Burns Philp Investment Pty Ltd v Dickens

Introduction 1 The final issues for determination in this proceeding concern remuneration and costs sought by the First Plaintiffs in respect of work they performed (or will soon perform) as administrators and now liquidators of the Second Plaintiff ('Mossgreen' or 'the company'). 2 The First Plaintiffs were appointed the joint and several voluntary administrators of Mossgreen on 21 December 2017. The originating process in this proceeding was filed on 7 March 2018 and prayers 1 to 5 and 7 to 14 were the subject of decisions of this Court and the Full Court on appeal: White, in the matter of Mossgreen Pty Ltd (Administrators Appointed) [2018] FCA 471; 125 ACSR 163 and White, in the matter of Mossgreen Pty Ltd (Administrators Appointed) v Robertson [2018] FCAFC 63; 125 ACSR 390 ('Appeal Reasons'). 3 On 4 May 2018, Mossgreen's creditors resolved to wind up the company and the First Plaintiffs were appointed its joint and several liquidators. The First Plaintiffs filed an amended originating process on 21 September 2018 and prayer 6 was the subject of a further judgment of this Court: White, in the matter of Mossgreen Pty Ltd (Administrators Appointed) (No 6) [2019] FCA 17 ('Mossgreen (No 6)'). 4 The Court has also heard and determined various additional applications made by consignor creditors. An application by a secured creditor, Jadig Investments Pty Ltd ('Jadig') dated 21 September 2018 in respect of the First Plaintiffs' right of indemnity from assets of the company was resolved by agreement without admission by the First Plaintiffs. 5 There now remains for determination prayers 17, 20, 21 and 22 of the further amended originating process filed on 30 August 2019. Prayers 20-22 concern the First Plaintiffs' application for remuneration. They are as follows: Remuneration of the Administrators and Liquidators 20 The First Plaintiffs be entitled to the payment of remuneration as administrators and liquidators of the Second Plaintiff in the amounts identified in orders 21 and 22. 21 The remuneration of the First Plaintiffs as administrators and then liquidators of the Second Plaintiff be fixed in the amounts indicated: (a) The remuneration of the First Plaintiff[s] as administrator of the Second Plaintiff in the period 21 December 2017 to 4 May 2018 be fixed in the amount of $431,075.50 plus GST; (b) The remuneration of the First Plaintiff[s] as liquidator of the Second Plaintiff in the period 4 May 2018 to 26 May 2019 be fixed in the amount of $185,056 plus GST. 22 The First Plaintiff[s] be entitled to the payment of further reasonable remuneration from and including 27 May 2019 up to an amount of $30,000 plus GST. 6 Prayer 17 deals with costs. It is as follows: Costs and other orders 17 The Plaintiffs' costs of and incidental to this application be costs and expenses in the administration of the Company, and be paid out of the assets of the Company. 7 In support of their application, the First Plaintiffs relied upon two affidavits of Andrew Thomas Sallway sworn 9 August 2019 and 5 September 2019 and an exhibit accompanying each.

Relevant principles 8 External administrations commencing after 1 September 2017 are regulated by the Insolvency Practice Schedule (Corporations) ('IPSC'), being Sch 2 to the Corporations Act 2001 (Cth) ('the Act'): s 1581 of the Act; Corporations Regulations 2001 (Cth) reg 10.25.01 and Sch 13. Division 60 of the IPSC applies uniformly to all external administrators, which s 5-20 defines to include both administrators and liquidators. 9 An external administrator of a company is entitled to receive remuneration for work performed by them in relation to the external administration in accordance with a remuneration determination: IPSC s 60-5(1). The Court's power to make a remuneration determination is conferred by s 60-10(1)(c). The onus is on the liquidator to establish that the remuneration claimed is reasonable and it is the Court's function to determine the remuneration by considering the material and bringing an independent mind to bear on the relevant issues: Sanderson v Sakr [2017] NSWCA 38; 93 NSWLR 459 ('Sanderson') at 470 [54] per Bathurst CJ; Morgan, in the matter of Brighton Hall Securities Pty Ltd [2018] FCA 2029 at [17] per McKerracher J. 10 The principles relevant to remuneration determinations were summarised by Black J in Re Sakr Nominees Pty Limited [2017] NSWSC 668 ('Sakr Nominees') at [23]-[24] (see also Sanderson at 470-471 [54]-[58]): 23. … A liquidator is entitled to reasonable remuneration for his or her services and the liquidator bears the onus of establishing that the amount of remuneration they seek is fair and reasonable and, in determining a liquidator's reasonable remuneration, the Court will have regard to the factors specified in s 473(10) of the Corporations Act, to which I refer further below. The Court must bring an independent mind to bear on the question whether the remuneration sought by a liquidator is fair and reasonable; the liquidator must lead evidence in sufficient detail that the Court can determine that question; and the Court will generally need to be provided with an account in itemised form, setting out at least the details of the work done; the persons who did the work; the time taken to perform the work; the remuneration claimed; and, to the extent relevant, the expenses incurred by the liquidator … Proportionality is an important matter in considering the question of whether remuneration is reasonable, and the "value" of a liquidator's work can include the benefit of resolving the position of creditors and beneficiaries; the benefit to the community of not permitting assets to remain unproductively in the hands of a defunct company for a long period; and can include work that was required to be done, although it did not result in a return to creditors … 24. Most decisions in both State Supreme Courts and in the Federal Court of Australia have applied time costing as at least the starting point for a calculation of remuneration, although those decisions also emphasise the need for proportionality between the cost of the work done and the value of the services provided … There has been a degree of concern as to time-based remuneration, over a considerable period, although it must be accepted that remuneration on that basis is now more common … Several recent decisions, of which the previous decision of Brereton J in this case was one, have emphasised the significance of the percentage that a liquidator's remuneration bears to the level of asset realisations achieved, and applied percentages of recoveries where time-based calculations would have led to unreasonable results … A percentage of realisations can also be used as a test of whether remuneration claims brought by a liquidator on a time costing basis are reasonable … (Citations omitted.) 11 That decision concerned the predecessor provision in s 473 of the Act, but the principles under the IPSC are materially the same so that authorities about s 473 remain apposite: Re Custometal Engineering Pty Ltd (in liquidation) [2018] VSC 726 at [18]. 12 The First Plaintiffs submitted, correctly in my view, that the matters as summarised in Sakr Nominees and Sanderson and prescribed by s 60-12 may be distilled into three categories: (1) the necessary and proper connection between the work performed and the external administration: ss 60-12(a)-(b); (2) the proportionality between the complexity of the external administration and the costs incurred: ss 60-12(c)-(i); and (3) the reasonableness of the billing method of the administrator: s 60-12(j). 13 These principles apply in fixing remuneration for both administrators and liquidators: Sanderson at 463 [12] per Bathurst CJ. It is accordingly necessary to assess the First Plaintiffs' application for remuneration in respect of both the administration and the liquidation against these three broad considerations prior to turning to creditors' objections to the application.

The application for approval of the First Plaintiffs' remuneration

The administration period 14 The First Plaintiffs recorded $766,962.50 of work done during the administration period, being between 21 December 2017 and 4 May 2018. However, by prayer 21(a) of the further amended originating process they seek a remuneration determination in the amount of $431,075.50 plus GST. Mr Sallway's second affidavit explained that the discount is the result of an undertaking made in the settlement with Jadig.

Necessary and proper connection between the work performed and the administration 15 The First Plaintiffs submit that the expression 'necessary and properly performed' in s 60-12(a) of the IPSC should be construed in such a way as to give the external administrators a 'measure of discretion'. They rely on Young J's observation in Burns Philp Investment Pty Ltd v Dickens (No 2) (1993) 31 NSWLR 280 at 285 that the Court must give liquidators 'a fair degree of latitude where they have incurred expense as a result of the exercise of their commercial judgment even if there is a loss to the company by so doing'. Whilst that decision concerned liquidator's expenses, the First Plaintiffs submit that it is equally applicable to administrators and that, accordingly, the phrase in s 60-12(a) ought not be read as requiring that the work should have been absolutely necessary to the minimum discharge of an administrator's statutory duties. I accept that submission. 16 There were five broad categories of work performed by the First Plaintiffs during the administration which were said to be necessary and proper for the discharge of the duties imposed on them by the Act. These were: (1) investigating Mossgreen's business, property, affairs and financial circumstances (required by s 438A of the Act) and convening meetings of the creditors (required by s 439A); (2) work done to preserve Mossgreen's property; (3) work relating to the sale of Mossgreen's business or realisation of its assets; (4) work relating to managing Mossgreen's secured and secured creditors; and (5) work relating to the distribution of property held by Mossgreen on consignment. In that regard, Mr Sallway deposed to the poor state of Mossgreen's inventory management and the unreliability of its records which was said to have complicated those processes. 17 The First Plaintiffs then drew attention to two findings made in the Appeal Reasons: that the taking of steps in respect of the systems for the management and return of consigned items was within the scope of the administration (at [21]), and that a lien could arise in relation to costs necessarily incurred by an administrator to identify, preserve and facilitate the return to the owners of their property, even if a lien did not arise in the present case (at [22]). These findings were said to demonstrate that my decision in White, in the matter of Mossgreen Pty Ltd (Administrators Appointed) [2018] FCA 471; 125 ACSR 163 could not support a finding that work done during the administration was not necessary or proper. 18 I am satisfied that the remuneration sought relates to work which was necessarily and properly incurred as part of the administration of Mossgreen.

Proportionality of the work performed to the remuneration claimed 19 Of the total remuneration sought by the First Plaintiffs, 67% is attributable to the first five months of the administration period, which was said to be due to the complexity of the work which had to be performed during that time. 20 Mr Sallway deposed that a number of factors made the First Plaintiffs' job in conducting the administration particularly difficult. During the administration period, there were between 1000 and 1100 interested persons to be dealt with, comprising roughly 700 consignors and between 300 and 400 consignor creditors. In addition, Mossgreen's employees were made to take mandatory annual leave immediately after the First Plaintiffs' appointment as administrators, and their unavailability hampered the First Plaintiffs' capacity to move through the unreliable and often inaccurate company records. Finally, the number of diverse claims being made against Mossgreen in administration, the need for directions from the Court in respect of a number of issues, and difficulties encountered with the recovery of debts owed to Mossgreen - such as debtors living outside Australia and consigned goods either being missing or released prior to payment - were all said to complicate matters further. 21 Of the 1,679.25 labour hours recorded by the First Plaintiffs and their staff during the administration period, 43.8% were said to have related to the unique issues arising from the nature of Mossgreen's business. I am satisfied that the idiosyncrasies of Mossgreen's business inflated and complicated the task which the First Plaintiffs faced and that, as a result, the remuneration sought in respect of the administration period is not disproportionate. 22 The First Plaintiffs also submitted that the fact the administration resulted in the realisation and recovery of $2.17 million in assets weighed towards the proportionality of the remuneration being sought. I agree.

Reasonableness 23 The remuneration sought by the First Plaintiffs has been calculated on a time costing basis and based on a schedule of rates broken down by staff member and annexed to Mr Sallway's second affidavit. The First Plaintiffs submitted that the delegation of work to particular staff members, and their respective rates, were reasonable having regard to the skill and experience of each staff member and the complexity of the administration. They further noted the 43.8% discount to their fees arising out of the settlement with Jadig. Mr Sallway also deposed that the rates charged were generally comparable to or lower than other insolvency specialist firms in Sydney. 24 Time costing has been found, 'at least in some circumstances', to be an appropriate starting point for a calculation of remuneration. However, the assessment of proportionality will be important in testing the reasonableness of time-based remuneration: Re NR Wolli Creek Pty Ltd (recs & mgrs appointed) [2019] NSWSC 313 at [6] per Black J. 25 The amount of remuneration claimed in respect of the administration is not small. However, having regard to the complexity of the administration and the skill of each of the First Plaintiffs' staff members, and in light of my findings on proportionality above, I find that the rates applied and the delegation of tasks were reasonable. Accordingly, I am satisfied that the remuneration sought in respect of the administration period is fair and reasonable.

The liquidation period and estimate for the remainder of the liquidation 26 By prayer 21(b) of the further amended originating process, the First Plaintiffs seek $185,056 plus GST in remuneration in respect of the period 4 May 2018 to 26 May 2019, and by prayer 22 they seek $30,000 plus GST for the period from 27 May 2019 onwards.

Necessary and proper connection between the liquidation and the work performed and yet to be performed 27 The First Plaintiffs submitted that all of the work performed by them during the liquidation to date were necessary and proper in the discharge of their statutory duties. Mr Sallway deposed that this included work relating to: (1) convening meetings of and reporting to the company's creditors (required by s 497 of the Act), and preparing and filing statutory reports (required by s 533); (2) the sale and realisation of Mossgreen's assets; (3) investigating unfair preference and other claims available to Mossgreen and for recovery of Mossgreen's property; (4) the return of property held by Mossgreen; and (5) the resolution of claims made against Mossgreen. 28 There were also several types of work which were said to be outstanding at the date of the hearing, the remuneration for which was sought in prayer 22 of the further amended originating process. The outstanding work includes bringing the present application in this Court and attending to matters incidental to it, liaising with the Australian Securities and Investments Commission, and investigating whether funding could be secured for claims against directors and former directors of Mossgreen. 29 I am satisfied that both the work performed and yet to be performed is and would be necessary and proper to bring the liquidation to an end.

Proportionality of the work performed to the remuneration claimed 30 The First Plaintiffs submitted that the work done during the liquidation was proportionate to the remuneration claimed. The remuneration claimed in respect of the liquidation period comprises approximately 33% of the total remuneration sought. Mr Sallway deposed in his second affidavit that the liquidation was and remains attended by similar complexities to those confronting the administration which are summarised above at [19]-[21]. In particular, the First Plaintiffs endured considerable difficulties in dealing with equitable claims made by aggrieved creditors, and there remain ongoing issues with various abandoned goods. In addition, the First Plaintiffs submitted that they recovered $300,000 in resolving an unfair preference claim, and realised a further $60,000 in assets during this period. 31 I am satisfied that the remuneration sought in respect of the liquidation is proportionate to the work done having regard to the complexity of the liquidation and noting the First Plaintiffs' additional recoveries.

Reasonableness 32 The remuneration sought by the First Plaintiffs for the liquidation period was also calculated on a time costing basis. I am satisfied that the delegation of tasks and the rates applied were reasonable having regard to the complexity of the liquidation and the skill of each staff member. 33 In respect of the work which remains to be performed, Mr Sallway deposed that the estimate of $30,000 was appropriate having regard to the rates applied, the work performed during the liquidation, and an estimate of outstanding work. Having regard to Mr Sallway's experience both in this liquidation and generally as a registered liquidator, I agree that Mr Sallway's estimate is a fair and reasonable one. 34 I also note the First Plaintiffs' submission that, in any event, the $30,000 estimate would represent a cap on the fees that the First Plaintiffs would be entitled to receive: IPSC s 60-10(4). The result of this cap is such that creditors will not suffer any disadvantage were that estimate to prove to be understated.

Objections to the First Plaintiffs' remuneration 35 Having been satisfied that the First Plaintiffs have made a prima facie case that the remuneration sought is reasonable, it is necessary then to consider the objections to the application. There were two objections to the First Plaintiffs' claim for remuneration. These were contained in an affidavit of Serena Clair Kang affirmed 28 August 2019 and in a letter sent to the First Plaintiffs by Bianca Korn on 20 August 2019. 36 Ms Kang objected to the remuneration application on three bases. First, the Full Court on appeal had found that the First Plaintiffs were 'intermeddling' with consignors' goods. Secondly, the effect of the orders I made on 8 August 2019 prevented the First Plaintiffs from recovering costs incurred prior to 5 May 2018. Thirdly, the difficulties encountered by the First Plaintiffs during the administration were a result of Mossgreen's business practices and the processes the First Plaintiffs chose to employ, rather than through any fault of the creditors. 37 However, the Full Court did not make such a finding, and the orders I made on 8 August 2019 do not so prevent the First Plaintiffs from recovering costs incurred prior to 5 May 2018. To the extent that the complexity of the administration was caused in whole or in part by Mossgreen's business practices, this is not a basis on which to refuse the remuneration sought. The First Plaintiffs are not responsible for those practices. As I have said I am also satisfied that the processes the First Plaintiffs employed were chosen in response to the difficulties inherent in the administration and do not justify refusing the First Plaintiffs' application. 38 Ms Korn raised two objections. First, she claimed that the First Plaintiffs had acted in their own interests and not in the interests of the vendors or other creditors. Secondly, the First Plaintiffs should not be remunerated for 'using money that [was] not legally part of [Mossgreen's] assets.' 39 I can detect no basis for Ms Korn's assertion that the First Plaintiffs acted in their own interests to the detriment of vendors or other creditors. In addition, Ms Korn's objection that the First Plaintiffs should not be remunerated for 'using money that is not legally part of [Mossgreen's] assets' cannot be maintained in light of the judgment of this Court in Mossgreen (No 6). 40 I do not think that either of Ms Kang or Ms Korn's objections should have any impact upon the remuneration granted to the First Plaintiffs.

Conclusion on remuneration 41 Accordingly, I will grant the remuneration sought in prayers 21 and 22.

The application for costs 42 The Court has power to make orders in relation to the costs of any proceedings commenced by an administrator or liquidator: IPSC ss 90-15(1), (3)(d). An external administrator is entitled to an indemnity for such costs from the assets of the company if the costs were properly incurred, that is, where the costs were reasonably and honestly incurred: Re Lonnex Pty Ltd (in liq) (No 2) [2019] VSCA 62; 56 VR 238 at [11], [29]. 43 I accept the First Plaintiffs' submission that neither this Court nor the Full Court were critical of the decision to bring the application concerning prayers 1 to 5 and 7 to 14 of the originating process and that, if anything, the Full Court criticised the First Plaintiffs for not having brought that application sooner: Appeal Reasons at [94]. With respect to the prayers of the further amended originating process presently before the Court, I accept that it was reasonable and honest for the First Plaintiffs to bring the application in circumstances where their remuneration proposals to creditors and the committee of inspection were rejected. 44 I am therefore satisfied that the costs in the administration and liquidation were incurred in respect of legal issues for which the First Plaintiffs reasonably sought directions from the Court. The First Plaintiffs should be granted an indemnity for their costs from the assets of Mossgreen.

Conclusion 45 I make the orders sought in prayers 17, 20, 21 and 22 of the further amended originating process filed on 30 August 2019. I certify that the preceding forty-five (45) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Perram.