In the matter of Dungowan Manly Pty Limited [2016] NSWSC 1346 - NSWSC 2016 case summary — Zoe

NSWNSWSC

In the matter of Dungowan Manly Pty Limited [2016] NSWSC 1346

[2016] NSWSC 1346

Supreme Court of NSW|2016-08-29|Before: Brereton J

At a glance

AI case summary

Result

defendant. Remuneration fixed at $36,000 inclusive of GST (less than the $42,791.51 claimed); leave reserved to apply for further remuneration if substantial recoveries made from striking special levy

Key principles

Where liquidators inherit assets recovered by former liquidators at substantial expense, and their work has detracted from value for creditors rather than generated value, their...
Liquidators are entitled to remuneration for necessary work undertaken even where that work has not generated value, provided the work was required to assume conduct of the...
The Court has a very wide discretion in fixing liquidators' remuneration under ss 499 and 504 of the Corporations Act 2001 (Cth), and the determination does not admit of...
Where liquidators undertake work that may yet prove productive but whose outcome is uncertain at the time of the remuneration application, the Court may fix remuneration on the...

Issues before the court

Whether the Court has power to fix liquidators' remuneration where creditors have not passed a resolution approving remuneration at a meeting that...

Plain English Summary

The Supreme Court fixed liquidators' remuneration at $36,000 rather than the $42,791 they claimed, because they had inherited most of their funds from previous liquidators and their work had reduced rather than increased value for creditors. The liquidators took over a company in liquidation that had already paid a 75 cent dividend. They spent time investigating whether to strike another special levy and dealing with creditor inquiries, but this work cost money without generating returns. The Court said they should be paid for this necessary work, but at reduced rates because they hadn't created value. However, the Court allowed them to come back for more money if they do strike a special levy and make substantial recoveries.

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Judgment (3 paragraphs)

[1]

Solicitors: ERA Legal (plaintiff) File Number(s): 2016/227983

[2]

Judgment (EX TEMPORE)

HIS HONOUR: The company Dungowan Manly Pty Limited, now in liquidation, owned a company title apartment building in Manly, which has since been converted to strata title. Two members of the company, Mr and Mrs McLaughlin, brought proceedings against the company in which they eventually succeeded, obtaining a judgment for damages and costs, the total of which appears to be in the order of $1,322,500 - at least it is for that amount that their proof of debt is admitted in the liquidation. In response to the McLaughlins' obtaining judgment against the company, its directors placed the company into voluntary administration on 18 December 2012, when Messrs Shepard and Farnsworth ("the former liquidators") were appointed voluntary administrators, and they became liquidators on 13 May 2013 in a deemed creditors' voluntary winding up, as a result of the creditors resolving that the company be wound up. Mr Shepard resigned on 11 September 2013. Mr Farnsworth continued as sole liquidator until 14 March 2016, when he was replaced by the present applicants, Simon John Cathro and Christopher Damien Darin ("the new liquidators"). It does not much matter for present purposes, but it appears that there were regulatory or disciplinary proceedings against Mr Farnsworth, unrelated to this administration, and he resigned various administrations which he was then conducting and was replaced by the new liquidators. They convened a creditors' meeting, which was held on 23 May 2016, but failed to approve their remuneration, for which they claimed $42,791.51 inclusive of GST for the period 14 March 2016 to 5 May 2016. By originating process filed on 28 July 2016, they applied to the Court to have their remuneration as liquidators for the period 14 March 2016 to 5 May 2016 fixed in the amount of $42,791.
The application is said to be made under (CTH) Corporations Act 2001, s 511(1). Remuneration for a liquidator in a creditors' voluntary winding up is addressed by Corporations Act, s 499, which provides that the remuneration to be paid to the liquidator may be fixed, if there is a committee of inspection (which there is not) by that committee, or otherwise by resolution of the creditors and - by s 499(3A) - that if no remuneration has been fixed and a meeting of creditors is convened but a resolution cannot be passed because of the lack of a quorum and there has been no previous application of the subsection to the remuneration of the liquidator, then the creditors are taken to have passed a resolution determining that the liquidator is entitled to remuneration of whichever is the greater of $5000 or the amount prescribed in the regulations. Section 504 then provides that the liquidator may at any time before the deregistration of the company apply to review the amount of the remuneration of the liquidator. While there is some lack of clarity as to the situation if no resolution is passed, not for lack of a quorum but because the creditors do not carry the resolution, it seems to me that s 504, and failing that s 511 (which confers on the Court, in respect of a voluntary winding up, all the powers that it might exercise if the company were being wound up by the Court), gives the Court the requisite power to fix the liquidators' remuneration in the present circumstances.
The claim for remuneration is in respect of a total of 88 hours' work. 3 hours and 30 minutes is attributable to management of assets, for which $1,504 is claimed; 58 hours and 46 minutes to creditors, which involves in particular liaison and correspondence with Mr and Mrs McLaughlin, the convening of the creditors' meeting and the preparation of the report to creditors in advance of that meeting, for which $29,453 in all is claimed; 23 hours and 2 minutes for investigations, being reviewing the judgments of Black J and the Court of Appeal in the proceedings brought by the McLaughlins' against the company, reviewing other documents, considering the issue as to whether a further special levy should be struck, and further discussions with Mr and Mrs McLaughlin, for which a total of $10,426 is claimed; and administration of 3 hours and 13 minutes, for which $1,407 is claimed. The liquidators' claim is supported by an itemised schedule of time spent and the amount attributable to each item on that schedule.
When the proceedings first came before the Court on 8 August 2016, Mr and Mrs McLaughlin were joined as defendants, and I directed that the defendants file and serve by 22 August 2016 a notice specifying their objections to the plaintiffs' claim for remuneration, identifying so far as practicable each item in the plaintiffs' claim to which objection is taken and the grounds of each objection, and any affidavit evidence upon which they seek to rely. The McLaughlins did not serve an itemised notice of objection, but Mr McLaughlin swore and served an affidavit in which he articulated the objection that the work performed had generated no value to creditors. At the hearing, he maintained that as the essential ground of his objection.
It is relevant to understand some of the background to the appointment of the new liquidators and the issues with which they have had to deal. From their appointment as voluntary administrators on 18 December 2012, until the appointment of the new liquidators on 14 March 2016, the former liquidators realised assets or recoveries totalling in excess of $1.9 million, and paid out in excess of $1.8 million. The chief source of the funds they generated was a special levy struck by them as voluntary administrators, which generated in excess of $1.8 million. As a result, the former liquidators were able to declare and pay a first dividend to creditors of in excess of 75 cents in the dollar. Mr and Mrs McLaughlin received a little over $1 million in respect of their admitted proof of debt of $1.322 million; the amount that remains outstanding to them is $324,000. The other creditors are relatively minor - the total outstanding now, including the McLaughlins, is $350,000 approximately.
For their work over that period of three and a half years the former liquidators have so far recovered remuneration of $281,449. In addition, they incurred legal fees of $348,386 and other disbursements of in excess of $19,000 for which they have been reimbursed. At the end of their administration, there remained a fund of approximately $143,000. They made a claim for further remuneration of $51,000 approximately, which was not approved at the same creditors' meeting as that which failed to approve the remuneration of the present liquidators. The Court understands that they intend to make an application to the Court for approval of that additional remuneration, and it appears that they have retained a fund equivalent to that amount pending that application. They transferred to the new liquidators a total of about $92,000.
The new liquidators have made further recoveries of $21,000 - apparently from shareholders against whom the special levy was struck - and a little interest, so that with the $92,000 received from the former liquidators their total receipts amount to $112,770 - of which, as I have said, $92,000 had already been recovered by the former liquidators and was transferred to them. Having paid legal costs of almost $14,000 and some other minor outlays, they now retain $98,650.
Thus, on the one hand, it needs to be recognised that the new liquidators inherited assets that had already been recovered by the former liquidators, and to recover those assets, the administration had already incurred very substantial expenses through the former liquidators; but on the other, that having been appointed, the new liquidators necessarily had to undertake some inquiries and investigations in respect of the previous administration. In addition, they had little option but to deal with the correspondence and inquiries from the McLaughlins, and would no doubt have been criticised had they not done so.
The major issue, however, which they had to consider, was whether they should strike another special levy in order to endeavour to recover additional funds which might produce a further substantial dividend for creditors generally and, as the overwhelming creditors, the McLaughlins in particular. The liquidators took the course of seeking legal advice as to whether they were able to strike a special levy. They have been criticised by Mr McLaughlin for being overly cautious as he contended that it is self-evident on the face of Black J's judgment that a further special levy can be struck. However, the liquidators have adverted, as they did in their report to creditors, to some observations made in the course of his Honour's judgment to the effect that there was an issue which had not been argued before him which, if argued, might possibly have cast doubt on their ability to strike a special levy.
It is not for me on this application to resolve, or to give advice in respect of, that question, although it is one on which the liquidator might well be advised in due course to obtain judicial advice. However, it does seem to me that while the position may not be as difficult and obscure as the liquidators seem to think it is, on the other hand, it is not as clear-cut as Mr McLaughlin would have it.
While the liquidation is complicated by the necessity to consider whether or not a further special levy can be struck, and while no doubt the persistence of the McLaughlins has caused work for the liquidators, that is really the only issue of difficulty or complexity that they have had to address. Mr McLaughlin rightly points out that at least to this point, the new liquidators' work has in net terms not generated but detracted from value for the creditors. On the other hand, a substantial amount of the work they have done is work that had to be done, either to assume the conduct of the liquidation from the former liquidators, or to address the McLaughlins inquiries, or to convene the creditors' meeting, or to satisfy themselves whether they could reasonably strike a further special levy, and it may yet be that the work done in respect of a special levy will result in the generation of further value. The new liquidators are awaiting receipt of counsel's advice on that question and although it was indicated to the Court that their preference was simply to finalise the liquidation, it might be thought that if counsel advised that they could strike a further special levy, that they would do so and potentially recover additional amounts. It should be mentioned that the new liquidators are also concerned that, even if they can strike a special levy, there may be difficulties in recovering it. That may be so, but it seems to me if they have power to strike it, then no harm is done in striking it, and there is potential thereafter to recover from at least some, if not all, of the shareholders.
It is clear that although to this point value has not been generated, the creditors - and in particular, the McLaughlins - wanted the issue of a further special levy to be pursued, rather than the liquidation to be completed and the remaining funds promptly distributed. Urging that course necessarily involves some risk that the available funds will be eroded without generating a return. Similarly, where creditors engage with liquidators and require them to expend time and effort in responding, that is time which liquidators cannot spend elsewhere and which draws them away from what might be other remunerative work. Investigations of potential causes of action, preparatory to prosecuting them will often be unproductive; but that does not mean that they are not to be remunerated.
The difficulty in this case is that it is not possible to know, at this stage, whether the efforts that the liquidators have undertaken are going to prove productive or not. That means that I am not able to resolve at this stage whether the liquidators should be rewarded for risk undertaken and return generated. If they were to strike a further levy and make significant recoveries on it and thus become able to pay a further substantial dividend, it might well be that remuneration in an amount greater than that I presently propose to fix would be appropriate. But as things stand, it is not possible to take into account those matters.
As it seems to me, the fairest approach in this case is to fix remuneration for the entire liquidation - not just the period for which it is claimed - on the assumption that upon receipt of the legal advice they are currently awaiting, the liquidators will - as the Court was told was their preference - not strike a special levy, but proceed to finalise the liquidation. But in fixing remuneration on that basis, I propose to reserve leave to the liquidators to apply for further remuneration if they undertake substantial further work not contemplated by that scenario and, in particular, if they strike a special levy and make substantial recoveries which enables distribution of a further substantial dividend.
As I have said, the $100,000 approximately which the new liquidators hold was substantially inherited from the former liquidators, being the residue, after expenditure, to generate receipts of $1.9 million and a dividend of 75 cents. It is inevitable that the appointment of a replacement liquidator would incur some additional costs, and as I have foreshadowed it was necessary that the new liquidators investigate - as indeed the creditors insisted they do - the possibility of additional recoveries, and deal with the persistent communications from creditors as to which they would have been criticised had they not responded.
But on the footing presently assumed, the new liquidators' stewardship will have resulted in erosion rather than generation of value. The costs, disbursements and remuneration that they have incurred, ultimately at the expense of creditors, will have been to obtain advice that, on relevant assumptions, results in no further action and no further reward. It is not unreasonable that they have taken that advice, and just because they have not added value does not mean they should not be remunerated for it, but they cannot expect the same reward as would be appropriate for value-generating work. Their standard hourly rates applied to time spent must be moderated, having regard to the limited assets available in their administration, the stage at which they took conduct of the administration, and the results - or lack of results - they have produced. As I have said, it would be different if their investigations produced a further levy and recoveries, or if they had taken a less cautious and higher risk approach which would have attracted a premium for risk and results. On an application for further remuneration, that could still be the case, and by reserving leave to apply for additional remuneration the possibility for that outcome is preserved. By that I mean that an application for further remuneration would not be limited to the period after the present order is made or the period in respect of which remuneration was initially claimed. In other words, a premium in respect of work already done and remunerated can be justified in the future, if it turns out to have been productive.
To what extent the liquidators' rates and remuneration should be moderated does not admit of mathematical exposition or justification, any more than does the fact that they set their own hourly rates. As Dixon J said in Re Universal Distributing Co Ltd (In Liquidation) (1933) 48 CLR 171, the Court has a very wide discretion in this respect. I have derived some guidance from two somewhat comparable situations, in which there was effectively a second phase liquidation or a separate fund under the control of the liquidator, of roughly the same magnitude as the present liquidation. In AAA Financial Intelligence Ltd [2014] NSWSC 1004, there were recoveries of $180,000 and a residue for distribution before remuneration of $100,000. The liquidators were allowed 20% of the recoveries which was $36,000, representing 36% of the fund remaining available for distribution and remuneration. In In the matter of Independent Contractor Services (Aust) Pty Limited ACN 119 186 971 (in liquidation) (No 2) [2016] NSWSC 106, there were recoveries of $211,000 and expenses of $80,000 leaving a residue of $130,000. The liquidators were allowed $30,000, which represented roughly 14% of recoveries or 30% of the fund available for remuneration and distributions. In each of those cases, there were significant complexities comparable to and probably greater than the issue concerning the special levy that the present liquidators have to address. On the other hand, in the present case the liquidators have effectively had no choice but to deal with and respond to the creditors' inquiries and pressures.
In fixing an amount, I have also taken into account that even on the hypothesis that the liquidators will proceed to finalise the liquidation, there will be some further work to be done, including considering counsel's advice and calculating and distributing the final dividend and lodging final reports. On that basis I have concluded that a sum of $36,000 is appropriate remuneration for the new liquidators for this liquidation.
The Court orders that: 1. The remuneration of the plaintiffs Simon John Cathro and Christopher Damien Darin as liquidators of Dungowan Manly Pty Limited for the entirety of the liquidation be fixed in the sum of $36,000 inclusive of GST. 2. Leave be reserved to the plaintiffs to apply for further remuneration in the event that they undertake substantial further work not contemplated by the assumption on which this remuneration has been fixed and, in particular the event that they make substantial recoveries as a result of striking a special levy.
For these purposes I observe that I would regard an application to the Court for judicial advice as substantial additional work not contemplated by the remuneration I have fixed.

In the matter of Dungowan Manly Pty Limited [2016] NSWSC 1346

At a glance

Result

Key principles

Issues before the court

Plain English Summary

Judgment (3 paragraphs)

Cited legislation

Cases Cited (3)

Cited By (3)

AI Analysis