First and Second Plaintiffs v Defendant

Nature of the application and material relied upon

1 The defendant, Custometal Engineering Pty Ltd (in liquidation) ('Company'), went into voluntary administration on 21 September 2017 when Sam Kaso and Daniel Peter Juratowitch ('Plaintiffs') were appointed as administrators.[1]

2 Prior to that time, on 11 September 2017 U-Neek Bending Co Pty Ltd had issued winding up proceedings in this Court against the Company.[2]

3 The administration of the Company came to an end on 11 October 2017, when orders were made by this Court that the administration of the Company be terminated, that the Company be wound up and that Mr Kaso and Mr Juratowitch be appointed as joint and several liquidators of the Company.[3] The Company was wound up prior to the second meeting of creditors being held and thus the second meeting did not occur.[4]

4 By originating process filed 14 September 2018, the Plaintiffs apply, under s 60-10(1)(c) of the Insolvency Practice Schedule (Corporations) (Schedule 2 of the Corporations Act 2001 (Cth)) ('Practice Schedule'), for the approval of their remuneration in relation to the administration of the Company in the amount of $40,860 (excluding GST) and an order that the Plaintiffs' costs of the application be costs in the liquidation of the Company ('Application'). Rule 9.2 of the Supreme Court (Corporations) Rules 2013 ('Rules') also governs such applications.

(a) the First Kaso Affidavit;

(b) a further affidavit from Mr Kaso sworn 13 September 2018 ('Second Kaso Affidavit');

(c) an affidavit of service sworn 28 August 2018 by Payten Tanan Martin, an office assistant employed by Frenkel Partners, solicitors for the Plaintiffs.

6 Before making an application of this type, r 9.2 of the Rules requires the Plaintiffs to serve certain persons with a copy of the principal affidavit in support of the application and a notice in accordance with Form 16 of the Rules stating that it is the Plaintiffs' intention to apply to the Court for an order determining their remuneration.

7 Mr Kaso deposes to having caused his solicitors to serve, on 24 July 2018 by post, a copy of the Form 16 notice and the First Kaso Affidavit, on the persons required to be served pursuant to r 9.2(2) of the Rules.[5] In particular, they include each creditor of the Company who was present, in person or by proxy, at any meeting of creditors of the Company (being the first meeting of creditors held in the administration of the Company on 4 October 2017) and the sole member of the Company, Mr Glenn O'Meara.[6] Ms Martin's affidavit is an affidavit of service, where she states that she served the documents on those named persons in accordance with the Plaintiffs' instructions.[7]

8 Mr Kaso also deposes that, as at 13 September 2018, he did not receive any notice of objection to the remuneration claimed within the 21 day period prescribed by r 9.2(3) of the Rules or after that time.[8]

9 Rule 9.2(4) provides that if a notice of objection is not received within the 21 day period, the administrators can file an affidavit stating the date(s) upon which the requisite persons were served and that no objection has been received, and the administrators can endorse the originating process with a request that the application be dealt with in the absence of the public and without any attendances by or on behalf of the administrators. Rule 9.2(4)(c) then permits the application to be dealt with in that way.

10 The originating process filed in this case contains this endorsement. Since all elements of r 9.2(4) of the Rules have been complied with and there are no notices of objection, I am satisfied that it is appropriate that I proceed to determine the application in the absence of the public and without attendance by or on behalf of the Plaintiffs.

11 For the purposes of the Practice Schedule, an external administrator is defined as an administrator, an administrator under a deed of company arrangement, a liquidator, or a provisional liquidator, of the company.[9] A company is taken to be under external administration for the purposes of the Practice Schedule on the occurrence of certain events, being under administration, a deed of company arrangement has been entered into, a liquidator has been appointed, or a provisional liquidator has been appointed.[10]

12 This application is made under s 60-10(1)(c) of the Practice Schedule. Section 60-10 relevantly provides:

60-10 Remuneration determinations

(1) A determination, specifying remuneration that an external administrator of a company (other than an external administrator in a members' voluntary winding up) is entitled to receive for necessary work properly performed by the external administrator in relation to the external administration, may be made:

(a) by resolution of the creditors; or

(b) if there is a committee of inspection and a determination is not made under paragraph (a) - by the committee of inspection; or

(c) if a determination is not made under paragraph (a) or (b) - by the Court.

...

(3) [Amount of remuneration] A determination under this section may specify remuneration that the external administrator is entitled to receive in either or both of the following ways:

(a) by specifying an amount of remuneration;

(b) by specifying a method for working out an amount of remuneration.

13 In exercising the power to determine the Plaintiffs' remuneration, s 60-12 of the Practice Schedule states that the Court must have regard to whether the remuneration is reasonable, taking into account any or all of the following matters:

(a) the extent to which the work by the external administrator was necessary and properly performed;

(b) the extent to which the work likely to be performed by the external administrator is likely to be necessary and properly performed;

(c) the period during which the work was, or is likely to be, performed by the external administrator;

(d) the quality of the work performed, or likely to be performed, by the external administrator;

(e) the complexity (or otherwise) of the work performed, or likely to be performed, by the external administrator;

(f) the extent (if any) to which the external administrator was, or is likely to be, required to deal with extraordinary issues;

(g) the extent (if any) to which the external administrator was, or is likely to be, required to accept a higher level of risk or responsibility than is usually the case;

(h) the value and nature of any property dealt with, or likely to be dealt with, by the external administrator;

(i) the number, attributes and conduct, or the likely number, attributes and conduct, of the creditors;

(j) if the remuneration is worked out wholly or partly on a time-cost basis - the time properly taken, or likely to be properly taken, by the external administrator in performing the work;

(k) whether the external administrator was, or is likely to be, required to deal with one or more controllers, or one or more managing controllers;

(l) if:

(i) a review has been carried out under Subdivision C of Division 90 (review by another registered liquidator) into a matter that relates to the external administration; and

(ii) the matter is, or includes, remuneration of the external administrator;

the contents of the report on the review that relate to that matter;

(m) any other relevant matters.

14 While the criteria in s 60-12 of the Practice Schedule direct the Court to the factors that are to be taken into account, the ultimate question is whether the remuneration claimed by the Plaintiffs is reasonable.

The Court's approach when considering applications for approval of an administrator's remuneration

15 The principles concerning applications for approval of the remuneration incurred by insolvency practitioners are well established and have been referred to in many decisions of this Court. While many of the decisions concern liquidators, the same approach has been applied in respect of administrators.[11] These principles were developed when the previous statutory provisions applied, as I will briefly explain.

16 The Practice Schedule is relatively new, having been introduced with numerous amendments made to the provisions of the Corporations Act 2001 (Cth) ('the Act') relating to external administrators by the Insolvency Law Reform Act 2016 (Cth) ('ILRA'). Amongst other things, the ILRA repealed s 449E of the Act (which had provided for the determination of administrators' remuneration) and introduced the Practice Schedule. The factors contained in s 60-12 of the Practice Schedule are materially the same as the factors which were set out in s 449E(4) of the Act.[12]

17 The commencement of the new provisions concerning remuneration in Division 60 of the Practice Schedule were deferred until 1 September 2017.[13] Since the Plaintiffs were appointed as administrators of the Company after that date, the new provisions apply.

18 As the relevant provisions are relatively new, and as the factors to be taken into account are materially the same, the earlier authorities remain pertinent.

19 Gardiner AsJ summarised the relevant principles in IMO Traditional Values Management Limited (in liq)[14] ('Traditional Values') at paragraphs [18] to [25].

20 For convenience I adopt his Honour's summary, which referred to the principles identified by Davies J in Thackray v Gunns Plantations:[15]

At [60], her Honour summarised the principles to be applied by reference to the decision of the Full Court of the West Australian Supreme Court in Venetian Nominees v Conlan as follows:

(a) A summary procedure was involved, not unlike that applicable to the taxation of solicitor's costs, which is not necessarily subject to all the rules that would apply in an action.

(b) The initial task of the Court is to consider whether the liquidator has made out a prima facie case on the evidence before the Court that the remuneration claimed is fair and reasonable. The Court must make that assessment 'bringing an independent mind to bear on the relevant issues' even though at that point there is no objector.

(c) There is no absolute rule regarding the amount of detail required to support a remuneration claim. But the evidence relied on should be sufficient to enable potential objectors to review the amounts claimed and to ascertain whether there are matters to which objection should be taken. If there is inadequate evidence supporting the claim, no order should be made.

(d) If the liquidator establishes a prima facie case, the Court should allow for an objection procedure to enable objections to be made.

(e) If there are objectors to the claim or any part, the Court should then establish the validity of those objections.

At [63] and [64] of Thackray, her Honour stated:

.... the receivers accepted that the principles set out Venetian Nominees Pty Ltd v Conlan are persuasive and that they should put sufficient evidence before the Court to enable the Court to determine that the amounts claimed are fair and reasonable. That involved providing sufficient detail of the work that was done and the expenses claimed for the Court to assess the reasonableness of the remuneration claimed for that work and the reasonableness of the expenses incurred by the receivers. The reasonableness of remuneration may be adduced by evidence for example of an appropriate benchmark, such as the Insolvency Practitioners Association of Australia rates, for comparative work by persons with the relevant status and qualifications for that kind of work and justification of the hours spent. That amount can then be adjusted up or down to reflect other factors including:

(a) complexity above the norm for the kind of work involved;

(b) novelty and difficulty of the issues faced;

(c) the ultimate outcome obtained by the claimant.

The Court is looking for evidence of overcharging. Excessive charging may be indicated if there is a lack of proportionality between the cost of the work done relative to the value of the services provided. But there is no universal approach applicable in all circumstances by which the "reasonableness" of remuneration claimed or expenses incurred should be measured. The size, importance and complexity of the tasks performed are all factors to be taken into account. What is needed is sufficient information for the Court and any objector to have a clear view about what was done so that an assessment can be made about the reasonableness of the claim.[16]

21 Black J of the New South Wales Supreme Court also summarised the applicable principles in In the matter of Sakr Nominees Pty Limited.[17] In addition to the matters referred to above, his Honour stated the following propositions:

[T]he 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[18].

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.[19]

22 His Honour also canvassed a number of authorities regarding the method for calculating the remuneration, such as time costing or remuneration based on a percentage of realisations, concluding that:[20]

Most decisions ... 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 costs of the work done and the value of the services provided.

23 On this point, his Honour concluded by referring to the New South Wales Court of Appeal decision in Sanderson, as liquidator of Sakr Nominees Pty Ltd (in liquidation) v Sakr[21] which he said did not prefer any particular approach over another. Black J then stated:

Whether time-based remuneration or a percentage of recoveries is appropriate in a particular case will depend, in part, on the basis on which the liquidator puts his or her application for remuneration; and, in part, the view taken by the Court.[22]

24 In the First Kaso Affidavit, Mr Kaso sets out the work the Plaintiffs and their staff undertook during the period of the administration. This includes:[23]

(a) Meeting with the Company's director to understand the history, business and assets of the Company;

(b) Attendance at the Company's business premises;

(c) Meeting with the landlord of the business premises to secure continued access to the premises;

(d) Completing a review of the Company's work in progress and evaluation if any of the works could be completed for the benefit of creditors;

(e) Undertaking a review of projects to determine retention monies being held and the likely recovery of the retention monies;

(f) Reviewing the financial position of the Company, including to determine if the Company's business could or should be traded during the administration period;

(g) Meeting with former employees of the Company at the business premises;

(h) Reviewing the previously executed sale of assets agreement between the Company and Custometal Pty Ltd;

(i) Reviewing documentation in regard to the Personal Properties Securities Register and the validity of claims;

(j) Overseeing the collection of hire equipment after it was determined that an interest in that equipment could not be established;

(k) Numerous discussions with the solicitor acting for U-Neek Bending Co Pty Ltd, the creditor of the Company that obtained the orders to wind up the Company;

(l) Instructing a solicitor to prepare an affidavit and attend the winding up hearing on 11 October 2017;

(m) Convening and conducting a first meeting of the Company's creditors; and

(n) Attending to all statutory notifications and lodgements.

25 Mr Kaso deposes that the work performed by the Plaintiffs and their staff during the administration was necessary and properly performed.[24]

26 Mr Kaso has exhibited a notice of the first meeting of creditors to be held on 4 October 2017, which attached an initial remuneration notice providing creditors with information about how the Plaintiffs proposed to set their remuneration for undertaking the administration of the Company ('Initial Remuneration Notice').[25] The Initial Remuneration Notice stated that the Plaintiffs proposed that their remuneration be calculated on a time basis, attached rates for the Plaintiffs' remuneration calculation, and estimated that the Plaintiffs' remuneration for undertaking the administration would be approximately $30,000 to $50,000 (plus GST), subject to variables identified in the Initial Remuneration Notice.[26] The rates referred to is a copy of the schedule of hourly rates issued by the firm of which the Plaintiffs are partners, Cor Cordis ('Fee Schedule').[27] This sets out the hourly rates for Cor Cordis employees and partners (effective 1 July 2017). From my experience in matters connected with insolvency administrations, I know these rates to be commensurate with the hourly rates typically charged by insolvency practitioners.

27 Mr Kaso has also exhibited a schedule setting out the work undertaken during the administration of the Company, being the period 21 September to 11 October 2017 ('First Remuneration Report').[28]

28 The First Remuneration Report sets out the details in respect of each task performed. It contains:[29]

(a) A description of the task;

(b) A classification of the task to identify the aspect of the administration of the Company to which it related. These were: administration; assets; creditors; dividend; employees; investigation; and trade on;[30]

(c) The identity and position of the Cor Cordis employee or partner carrying out the task;

(d) The dates upon which that task was performed;

(e) The time taken for the task; and

(f) The rate charged for the task, calculated in accordance with the Fee Schedule.

29 Mr Kaso deposes that the fees incurred for the period 21 September to 11 October 2017 were $33,872.50 (excluding GST), calculated on the basis disclosed to the Company's creditors in the Initial Remuneration Notice.[31]

30 Mr Kaso says that he reviewed the detailed time narrations contained in the First Remuneration Report, and that he believes all of the work specified was both necessary and of an appropriate quality. He says that there are no entries in the First Remuneration Report that he considers to be unnecessary or excessive, and that there was an appropriate level of delegation of the necessary work, so that appropriate tasks were undertaken by junior staff with a lower hourly rate.[32]

31 In addition, the Plaintiffs seek approval of their remuneration for preparing the Application in the sum of $6,987.50 (excluding GST).[33] A further remuneration report setting out the details of the fees incurred, in the same format as the First Remuneration Report, is exhibited ('Second Remuneration Report').[34]

32 Accordingly, the total sum claimed is $40,860 (excluding GST).

33 The Administrator states that he believes that the claimed remuneration is reasonable in all of the circumstances, that all of the work performed was necessary, warranted and performed properly, and that the quantum for which approval is sought is reasonable and properly incurred.[35]

(a) During the administration period, there were no receipts taken or payments made;[36]

(b) The Plaintiffs presently hold funds totalling $141,665.97, which are the net proceeds of the realisation and recovery actions taken by them, both during the administration period and after their appointment as liquidators of the Company;[37]

(c) Creditors of the Company have claims against it valued at $1,856,712.85, comprising:[38]

(i) $128,800 said to be owing to the Company's secured creditor;

(ii) $134,448.16 owing as unpaid employee entitlements; and

(iii) $1,593,464.69 said to be owing to unsecured creditors. There are approximately 60 unsecured creditors.[39]

35 The Plaintiffs seek that the Court determine their remuneration for the administration period, as a second meeting of creditors was not held and the determination of the remuneration could not be presented for the approval of the creditors.[40]

36 I am satisfied, based on the evidence filed by the Plaintiffs and the summary of evidence provided above, that the Plaintiffs have made out a prima facie case for payment of their remuneration, within the meaning referred to in paragraph 20 above. That is, the Plaintiffs have made out a prima facie case that the remuneration claimed is reasonable, and there is sufficient information to enable potential objectors to review the amounts claimed and to ascertain whether there are matters to which objection should be taken.

37 Although no objection has been taken to the remuneration claimed by the Plaintiffs, the Court is still required to review the claimed remuneration, taking the matters identified in s 60-12 of the Practice Schedule into account.

38 As noted above, the Plaintiffs seek approval for their remuneration for the administration period in the sum of $33,872.50 (excluding GST).

39 In terms of the matters identified in s 60-12 of the Practice Schedule, I am satisfied that:

(a) The work performed by the Plaintiffs was necessary and properly performed;

(b) The period during which the work was performed was 21 September to 11 October 2017. While this is a relatively short period, in my experience it is usual for the first few weeks of an administration to require an intense injection of time and effort;

(c) The work was performed to an appropriate standard;

(d) The Plaintiffs do not appear to have been required to perform any complex work or to deal with any extraordinary issues, save for the winding up application;

(e) The Plaintiffs were not required to accept a higher level of risk or responsibility than was usually the case;

(f) The Plaintiffs do not appear to have been required to deal with property of any significant value;

(g) The dealings with creditors appear to have been in the ordinary course, noting that there was a secured creditor, four priority creditors, three employee creditors and approximately 60 unsecured creditors;[41] and

(h) The remuneration was calculated on a time basis, and the time taken by the Administrator and each employee is set out in sufficient detail, by reference to the First Remuneration Report and the material contained in the First Kaso Affidavit.

40 I have reviewed the First Remuneration Report and the description of work given by Mr Kaso. These contain sufficient detail for me to be satisfied as to the amounts claimed. In particular, I am satisfied that:

(a) There was an appropriate degree of delegation of the work to be performed, such that the matters which could be adequately handled by junior staff were dealt with at a suitable level of seniority, experience, and charge out rate;

(b) The tasks described are necessary to have been performed. These tasks are those described in paragraph 24 above, along with a number of other tasks which I consider to have been necessary;

(c) The time taken to perform those tasks, and therefore the amounts charged for them, was reasonable; and

(d) There is no evidence of duplication, or unnecessary duplication, of work.

The Plaintiffs' remuneration in connection with the Application

41 The Plaintiffs seek approval for their remuneration for work done in connection with the Application, in the sum of $6,987.50 (excluding GST). As noted in paragraph 31 above, the Second Remuneration Report covers this period and is in the same format, with the same level of detail, as the First Remuneration Report.

42 External administrators are entitled to reasonable remuneration for work performed after the termination of their appointment, which includes work properly done in preparation of the application for remuneration currently before the Court.[42]

43 I have reviewed the Second Remuneration Report, and I am satisfied that the work was necessary and properly performed, and that the amount of the remuneration claimed in respect of it is reasonable, having regard to the factors identified and discussed above. In my view, the circumstances of this administration, particularly it ending before the second meeting of creditors could be held to consider, inter alia, the administrators' remuneration, means that the application to the Court was necessary, and it was a necessary part of that application that the Plaintiffs perform the work that they did in preparing it.

44 Accordingly, I will approve the Plaintiffs' remuneration in the amount of $40,860, comprising $33,872.50 for the period 21 September to 11 October 2017 and $6,987.50 for the work performed in connection with the Application. Those amounts are all GST exclusive.

45 I will also make orders that the Plaintiffs' costs of the Application be costs in the liquidation of the Company.

46 Once the parties have had an opportunity to consider these reasons, the Court requests that the Plaintiffs' solicitors provide a draft form of order to my Associate.

[1] Affidavit of Sam Kaso sworn 23 July 2018 ('First Kaso Affidavit'), [4].

[3] First Kaso Affidavit, [6]; Exhibit SK-2. The orders were made by Gardiner AsJ in proceeding number S CI 2017 03646.

[6] Second Kaso Affidavit, [5]. Mr O'Meara is recorded as the sole member of the Company in the records maintained by the Australian Securities and Investments Commission: Exhibit SK-1.

[11] By way of example, see Re AsiaPAC Communications Group Pty Ltd (In Liquidation) (Receivers and Managers Appointed) [2015] VSC 413.

[12] There are some minor changes to the language used: for example, s60-12 of the Practice Schedule refers to the extent to which the work was 'necessary and properly performed', whereas s 449E(4) of the Act referred to the extent to which the work performed was 'reasonably necessary'.

[13] Regulation 10.25.02(3) of the Corporations Regulations 2001 ('Corporations Regulations').

[14] [2012] VSC 650 (14 December 2012).

[15] [2011] VSC 380; (2011) 85 ACSR 144 ('Thackray').

[16] Traditional Values [60], citing Thackray [2011] VSC 380; (2011) 85 ACSR 144, [63]-[64] (citations omitted).

[17] [2017] NSWSC 668 ('Sakr').

[21] [2017] NSWCA 38.

[25] First Kaso Affidavit, [16]-[17]; Exhibit SK-5.

[27] First Kaso Affidavit, [1]; Exhibit SK-5.

[28] Exhibit SK-6. However, the version of the First Remuneration Report contained in Exhibit SK-7 is easier to follow, hence I have used that version.

[29] First Kaso Affidavit, [19]; Exhibit SK-7.

[34] Second Kaso Affidavit, [9]; Exhibit SK-8.

[42] In the matter of P.P.I Corporation Pty Ltd [2014] VSC 366, [46]-[47]; Deputy Commissioner of Taxation v Starpicket Pty Ltd (No 2) [2013] FCA 699, [54]; Re Reiter Brothers Exploratory Drilling Pty Ltd [1994] TASSC 42; (1994) 12 ACLC 430, 441.