Gis Electrical Pty Ltd v Melsom & Ors [2001] WASC 314

Gis Electrical Pty Ltd v Melsom & Ors [2001] WASC 314 - WASC 2001 case summary — Zoe

[77]

"Ongoing discussions with and monthly reports to the company's secured creditor concerning the realisation of assets of the company and progress of the administration.

Consideration of priority claims and payment thereof involving correspondence with taxation authorities and lawyers together with review and examination of FBT, Payroll Tax and Superannuation Guarantee Levy records to determine the correctness of the company's records and reported debt in respect of such, and settlement of liabilities relative thereto.

Finalisation of the Liquidators Section 533 report to ASIC.

Discussions and meetings with ASIC relative to matters raised in the Liquidators Section 533 report.

Ongoing investigating and communicating with solicitors in respect of employee unfair dismissal claims against the company.

Ongoing investigation regarding the existence of lease agreements with a company related to the director and disputed rent increase for main premises of Kalgoorlie branch.

Site visits regarding finalisation of WMC account and Kalgoorlie Nickel Smelter contract.

Ongoing and substantial debtor recovery issues and consideration of legal actions appropriate thereto, involving correspondence/discussion with solicitors.

Ongoing correspondence and discussions with major debtor, WMC, relative to settlement of its account, including correspondence and meetings with independent adviser on contractural [sic] matters.

Ongoing review of records to separate current query data and those requiring storage and archive.

P.M. MELSOM

ADMINISTRATOR 38.7 hrs @ $240/$265 per hr $ 9,337.00

S.F. ROBSON

ADMINISTRATOR 5.5 hrs @ $240 per hr $ 1,320.00

G.A. LOPEZ

ADMINISTRATOR 1.1 hrs @ $240 per hr $ 264.00

OTHER INSOLVENCY

STAFF 497.3 hrs @ $80 - $155 per hr $56,413.00

TAXATION STAFF 1.5 hrs @ $125 per hr $187.50

ADMINISTRATION

AND TYPING 13.7 hrs @ $60 - $75 per hr $ 1,041.50

$ 68,563.00

ESTIMATE TO FINALISE $ 15,000.00

$ 83,563.00

LESS FEES DRAWN $ 68,563.00

FEES TO BE DRAWN $ 15,000.00

Plus all disbursements and out of pocket expenses including bank fees, fax, postage, telephone, photocopying and overheads."

[119]

59 The first criticisms relate to the manner in which the fees were submitted to, and approved by the creditors' meetings held on 3 February, 4 June and 31 July 1998 with further residual fees being approved, after the administration period, on 10 February 1999. Firstly, although the creditors were given notice at each meeting that the administrators' remuneration was to be fixed, they were not given any notice of the amount of remuneration sought. That is a serious fault. If the remuneration is small, or appears to the creditor to be reasonable, a creditor might not bother attending the meeting. If, on the other hand, the sum sought is large, for example, at the second meeting $296,023, the creditor might decide to attend the meeting; he might speak to other creditors and lobby support for a questioning of the fees; or he might decide to vote against approval of those fees. I consider it unfair to the creditor not to stipulate the amount of remuneration sought. In Re Solfire Pty Ltd (No 2) [1998] NSWSC 596; (1998) 16 ACLC 1,156 at 1,157, Shepherdson J said that a liquidator seeking to have his or her remuneration determined at a creditors' meeting should provide the creditors with documentation containing sufficiently detailed information for them to decide on the reasonableness of the amount being claimed. This applies, by virtue of Venetian (supra), also to an administrator. As previously stated, no notice of the amount claimed was circulated prior to the meeting, nor was prior notice given of the work done to justify the amount. However, at each meeting a statement of fees sought, and a description of the work done, was circulated amongst the creditors attending, and I have no doubt that the creditors perused that document before voting on the resolution to fix the fees. The statement of fees which accompanied the first meeting held on 3 February 1998 has not been produced in these papers but the statements presented to the other meetings during the administration period have been produced. I have extracted sentences from those statements in my narrative of the factual background above. The statements give a reasonable idea of the nature of the work. The statement of 31 May 1998, for example, covers two and a half pages. It gives 32 statements, that is in 32 sentences, describing the type of work done. It is in general terms but, nevertheless, is comprehensive in scope. It then details the number of hours worked by each of the three administrators and the hourly rate, which in that example is stated to be within the range of $210 - $240 per hour. It does not list other insolvency staff by name, except to say:

[129]

"Since our appointment, it became immediately apparent that the prior involvement of a suitor company, Kiam Corporation Pty Ltd (Kiam) had wielded significant influence upon Mr Brett Price, the managing director of GIS and by assumption, Kiam had acquired the view that the administration process was for their benefit in acquiring GIS on terms appropriate to their needs and consequently a misunderstanding of the process that administration involved.

Indeed, in the very early stages of our administration, Kiam commenced interfering, seeking to impose their will not only upon the administrators, but upon staff of GIS and clients of GIS almost as a 'fait accompli' of their takeover.

Several discussions took place with executives of that firm at which the administrators' independent role was enunciated as a consequence of which, Kiam were invited to submit a formal proposal in respect to their interest.

Unfortunately, their submission was of little value and for your interest, I enclose a copy of their letter and my reply which provides more understanding of the issues.

It was apparent that an unhealthy culture existed within the organisation, principally due to a total lack of management control, personality differences between executives and staff with rapid turnover of office staff in the Como administration section which significantly incurred 16 staff changes over a period of some 12 months, thus the longest serving employee upon our appointment had accumulated only 4 months.

As a consequence, there were no training programs, no procedure manuals, no defined lines of authority and where they did exist, total lack of management skills.

It became apparent, particularly as a consequence of emerging events highlighting the total lack of management systems and management understanding of the problems, that company executives had poor ability and could provide no meaningful assistance to the administrators.

The following staff changes were progressively initiated as part of our rationalisation of highly paid executives and efficiency of function.

Those that were dismissed included:-

[144]

72 I remind myself of the different context of the plaintiff seeking a review in this case and the plaintiffs seeking a review, for example, in Solfire (supra). In this case the plaintiff is an unsecured creditor and, even if this review succeeds, the plaintiff is unlikely to get anything. Any money ordered to be refunded from the administrators' remuneration will go to the secured creditor, the Commonwealth Bank of Australia. The Commonwealth Bank is owed more than $2 million. The Bank does not support this application. The Bank voted at the various creditors meetings to approve the administrators' fees. In Solfire (supra), the two plaintiff shareholders, who sought the review, were the ones who were going to pay the fees. They undertook to pay the fees as reviewed by the court and the debt which pushed the company into liquidation and then asked that the winding up be terminated or permanently stayed. In this case, no such offer is made by the plaintiff. The present exercise is academic. This plaintiff has not paid the administrators' fees. They have been paid, in effect, by the Bank. This plaintiff will not gain if the administrators' fees are reduced by the court. It would have been better if the notice sent out to creditors by the administrator had mentioned the sum of fees claimed, and if the administrator had circulated in advance his statement of account setting out the fees claimed and the work done for the fees claimed. It would have been better if his statements of account had been more detailed. It also would have been preferable if the administrator had brought along to the creditors' meetings his hourly charge sheets so that they could have been inspected by any interested creditors - particularly when the plaintiff requested to see those records. Nevertheless, when I weigh up all these factors together with the others which I have mentioned, I am not persuaded that the information supplied to creditors was so inadequate that they were unable to make a properly informed decision on the reasonableness, or otherwise of the remuneration.

[162]

80 Mr Melsom, who is an experienced liquidator and accountant, says at par 11 of his affidavit of 25 October, and I summarise, that the CBA accounting software was only part of the company's accounting software. Fifty per cent of the accounting was done on Excel spreadsheets which were used exclusively at the Leinster, Murrin Murrin, and Esperance sites and for some of the Kalgoorlie accounting. The payroll system was "Micro Pay System" which dealt with in excess of 150 employees and the company's average monthly wages bill was $1 million during the administration and then progressively less as employees left as contracts came to an end. The payroll system was not interfaced with either the CBA or Excel systems, this being an essential element in properly allocating costs to particular jobs. The Leinster site, upon Melsom's appointment, represented approximately 40 per cent of the company's revenue. The MYOB programme was not used for job costing. Mr Keeffe was not involved in the affairs of the company at the time that MYOB software was finally implemented. Notwithstanding the change in other software programmes, the Excel spreadsheet software was maintained by the company during the course of the defendant's appointment and integrated with the replacement software for job costing and accounting. The final package which the administrators installed produced information which was far more accurate and timely than that which was in place at the time of their appointment. The final package took approximately three months to instal from the time of their appointment (which was January 1998). Firstly, MYOB was installed to allow the administrators to have a better control of debtors and creditors and that took about a month. Secondly, the purchase order system required refinement to allow purchase orders to be electronically issued which took a further three weeks. Finally, the software had to be written to integrate and interface the job costing from all the sites and all the various programmes which was finalised in the third month from the time of the defendants' appointment.

[167]

"When we arrived at GIS we found that the systems were in disarray. There were no systems procedures, manuals and a general lack of knowledge in regard to the day-to-day maintenance of any system. Users were trained by other users and my understanding is that due to many personality conflicts in the organisation, there was a turnover of 16 accounts staff in the 12 months prior to our appointment. As there were no written procedures, the training of staff lacked somewhat.

The Accounting system provides for a standard General Ledger structure with a ledger and sub-ledgers for debtors and creditors. This means that "one-sided" journals are an acceptable practice. It also means that without constant trial balances, the system does not necessarily balance with itself. (NOTE: These balances were not being carried out regularly). Profit and Loss statements also include the movement in "Work in Progress" which seems to be 'pulled out of the air'.

During the years of use of the CBA system, many duplicate debtor and creditor accounts have been created due to user error and the balances in these accounts cannot be reconciled with any level of confidence. This is often due to a liability being accrued in one customer account and paid for in another or a debtor payment being credited to the wrong account or the wrong period (the future) which causes an incorrect balance for the period being reconciled.

The payroll system utilizes a piece of software called 'Micro-pay' and as this software is not dynamically linked to the accounting system it means that at the end of a pay period, the accrued Prescribed Payment accounts are manually re-keyed into the CBA accounting system. There is a flaw in the accounting system which means that if anyone happened to be in the accounts payable area whilst the payroll was being batched through, a simple press of the key can wipe out all pending creditors or make then appear as paid in the future.

It is also feasible to manually alter the database to remove certain transactions. The debtor's database does not contain a current balance field for each customer and summing the debtor transactions generates a customers debt owing. This would be acceptable, however the system also allows for a transaction set to be removed once the debt has been paid. This was common practice before we arrived and certainly opens the possibility of fraud being committed against the company (or contra set-offs) by anyone who knew this.

Invoices are only generated monthly which reduces the company's cashflow position. There also seems to have been no reconciliation of the timesheets to the payroll system, which means that there is no guarantee that all costs are being recovered in the operation.

As timesheets were being transcribed manually onto spreadsheets, we have seen many transcription errors as well as overlap in dates and times worked.

There was no system backup for any data created in the personal computer environment and no security within the office for confidential documentation. All drives on PC's were shared to all others. There are also many pirate copies of software being used in the office.

CHANGES SINCE ADMINISTRATION

To resolve some of these issues, we have made many alterations to the systems in the office. Our brief was to make the systems stable and provide reliable information, create system backups and security, standardise whatever method of operation we could, at minimal possible cost.

To do this we did the following:

A Software audit was started to determine the depth of Software piracy and to resolve this issue by buying or removing the software for/from the PC's.

We stabilised the existing PC and terminal environment to allow continued operation by the staff at the site.

We assessed the needs of the Administration in relation to information and wrote extract procedures to retrieve data from the existing Accounting system.

A file server (using existing hardware and software) was created in the Como office and backup and security groups were created to maintain a level of security of data in the organisation. Data from all available machines was consolidated and a daily backup is now performed and stored off-site (The same methodology is now being adopted at Kalgoorlie office).

M.Y.O.B. was installed, initially as a stand-alone piece of software to capture the purchase orders for the administration and subsequently we networked it on a multi-user version to do the billing at Como and Kalgoorlie. As a result, billing can now be done daily to increase cashflow. (We recognise that the software being used does not provide a long or medium solution to the systems needs at GIS, but they do offer a cheap short-term solution).

Data transfer is now occurring on a daily basis to ensure that we can provide a daily P&L position. (NOTE: This is an incremental process and will need time to complete).

[169]

86 Mr Brickhill, for the plaintiff, has argued that it is not necessary for me to reach a conclusion on this question because the plaintiff only needs to raise a complaint in relation to these computer costs to justify the Court ordering an inquiry. I do not agree with that submission in relation to Delpride's computer charges. As stated above, they are almost entirely incurred in the administration period. It is s 536 that permits a complaint to be made about the conduct of a liquidator which can lead to the Court making an order calling upon the liquidator to answer the complaint, ie, calling for an inquiry. That section relates only to liquidators. It is headed "Supervision of Liquidators". The computer charges in question where incurred in the administration period. They are consultant's fees so they are not part of the administrators' remuneration as it has been defined by case law, so they fall outside the ambit of s 449E. The complaint about these fees falls for consideration under s 447E. On the plaintiff's case, these computer charges were unnecessary. Is the payment of these charges prejudicial to the interests of some or all of the creditors? Yes, obviously, if the complaint is made out, there is less money available to pay creditors. Which creditors are so affected? Only the Commonwealth Bank. If this $92,000 expense was totally unnecessary, and did not produce any contrary savings to the company, then the Bank has been prejudiced by the sum of $92,000. Yet it has made no complaint. It received the administrators' accounts and evidently does not support the application. It attended most creditors' meetings and received regular separate reports, as the secured creditor, on the progress of the administration. If I made an order refunding this $92,000 or part of it, the only creditor who would benefit would by the Commonwealth Bank. It still has more than $2 million owing to it. In these circumstances, I am not prepared to say that the computing fees paid by the administrators are prejudicial to the interests of any relevant creditor so that I need consider making an order about them.

[172]

88 Each of these six assertions is hotly contested by the defendants and much material has been presented on their answer to these points. I do not propose to go into any of these allegations at length because I do not think it necessary to do so in view of my main point, which I made in relation to the computer fees and which I repeat here. It is that the only relevant creditor prejudiced by these allegations, if they are all proved, is the Commonwealth Bank. Yet, with good knowledge of the administrators' actions, it has chosen not to join in or support this application. That is a complete answer. However, by way of an example I will say something about the allegation in (g). The defendants have produced answering documents on this. When Mr Price and his wife appointed administrators to this company it was in serious financial difficulties. It was insolvent. Mr Price spoke with Mr Robson prior to the appointment of administrations about the prospects of an administration and it was obvious that he had a deed of company arrangement in mind. He hoped that a rescuer could be found which would inject some money into the company which could provide some payment to the creditors and that the company would be allowed to continue to trade under a deed of company arrangement. That much is clear from letters at the time. Mr Price saw Kiam Pty Ltd as the proposed rescuer and at the time of the appointment of the administrators, and immediately afterwards, kept in close contact with persons associated with Kiam Pty Ltd, such as Peter Anderton. Mr Anderton thought that the company could possibly be jointly administered by him and the administrators. Mr Anderton in turn took an active interest in the running of the company. In a faxed memo to Mr Robson of 14 January 1998, he gave his views on the staff members who should be terminated and relocated. He gave detailed views on Mr Brett Price, who he said should be relocated to Kalgoorlie immediately, to continue as director of GIS's Kalgoorlie operations and he gave detailed suggestions as to the placement, sacking or relocation of another 12 staff members. He said that input on the company from himself and Mr Stedman and Mr Andrew Ellison would be at the expense of Kiam Pty Ltd. Mr Melsom has given detailed account of why Kiam Pty Ltd was not to be the rescuer. It ultimately did not offer any rescue package. In May 1998 he prepared a summary of the activities of the company and of its finances, which was publicised to see if any other company might be interested in putting up a sum of money to fund the deed of company arrangement but there were not takers. I accept his evidence entirely that proper and genuine efforts were made to find a rescuer. Discussions were held with six interested parties, including Kiam (Melsom p 144) including detailed discussion with Kiam's staff, but it was not to be. No offer was made by Kiam or by anyone else. He was thus unable to recommend a deed. He recommended the winding up of the company and this was accepted by the creditors.

[185]

98 The plaintiff's general submission in relation to the liquidators' charges is that, on the authority of Solfire (supra), the information supplied is not sufficient. The information should be as detailed as in a bill of costs. Mr Brickhill says that the computer print-out of the work done does not enable a creditor to ascertain if the appropriate level of person was used for a particular task. For example, at "BHP 35" at p 108, the first staff member mentioned is Mr Colin Sharp and during the liquidation period he did fifty-three units of work at a cost of $662.50. His charge out rate was $125 per hour. Some details of his work are given. For example, on 16 September 1998 he did twenty-one units of work at a cost of $262.50 described as "super contributions and FB tax matters". I do not know Mr Sharp's qualifications or his level of experience. Nor do I know the details of the work he did on the super contributions and the FB tax matters. I think it matters not. The liquidators are officers of the Court. They are normally highly experienced. I know that Mr Melsom and Mr Robson are experienced liquidators. I have seen their work on other occasions. I am not familiar with the work of Mr Lopez. Given that the amount of information supplied is fairly detailed, I am not disposed to require further information on the role of Mr Colin Sharp. The criticism made of the lack of detail about his work does not persuade me that I should call for an inquiry. This computer print out "BHP 35" of ninety-seven pages is inadequate according to the plaintiff but there must be a limit to the amount of detail that can legitimately be required. As previously stated, the Full Court of this Court did not endorse completely the view of Shepherdson J in Solfire (supra) on this matter. I note from the summary of fee earners at "BHP 36", that twenty-five staff members were engaged by the defendants as both liquidators and administrators and Mr Colin Sharp was not a significant fee earner. That summary does not differentiate between the fees earned by the various earners in the administration and the liquidation periods but in the combined periods the fees earned by the three defendants were as follows:

At a glance

Court

Decision date

Catchwords

Source

Catchwords

Judgment (220 paragraphs)

Gis Electrical Pty Ltd v Melsom & Ors [2001] WASC 314 (16 November 2001)

Parties

Cases Cited (3)