the caveators. On 14 October 2015, the solicitors for National Masonry again disputed Mr Clout's claim concerning the amount of his fees and expenses protected by his lien in priority to the claims made by the caveators. They again offered to provide their client's withdrawal of caveat on settlement on the condition that the disputed funds were paid into court.
The solicitors for Bunnings, on 14 October 2015, agreed on behalf of their client with the position adopted by the solicitors for National Masonry.
As I understand Mr Clout's solicitors' 14 October 2015 email in reply to the letter from National Masonry's solicitors, the former took the position that Mr Clout was entitled to deduct his fees and expenses in relation to what had been described as the "conveyancing" on settlement, while his entitlement to the balance of his claim would be reserved.
The solicitors for Adbri again offered, on 14 October 2015, that their client would provide a withdrawal of caveat on settlement, if the balance of the proceeds of sale, calculated after the deduction of "reasonable legal costs of the conveyance", was paid into court.
Mr Clout's solicitors sought confirmation, on 14 October 2015, that the costs and expenses referable to the conveyance could be paid on settlement.
Before a response could be received, Mr Clout's solicitors advised the other solicitors that the settlement had been postponed. They then advised, on 20 October 2015, that settlement was to take place on 23 October 2015, and that under the contract, settlement could not be postponed again.
Mr Clout's solicitors provided a draft settlement statement to the solicitors for the caveators on 21 October 2015.
The solicitors for Stoddart and Adbri confirmed, on 22 October 2015, that they would provide withdrawals of caveats on settlement, provided that the balance of the proceeds of sale, after payment of reasonable legal costs of the conveyance, would be paid into court.
There was then further correspondence, including Mr Clout's solicitors stating, in an email on 22 October 2015, that "there has been no concession that our client is entitled to any amount whatsoever" under his lien from the balance of the proceeds of sale on completion.
It appears that settlement of the contract for sale took place on 23 October 2015.
It is not an easy matter to analyse the significance of this protracted and complex correspondence, from the perspective of identifying the nature and extent of the work done by Mr Clout and his solicitors that was justified as being reasonably necessary for the care, preservation and realisation of the Property.
There is an appearance, although it is obscured by the complex evolution of the correspondence, that Mr Clout could have secured the agreement of the caveators to withdraw their caveats on settlement of the contract for sale, if the net proceeds of sale had been retained as a separate fund, much earlier than he did, if Mr Clout had pursued that outcome from the beginning. That would have been the most efficient way to secure the realisation of the Property by the completion of the contract for sale.
It is likely that Mr Clout acted with reasonable efficiency in securing the lapsing of their caveats lodged by PACR and Bulldog, but as I have noted, the evidence on this issue is not at all complete.
It is clear that Mr Clout and his solicitors went much further than taking the steps necessary to enable the completion of the contract for sale by securing the removal of all of the caveats; by entering upon all of the work apparently done to determine the validity of the charges claimed by the caveators, their relative priority, and the amounts secured.
That said, the extent to which Mr Clout can justify his remuneration and expenses as having been reasonably incurred in the care, preservation and realisation of the Property remains obscure. Faced with the unanticipated need to secure the withdrawal of the caveats, Mr Clout may have been justified in taking some steps to investigate the validity of the charges claimed by the caveators, and the amounts secured, so that he could obtain advice, and properly decide, whether to pursue the lapsing of the caveats, or some alternative negotiated solution.
Just as the evidence of the correspondence does not present to the court a clear basis for deciding which of the remuneration and expenses of Mr Clout were reasonably incurred in the care, preservation and realisation of the Property; nor does Mr Clout's remuneration report regarding the care, preservation and realisation of the Property.
[9]
Claims for remuneration and expenses distinguished
The caveators claim, as I have noted above, that the approach of determining a liquidator's entitlement as a percentage of the amount realised in the winding up should be applied both to Mr Clout's claim for remuneration, and also his claim to reimbursement for expenses out of the property of the company.
That submission is based upon the premise that the provisions of the Act which govern the determination of the remuneration to which a liquidator is entitled also govern the expenses for which a liquidator is entitled to be reimbursed out of the assets of the company.
However, as far as Mr Clout's expenses are concerned, the sections of the Act that give to the court a power fix or determine a liquidator's remuneration do not apply. As Brereton J said in AAA Financial Intelligence Ltd (in liq) (No 2) [2014] NSWSC 1270 at [14]:
In the ordinary case, the court's approval of a liquidator's remuneration does not include disbursements, the liquidators' right to indemnity for which depends on the general law relating to a trustee's right of indemnity [Venetian Nominees Pty Ltd v Conlan (1998) 20 WAR 96, 100; Re Stockford Ltd; Korda [2004] FCA 1682 ; (2004) 52 ACSR 279, 296 [59]].
His Honour made a similar observation in the Independent Contract Services case at [28].
I respectfully accept that the authorities upon which his Honour relied support his conclusion that the principles upon which a liquidator's remuneration must be determined differ from those that govern his or her entitlement to be reimbursed for the expenses of the winding up. The reasons for this difference were set out by Kennedy and Ipp JJ in Venetian Nominees Pty Ltd v Conlan (1998) WAR 96 at 100 to 101. A liquidator has a right to reimbursement by the company of all of his or her expenses, in a similar manner to a trustee. There is no requirement for the expenses incurred by a liquidator to be "determined" by the court. Reimbursements for expenses taken by a liquidator out of the property of the company may, however, be challenged as part of the process of the liquidator's accounts being audited (s 539 of the Act), or as part of an investigation into the liquidator's books, or an inquiry into the liquidator's conduct (s 536 of the Act).
Consequently, Mr Clout's claim to be reimbursed for his expenses out of the money paid into court will not be subject to the principles that must be applied to his claim for remuneration. In particular, the caveators' submission, based upon the Independent Contractor Services case, that the court has power to limit the expenses for which Mr Clout is entitled to reimbursement to a percentage of the amount realised by the sale of the Property must be rejected.
In Re AAA Financial Intelligence Ltd (in liq) (No 2), Brereton J continued, following the extract from [14] that I have set out above, by saying:
[14] … As Ferris J explained in Mirror Group Newspapers plc v Maxwell [1998] 1 BCLC 638 (at 662), there are two questions. First, the liquidators (or trustees) must first decide to what extent they are bound to pay the liabilities they have incurred, and if they accept that they are bound to pay must do so, as they are personally liable. The second question is whether and to what extent they are entitled to recoup what they have paid from the estate. That question ordinarily arises upon the taking of a trustee's accounts, or upon a misfeasance summons arising from a liquidator's accounts [Mirror Group v Maxwell, 662; Venetian Nominees v Conlan, 100]. Although the court will generally be supportive of liquidators who have incurred disbursements and paid them out of the estate in the exercise of their commercial judgment, albeit without the prior approval of the court - as liquidators are to be encouraged to use their commercial judgment and not to make applications for directions in respect of comparatively trivial matters - the liquidators bear the onus of justifying their disbursements, and since they can only recoup from the estate if they have acted properly in instructing and paying third parties (such as solicitors), they should subject the bills received from them to critical scrutiny [Mirror Group v Maxwell, 661-2]. The following observations of Finkelstein J in Re Stockford Ltd warrant repetition (at 296-7):
[50] To this point I have said nothing about disbursements. The reason is that s 449E is concerned solely with remuneration. (In Venetian Nominees Pty Ltd v Conlan (1998) 20 WAR 96 at 100 the court finally laid to rest the erroneous view that a liquidator's remuneration included disbursements.) The right to be indemnified for properly incurred expenses is covered by ss 443A and 443D. Nevertheless, I wish to make one or two observations about disbursements, particularly legal fees which are often the largest component of an administrator's costs. My observations derive from the comments of Ferris J in Mirror Group Newspapers Plc v Maxwell (No 2) [1998] 1 BCLC 638 and Lightman J in an article entitled "Office Holders' Charges - Costs Control and Transparency" (1998) 11 Insolvency Intelligence 1.
[51] An insolvency practitioner stands in a fiduciary relationship with the creditors. He must act with the same care as a prudent businessman would act in his own affairs at his own cost and risk. A prudent businessman will run litigation as a last resort and when he embarks upon litigation he will keep it under close scrutiny. A prudent businessman will shop around to ensure that he obtains the services of good lawyers (solicitors and counsel) at the best possible rate. Personal relationships should not obscure the practitioner's duty. The sole selection criteria should be the benefit to him as a litigant. So he will avoid cosy relationships with solicitors and counsel. He will negotiate over fees with both solicitors and counsel. He will closely monitor the fees as they are incurred. (In some jurisdictions contingency fees are permitted and where they are they should be exploited.) Overall, this approach is likely to cause disquiet among the profession. Lightman J said that the requirement of adopting the perspective of the insolvency practitioner expending his own money in place of the perspective of spending his client's money is a "sea change". If made it is a change that will restore public confidence in this area of commercial life.
[15] As Ferris J and Finkelstein J make clear, in this respect legal costs are no different from other liquidator's disbursements, save that the court has available to it mechanisms for itself determining legal costs between liquidators and their lawyers (the first question), as well as to what extent the liquidator may be allowed those costs out of the estate (the second question).
As Young J (as his Honour then was) said in Burns Philp Investment Pty Ltd v Dickens (No 2) (1993) 31 NSWLR 280 at 285, "the court may order the [solicitors'] bill to go to taxation notwithstanding that the time for sending the bill for taxation has well and truly expired". That proposition would now permit the court to require a liquidator's solicitors' bill to be assessed in an appropriate case.
[10]
Liquidator's remuneration as a percentage of assets realised
As I have noted above, the primary submission that the caveators made was that Mr Clout's remuneration should be fixed as a percentage of the value of the Property realised upon its sale.
I have already shown how the caveators wrongly argued that the court was entitled to fix both Mr Clout's remuneration, and also his expenses, and that both should be limited to a percentage of the value of the Property.
The caveators submitted that the court should choose 2% as the appropriate percentage, based upon the reasoning of Brereton J in the Independent Contractor Services Case. I have already noted (at pars 44 and 45 above) that in adopting this approach, the caveators have selected 2%, which Brereton J was "inclined" to allow "indicatively" on realisations, while his Honour was inclined to allow 15% on distributions, and ultimately allowed remuneration that equated to about 14% of gross realisations.
In this context, the caveators did not explain why 2% was an appropriate rate in the present case. Nor did they analyse other cases in which different percentages have been used to guide the court to determine the amount of the remuneration that should be allowed to the liquidator.
The caveators' submissions call for a response insofar as they suggest that the appropriate approach to the determination of a liquidator's remuneration is to start with the selection of a rate expressed as a percentage, and then simply apply that percentage to the value of the assets realised (in the present case, the value of the Property).
It is not correct to say that the process by which the court determines the amount of remuneration to be allowed to liquidators has evolved to the point where the determination involves the selection of a percentage, divorced from all of the other relevant circumstances of the winding up.
A review of recent cases in which the liquidator's remuneration has been influenced by the proportion it bears to the value of the assets realised by the liquidator would suggest a level of inconsistency, if it were the case that the courts had acted upon the basis of proportion alone. Considering some of those cases:
1. In AAA Financial Intelligence Ltd (in liq) (No 2) at [53] the court allowed remuneration of $36,000, which was about 20% of the value of the assets realised.
2. In Re Hellion Protection Pty Ltd (in liq) [2014] NSWSC 1299 at [9] the court allowed 10% for the first $50,000 realised, and 5% for subsequent receipts.
3. In Re Gramarkers Pty Ltd (No 2) [2014] NSWSC 1405 at [10] the court determine the remuneration on the basis of 10% of the first $100,000 realised, and 5% on the balance of the total of $495,000.
4. In Re Sakr Nominees Pty Ltd [2016] NSWSC 709 at [22] the court considered alternative bases to assist it with assessing the appropriate remuneration for the liquidator. First, the court considered the result of allowing 2.5% on realisations of $3.72 million, and 3% on distributions of $3.3 million. That gave a comparable amount to allowing 10% on the first $100,000 of realisations, and then 5% thereafter. However, due to the liquidator's difficulty in identifying the contributories in that case, the court at [25] allowed an additional $20,000 of remuneration.
5. Finally, in the Independent Contractor Services Pty Ltd case, the court at [48] started with an allowance of 2% on realisations (reflecting very limited work done by the liquidator) plus 15% on distributions. However, the court allowed an uplift (having regard to the totality of the work undertaken and the time expended by the liquidator) to give remuneration of $30,000, which was approximately equal to 14% of gross realisations.
Any appearance that the approaches that the court adopted in these cases have been inconsistent is illusory, and ignores the role played by the rates or percentages adopted in the entire process by which the court determined the appropriate amount of remuneration.
In nearly all of the cases the court started with a claim made by the liquidator for a particular amount, based upon time expended and a fixed scale of fees: see AAA Financial Intelligence Ltd (in liq) (No 2) at [43]; Re Gramarkers Pty Ltd (No 2) at [10]; Re Sakr Nominees Pty Ltd [2016] at [11] and the Independent Contractor Services Pty Ltd case at [37]. That provided a rational and objective starting point for the liquidator's claim for remuneration, which could be assessed in the context of the other factors made relevant by ss 473(10) or 504(2) of the Act. Thereafter, the court considered in each case specific factors relevant to the work undertaken by the liquidator. Then, having regard to the assets realised and distributed by the liquidator, the court called in aid percentages that appeared reasonable in the particular case to assist the court in judging how to achieve proportionality between the liquidator's remuneration and the value to creditors of the work done.
The process in which the court engages does not involve the direct adoption of any particular proportion or percentage, but, in a process that involves an evaluative assessment of a number of discretionary factors, in an appropriate case - more likely where the value of the assets realised is low, or where the remuneration claimed is a substantial proportion or exceeds the value of the assets realised - the court will adopt an appropriate percentage having regard to the court's experience of other cases as a guide to assessing the appropriate remuneration for the liquidator in the particular case.
[11]
Quantification of the liquidator's remuneration
Mr Clout submits that he should be entitled to remuneration calculated in accordance with the resolutions of the creditors of Mainz made on 21 January 2015. Accordingly, he claims remuneration based upon hours of work done by him and his employees, calculated on the basis of his firm's Schedule of Hourly Rates.
I have described above the content of Mr Clout's remuneration report, whereby he purports to quantify and substantiate his remuneration for realising the Property. Mr Clout's case it is that the creditors of Mainz fixed his entitlement to remuneration by their 21 January 2015 resolutions. However, Mr Clout has expressed his claim in terms of general descriptions of work done, on the basis of time spent in terms of hours expressed globally, and without identifying categories of worker and time spent.
It follows from the consideration that I have set out above of the events relevant to the realisation of the Property, that it is likely that Mr Clout has claimed remuneration for work that was not in fact reasonably done for the purposes of the care, preservation and realisation of the Property. To the extent that that is true, it will be necessary for Mr Clout to revise his claim for remuneration.
The question will remain relevant, however, as to whether Mr Clout is entitled to calculate any revised claim on the basis of hours of work done and a schedule of hourly rates.
Until Mr Clout has revised his claim for remuneration, it cannot be known whether he will be able to do so on the basis of hours of work done and the schedule of hourly rates. That is so, because it may for practical reasons now be an exercise for Mr Clout to dissect his original claim into hours worked for the care, preservation and realisation of the Property, and hours that related to other matters. Accordingly, it remains possible that Mr Clout will be content to formulate his claim for remuneration in respect of the care, preservation and realisation of the Property on some other basis than an hourly rate for work done.
It is therefore premature for the court to consider the appropriateness of a claim for remuneration in this case based upon an hourly rate for work done, as opposed to some other basis, such as a percentage of the value of the Property that was realised.
It will nonetheless be appropriate for the court to make a number of observations, which may reduce the likelihood that Mr Clout's claim for remuneration will miscarry again.
First, the major part of the remuneration sought by Mr Clout relates to his work done as liquidator.
As Mr Clout was appointed as the liquidator of Mainz by its creditors by a resolution made under s 439C(c) of the Act, s 446A(2) of the Act had the effect that Mainz was taken to have passed a special resolution under s 491 of the Act that the company be wound up voluntarily. Section 499(3) of the Act then has the effect that:
The remuneration to be paid to the liquidator may be fixed:
(a) if there is a committee of inspection - by that committee; or
(b) by resolution of the creditors.
In the present case, the creditors of Mainz purported to make a resolution in accordance with s 499(3)(b) on 21 January 2015.
Section 499(3) of the Act thus provides that either the committee of inspection or the creditors may "fix" the liquidator's remuneration.
Section 504(1) of the Act has the effect that "any member or creditor, or the liquidator, may at any time before the deregistration of the company apply to the Court to review the amount of the remuneration of the liquidator, and the decision of the Court is final and conclusive".
The matters that may be taken into account by the court in reviewing the remuneration of the liquidator are set out in s 504(2) of the Act. The primary consideration of the court is that the liquidator's remuneration must be reasonable, having regard to all relevant matters, including the 11 factors listed in the subsection. One of those factors concerns the liquidator being wholly or partly remunerated on a time basis, as follows:
(2) In exercising its powers under subsection (1), the Court must have regard to whether the remuneration is reasonable, taking into account any or all of the following matters:
...
(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…
Brereton J has considered the issues involved in applying s 504(2) (or the equivalent provision in s 473(10), which applies in cases where the liquidator is appointed by the court) in the decisions to which I have referred in par 132 above. This is not the appropriate occasion for me to make any observations about how those considerations should apply to Mr Clout's claim for remuneration in the present case.
There is an unresolved question about whether the creditors, by making a resolution such as the one relied upon by Mr Clout in the present case, can effectively fix the prospective remuneration of the liquidator. The issue is whether the remuneration of the liquidator can be said to be fixed (or determined, where that alternative term is used in the Act in an equivalent context: see ss 449E and 473(3) of the Act) where the resolution takes the form of a broad description of the basis for fixing the liquidator's remuneration, and not a strict formula; so that, as in the present case, it is left up to the liquidator to determine the number of hours worked, by which workers, the suitability of those workers for the work done, and the hourly rate applicable.
In Re Stockford Ltd (subject to a deed of company arrangement); Korda and Another [2004] FCA 1682; (2004) 52 ACSR 279 at [30], Finkelstein J raised doubts as to whether such a resolution of creditors could effectively fix or determine the liquidator's remuneration. However, it was not necessary for his Honour to determine the question. There is a suggestion in his Honour's observations that it may make a difference if, as in the present case, the creditors imposed an upper limit on the amount of the liquidator's remuneration, requiring further resolution of the creditors if it was necessary to go beyond that limit.
It is difficult to see how the imposition by the creditors of an upper limit to the remuneration could cure the omission of the creditors to actually fix an amount, or specify an objective formula for determining the amount of remuneration.
However, as was the case in Re Stockford Ltd, it is not necessary to decide this question in the present case. The reason is that there are factors relevant to the present case that have the effect that, even if the creditors' resolution are given full effect, they do not provide conclusive basis for the determination of Mr Clout's remuneration.
First, resolutions that, for the period of his time as administrator determine the amount of his remuneration, and for the period of his time as liquidator authorize Mr Clout to determine the amount of his remuneration on the basis of hourly rates up to a limit, relate to the whole of his work as administrator and liquidator. Nothing in the resolutions authorised Mr Clout to determine for himself the amount of the remuneration to which he is entitled for the care, preservation and realisation of the Property.
Secondly, the caveators were not privy to the resolutions, and should not be bound by resolutions made by the unsecured creditors in relation to the work done generally by Mr Clout as administrator and liquidator. The position of the caveators is materially the same as the beneficiaries of the trust of which the company in liquidation was the trustee, in the circumstances considered by Brereton J in Re AAA Financial Intelligence Ltd. In that case, Brereton J said at [29]:
[29] ... While Mr Tonks reiterates that the total amount claimed of $110,497 claimed for remuneration and expenses in the respect of the Adviser Funds "form part of the remuneration amount approved by creditors to date during the administration and liquidation of the Company" … as I pointed out in the first judgment, if the remuneration is to be paid from trust funds, the general creditors who participated in that meeting (to the exclusion of the trust beneficiaries) have no interest in the trust funds, and their approval is to that extent of little significance. There is no approval from the Advisers and Stockbrokers, whose interest in the trust funds will bear the burden. Thus while it is correct that the liquidators' remuneration - for the whole of their work, both general liquidation and trust-specific - has been fixed by the creditors under s 499(3) at $80,000, and there is no application before the court for a review of that, that is of little moment in the exercise of the jurisdiction presently invoked, to authorise the application of the trust funds in payment of remuneration - save that it sets an outer limit on the total remuneration for the whole liquidation, including general liquidation work and administration of the non-trust assets as well as administration of the trust funds.
The same is true in the present case, even though the caveators are chargees rather than beneficiaries.
It does not follow that the creditors' resolution concerning Mr Clout's entitlement to remuneration as liquidator is irrelevant, as it should be taken into account that Mr Clout was led to believe by the resolutions that he would be entitled to be remunerated for all of the work done in the liquidation on a time basis in accordance with the resolution. However, the resolution is only one factor to be taken into account.
The history of the circumstances in which the courts have been prepared to fix or determine the entitlement of liquidators to remuneration based upon fixed scales for work done and time spent has been considered by Zeeman J in Re Fine Food Distributors Pty Ltd; Ex parte Whitehouse [1992] 9 ACSR 599 at 600 to 603 and Finkelstein J in Re Stockford Ltd at [2] to [29], and other cases. It is not necessary to retell that history here.
However, arguably the high point of judicial acceptance of the appropriateness of the determination of the remuneration of liquidators by applying a scale of hourly fees to the hours worked in the winding up is the decision of the Full Court of the Queensland Supreme Court in Re Queensland Forests Ltd (in liq) [1966] Qd R 180, where Lucas J (with whom the other judges agreed) said at 186:
… It appears therefore that the decision [of the court below] proceeds solely on the basis that it had not been shown that a fee within the scale of rates recommended by the Institute of Chartered Accountants was reasonable. With respect to the learned judge, I think that he fell into error in refusing to accept these rates, and in fixing the remuneration according to what his own experience led him to conclude was a reasonable rate. For myself, I cannot see why a scale of charges compiled and recommended by a reputable professional body should not, by virtue of the very fact that it is so compiled and so recommended, be regarded as reasonable; I should indeed have thought that such a scale constituted the most reliable standard of comparison obtainable. Nor is it by any means unusual for the court to fix a liquidator's remuneration by reference to such a scale…
The inclination to accept the appropriateness of a fixed scale for the remuneration of liquidators was followed in a number of cases, particularly in Queensland, but another line of authority, exemplified by the decision of the Full Court of the Supreme Court of Victoria in Re Standard Insurance Co Ltd (in liq) [1967] VR 600, has not been prepared to give such absolute effect to fixed scales. The Full Court said at 602 to 603, in response to the decision in Re Queensland Forests Ltd (in Liq):
… Without pausing to examine the reasons for that decision in detail, we are of opinion that evidence of the existence of such a scale is not in itself conclusive. In the absence of evidence explanatory of the basis on which such a scale was compiled and the method of its compilation, or even with such evidence, its weight must, we think, be a matter for the trial judge.
On the material before us we are by no means satisfied that the learned judge disregarded the scale. As we have said the weight to be attributed to it was a matter for him and we can only conclude that the lack of supporting material left him unpersuaded by it.
The point relevantly to be taken from these authorities is that the preparedness of the courts to determine liquidators' remuneration based upon hours of work done and fixed scales, is depended upon the credibility given to the scales, and by the fact that they had been determined by a formal process engaged in independently by a professional body.
As Finkelstein J pointed out in Re Stockford Ltd at [28], the Insolvency Practitioners Association of Australia ceased to publish a recommended scale of time based charges to guide its members in June 2000; and advised its members thereafter to claim fees based on their own rates, which for the most part are time based: see IPAA, Statement of Best Practices - Remuneration, 1 July 2000. Finkelstein J noted that the statement assumed that every insolvency practitioner had a uniform basis of charging fees to clients, which Finkelstein J regarded as being unlikely to be true.
The respect formerly given by the courts to recommended scales of time based charges that were produced by a professional association may no longer have the same force where, as in Mr Clout's case, the scale has been produced by the liquidator's own firm.
Ultimately, a liquidator in Mr Clout's position must approach the task of formulating and justifying his claim for remuneration on the basis that he or she has the burden of proving that the claim is reasonable.
As Barrett J (as his Honour then was) said in Re Anderson Group Pty Ltd; Mann v Anderson [2002] NSWSC 764:
[11] Under s473(3)(b)(ii), a liquidator has an entitlement to have his or her remuneration fixed by the court if other methods do not result in its being fixed. As with a trustee in bankruptcy, a liquidator "becomes entitled as remuneration to what is fixed (subject to alteration as provided) but only upon its being fixed": Mayne v Jaques (1960) 101 CLR 169 at 176 per Menzies J. And it is to be remembered that the remuneration is remuneration for the services actually rendered and the work actually done. The worth of this may be calculated in various ways, whether by reference to "the results obtained" that is on a percentage basis (Re Carton Ltd (1923) 128 LT 629) or by reference to the time expended (Burns Philp Investment Pty Ltd v Dickens (No 2) (1993) 31 NSWLR 280). It was suggested by Master Gambrill of the High Court of New Zealand in Re Medforce Healthcare Services Ltd [2001] 3 NZLR 158 that the time basis is more common in Australia than it is in the United Kingdom and Canada where the percentage approach is preferred.
[12] In the ordinary course, the process of determination comes down essentially to ensuring that the work upon which the claim was based was work undertaken in the due course of administration and that the amount claimed for having done that work is a fair and reasonable reward for it.
Brereton J has also recently made a similar statement of principle in Re AAA Financial Intelligence Ltd (in liq) (No 2) at [26].
Mr Clout should also give careful attention to the procedure by which his remuneration is to be determined as considered by the Full Court of the Supreme Court of Western Australia in Venetian Nominees Pty Ltd v Conlan (1998) 20 WAR 96 at 102 to 104; and by the Western Australian Court of Appeal in Conlan (as liquidator of Rowena Nominees Pty Ltd) v Adams [2008] WASCA 61; (2008) 65 ACSR 521 at [28] to [23]. In Re Kal Assay Southern Cross Pty Ltd (in liq) (1992) 9 ACSR 245 the court refused to approve a liquidator's claim for remuneration based upon a claim formulated in much the same way as is Mr Clout's claim in the present case.
[12]
Conclusion
In my view it is clear, from the foregoing analysis of the events relevant to the completion of the contract for sale of the Property, that Mr Clout and his solicitors went beyond the steps necessary to effect an early settlement of the contract for sale, by obtaining the agreement of all of the four caveators to provide withdrawals of caveat at settlement, on terms that Mr Clout would either hold the balance of the proceeds of sale, or pay that balance into court.
It may have been reasonable for Mr Clout and his solicitors to explore the issue of the validity of the charges claimed by the caveators. To some extent, his fees and expenses of doing so may have been reasonably necessary for the purposes of realising the Property, but it appears that, in making final adjudications of the caveators' claims, he was acting on behalf of the unsecured creditors, in a way that would cause part of his fees and expenses to fall outside the lien which he had and which took priority over the charges claimed by the caveators.
These are only general observations, as a determination of the remuneration claimed by Mr Clout, and the expenses incurred by him, that were reasonably required for the realisation of the Property, will require a close examination of more detailed facts than have been provided in the court books on the present application.
Given the relatively small sum that has been paid into court, it would obviously be wise for the parties to explore the possibility of reaching a compromise as to how that amount should be distributed between the parties, to reflect the amount of the fees and expenses claimed by Mr Clout for which he is entitled to priority in enforcement of his lien, as being reasonably incurred for the care preservation and realisation of Property.
When I deliver these reasons for judgment, I will give the parties time to consider their positions. If they cannot reach agreement, it will be necessary for the parties to suggest directions for the further conduct of the dispute.
The caveators have not yet established that the charges upon which they relied to support their caveats are valid; nor have they established the amounts secured by any valid charges. Those issues will require judicial determination, unless the parties would prefer that the issues be resolved in some other way. Directions must be made to deal with the determination of these issues.
Once the court has determined which, if any, charges are valid, and the amount secured by the valid charges, it will then be necessary for the issue of the amount of the fees and expenses secured by Mr Clout's lien as executor to be determined. In due course, it will be necessary to make appropriate directions to determine that question.
Once the steps necessary to resolve all remaining issues in this dispute are considered soberly, it is plain that it will be in the interests of the parties to compromise the dispute.
At this stage I will only make the following orders:
1. The court declines to grant the relief sought by the plaintiffs in their notice of motion filed on 16 February 2016 at this stage of the proceedings.
2. The parties are to confer and bring in short minutes of order to provide for the further conduct of the notice of motion.
3. The costs of the notice of motion are reserved.
[13]
Amendments
09 September 2016 - Par [48] Gaegler to Gageler;
Par [69] 2014 to 2015
Par [72] 27 April 2015 letter to 24 April 2015 letter
Par [135] "the court in an appropriate case" to "in an appropriate case"
Par [144] there's to there is
Par [149] be to the
Par [163] formally to formerly
Par [167] Western The Australian Court of Appeal to Western Australian Court of Appeal
06 December 2016 - Representation amended (plaintiff) amended to (plaintiffs)
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Decision last updated: 06 December 2016