Jennifer Helen Papadam v Smidam Pty Limited

Supreme Court of NSW|2022-03-28|Before: Williams J, Mr J

Salient facts

Smidam Pty Ltd ACN 160 606 404 (the Company) was appointed as the trustee of the Smidam Superannuation Fund (the Fund) when the Fund was established on 17 October 2012.
Ms Jennifer Papadam and Mr Anthony Smith are the directors and shareholders of the Company and the beneficiaries of the Fund. They are the plaintiff and third defendant (respectively) in these proceedings, which were commenced in 2018.
The principal asset of the Fund was a commercial property located in Hunter Street, Sydney. That property was sold and the net sale proceeds were paid into Court pursuant to orders made by the Court on 24 September 2018. The amount paid into Court was $914,896.
A "Rectification Plan" prepared for the Fund on or about 28 April 2020 identified various matters that needed to be addressed in order to bring the Fund into compliance with the Superannuation Industry (Supervision) Act 1993 (Cth) (the SIS Act) and other relevant legislation and regulations. The Rectification Plan was prepared by Mr David Saul, an auditor who had been appointed to audit the Company's financial statements. The "Key Rectification Plan Items" set out in the Rectification Plan included for the directors to cease legal conflict and work together to comply with the legislative requirements applicable to the Fund, to address certain anomalies within the Fund's financial records, to prepare and lodge financial statements and tax returns for the Fund, and to wind up the Fund and transfer to alternative complying superannuation funds the assets to which each member of the Fund was determined to be entitled.
On 21 May 2020, the Court made orders by consent appointing Mr Daniel Frisken as receiver and manager of the assets and undertaking of the Company until further order of the Court and conferring on him the powers in s 420 of the Corporations Act 2001 (Cth). The Court made the following orders in respect of the Receiver's remuneration: "6. Orders that the reasonable costs and expenses properly incurred by the Receiver in the performance of his/her duties and the exercise of his/her powers and any matters arising from, relating to, incidental to and in connection with the performance of his/her duties and the exercise of his powers under these orders be paid from the funds held in Court. 7. Order, subject to further order, that: (a) the amount of remuneration to be allowed to the Receiver is to be calculated at a rate not exceeding $680 per hour inclusive of GST; and (b) the total amount of remuneration to be allowed to the Receiver is not to exceed $40,000 inclusive of GST, without the leave of the Court."

The application before the Court

Upon forming these views, the Receiver filed a notice of motion on 1 March 2022 seeking: 1. an order that the cap in respect of his remuneration under order 7(b) made on 21 May 2020 be increased to $130,549.37 (including GST); 2. an order that order 4 made on 21 May 2020 be vacated or alternatively that he be excused from further compliance with that order; 3. an order pursuant to ss 420(2)(u) and 461(1)(k) of the Corporations Act winding up the Company; 4. an order that he cease to act as receiver upon the winding up of the Company and be appointed as the liquidator of the Company; and 5. costs (if the notice of motion is opposed).
Ms Papadam did not oppose any of the orders sought by the Receiver and did not seek to be heard at the hearing on 28 March 2022.
Mr Smith appeared for himself at that hearing and opposed the order sought in relation to the Receiver's remuneration. Mr Smith contends that an increase in the cap to $130,549.37 would be excessive and that the cap should only be increased to $60,000.
Mr Smith consents to the proposed order winding up the Company and other orders sought by the Receiver.

Remuneration

The power pursuant to which the Court made the orders concerning the Receiver's remuneration on 21 May 2020 and is now asked to vary those orders by increasing the cap is r 26.4 of the Uniform Civil Procedure Rules 2005 (NSW). The applicable principles were summarised by Brereton J (as his Honour then was) in Re Say Enterprises Pty Ltd [2018] NSWSC 396 at [6] (footnotes omitted): "The remuneration of court-appointed receivers is provided for by (NSW) Uniform Civil Procedure Rules 2005, r 26.4 which provides that a receiver is to be allowed such remuneration (if any) as may be fixed by the Court. Founding on what Young CJ in Eq said in Ide v Ide, but drawing on the qualifications expressed in later cases, the relevant principles may be restated as follows: (1) A receiver is entitled to the costs, charges and expenses properly incurred in the discharge of the receiver's ordinary duties, or in the performance of extraordinary services that have been sanctioned by the Court. (2) The ultimate question is what amount of remuneration is 'reasonable', and this involves considering whether the work in respect of which remuneration is claimed was reasonably undertaken in the due course of the receivership, and whether the amount claimed for it is a fair and reasonable reward for it. The objective is to award a sum or devise a formula which will reasonably and fairly compensate the receiver for the time and trouble expended in the execution of his or her duties and the responsibility he or she has assumed. (3) The receiver bears the onus of justifying the reasonableness and prudence of the tasks undertaken for which remuneration is sought, and the reasonableness of the remuneration claimed for them. (4) Remuneration may be allowed on the basis of a fixed salary, a commission on receipts, or a quantum meruit having regard to the time, trouble and responsibility involved. It is a matter for the Court to determine what basis is appropriate in the particular case, having regard to the principle that the remuneration must be reasonable. (5) If a time-based approach is adopted, the Court is guided by professional scales of charges, with emphasis on the broad average or general rate charged by persons of the relevant status and qualifications who carry out the relevant type of work. The Court will usually act on time sheets created in the receiver's office, provided that they do significantly more than merely detail the total number of hours spent by the receiver and officers of particular grades on his or her staff. (6) By analogy, the task involves consideration of the matters referred to in Corporations Act, s 425(8), which applies to receivers appointed under an instrument, namely: (a) the extent to which the work performed by the receiver was reasonably necessary; (b) the extent to which the work likely to be performed by the receiver is likely to be reasonably necessary; (c) the period during which the work was, or is likely to be, performed by the receiver; (d) the quality of the work performed, or likely to be performed, by the receiver; (e) the complexity (or otherwise) of the work performed, or likely to be performed, by the receiver; (f) the extent (if any) to which the receiver was, or is likely to be, required to deal with extraordinary issues; (g) the extent (if any) to which the receiver 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 receiver; (i) whether the receiver was, or is likely to be, required to deal with: (i) one or more other receivers; or (ii) one or more receivers and managers; or (iii) one or more liquidators; or (iv) one or more administrators; or (v) one or more administrators of deeds of company arrangement; (j) the number, attributes and behaviour, or the likely number, attributes and behaviour, of the company's creditors; (k) if the remuneration is ascertained, in whole or in part, on a time basis: (i) the time properly taken, or likely to be properly taken, by the receiver in performing the work; and (ii) whether the total remuneration payable to the receiver is capped; (l) any other relevant matters. (7) Many of those factors - in particular, pars (d) - (e) and (g) - (h) - have as their unifying theme the concept of proportionality (being the relationship of the work done and the remuneration claimed to the value of the estate), which is an important consideration in determining reasonableness. (8) It will rarely be appropriate for a Judge to review a decision of a Registrar on remuneration on an item-by-item basis. (9) In respect of disbursements, no Court approval or specific order is necessary in the absence of a challenge, although receivers should scrutinise them to ensure that they are reasonable and properly payable, and the Court has an inherent jurisdiction to review receivers' disbursements as they are officers of the Court. However, a receiver may seek a direction that he would be justified in paying certain disbursements in order to obtain prior protection in respect of such a disbursement."
It is not the function of the Court to undertake a taxation of the receiver's bill on an item-by-item basis. The exercise involves a more impressionistic and evaluative approach: Re Gondon Five Pty Ltd and Cui Family Asset Management Pty Ltd [2019] NSWSC 469 at [35].
The increase to the remuneration cap sought by the Receiver relates to: 1. an amount of $70,749.37 for work undertaken by the Receiver during the period from about September 2020 to February 2022 (in addition to the $40,000 covered by the existing cap) in an effort to give effect to the Rectification Plan. I shall refer to this component of the proposed increased cap as the past work component; 2. an amount of $19,800 that the Receiver estimates will be required for further work during the period from February 2022 until the winding up of the Company, assuming that the Court makes the winding up order sought. I shall refer to this as the future work component. If the remuneration for the work actually done by the Receiver from February 2022 to the date of winding up is less than the estimated amount, the Receiver will charge less than the proposed revised cap.

Past work

The Receiver has provided a detailed description of the past work in his remuneration approval report dated 23 February 2022 that was exhibited to his affidavit. The work is described by reference to the following four categories: Category Amount for past work component Administration $24,083.25 (55.7 hours' work) Assets $1,478.00 (3.6 hours' work) Investigation $55,251.00 (136.8 hours' work) Litigation $19,989.00 (42.4 hours' work) Sub-total $100,681.25 Plus GST $10,068.13 Less amount covered by existing cap $40,000.00 Amount above existing cap $70,749.38

The remuneration is calculated on a time-charging basis applying hourly rates below the level approved by the orders made on 21 May 2020. The exhibits to the Receiver's affidavit also include his firm's time sheets for all of the past work. The time sheets describe each item of work and identify the name of the employee who performed that work, the time taken and the amount charged. The remuneration report referred to above includes a summary of the total amount of time spent and fees charged by each member of the Receiver's staff for the whole of the receivership and in each of the four categories referred to above.
The investigation category accounts for most of the work undertaken. The remuneration report describes the work as involving: 1. the review of a significant volume of books and records of the Company and the Fund and directors' working papers concerning the affairs of the Fund that were provided to the Receiver's office in several stages after each draft of the 2020 financial statements were provided to the directors as referred to earlier in these reasons; 2. liaising with the directors regarding matters arising from the Receiver's review of that material; 3. engaging and liaising with Kelly Partners in relation to the preparation and lodgement of tax returns for the 2017 to 2019 financial years, corresponding with the financial statements for those years that had been submitted to the ATO prior to the appointment of the Receiver; and 4. liaising with Kelly Partners and Mr Saul concerning the preparation and audit of the 2020 financial statements.
I have reviewed the time sheets exhibited to the Receiver's affidavit in a broad way. My impression based on that review is that the description of the investigation work in the remuneration report reflects the work recorded in the time sheets.
The summary of the time sheets included in the remuneration report reveals that almost all of the work in the investigation category was undertaken by a staff member of the Receiver's firm with 3-4 years' experience under the supervision of a more experienced supervisor and a senior manager with 7-8 years' experience. In my opinion, the work was appropriately delegated yet limited to a small number of persons to avoid dilution of knowledge of the subject matter. The rates charged for the work are within the range of rates commonly charged in the insolvency industry and are below the upper limit of the hourly rate approved by the Court in the orders made on 21 May 2020.
On the basis of the evidence referred to at [14]-[22] above, I am satisfied that the work included in the investigation category was reasonably necessary to comply with the order made on 21 May 2020 that directed the Receiver to implement the Key Rectification Plan Items in the difficult and unusual circumstances arising from the directors' failure to maintain adequate books and records and their ongoing disputes which resulted in the Receiver and his staff being burdened with large volumes of material for review and analysis as part of their work which sought to comply with the Court's order. I am also satisfied on the basis of my broad review of the time records and the remuneration report that the investigation work was done in a reasonable manner in all the circumstances and that the amount of $55,251.00 is a fair and reasonable reward for that work. The cap in order 7(b) made on 21 May 2020 should therefore be increased to the extent necessary to permit the Receiver to recover the whole of the remuneration claimed for investigative work.
The next largest category of work is the administration category, which included the important administrative tasks typically undertaken during a receivership such as ASIC lodgements, BAS lodgements, bank account reconciliations and recording receipts and payments in the receivership accounts. In this case, the administration work also included liaising with the ATO regarding the Fund's compliance as a self-managed superannuation fund. Having regard to the numerous compliance issues raised by Mr Saul prior to the Receiver's appointment, this was an important task.
The time sheets exhibited to the Receiver's affidavit, which I have reviewed, appear consistent with the description of the administration work in the remuneration report.
The summary of the time sheets included in the remuneration report reveals that almost all of the work in the administration category was undertaken by a staff member of the Receiver's firm with 3-4 years' experience under the supervision of a more experienced supervisor and a senior manager with 7-8 years' experience. In my opinion, the work was appropriately delegated. The rates charged for the work are within the range of rates commonly charged in the insolvency industry and are below the upper limit of the hourly rate approved by the Court in the orders made on 21 May 2020.
On the basis of the evidence referred to at [14]-[22] above and my broad review of the time records and the remuneration report, I am satisfied that the work included in the administration category was reasonably necessary and was done in a reasonable manner and that the amount of $24,083.25 is a fair and reasonable reward for that work. The cap in order 7(b) made on 21 May 2020 should be increased to the extent necessary to permit the Receiver to recover the whole of the remuneration claimed for administration work.
The remuneration report describes the work undertaken in the litigation category as including liaising with the solicitors acting for Ms Papadam and Mr Smith throughout the receivership and instructing the Receiver's solicitor in relation to responses to numerous enquiries received from Ms Papadam and Mr Smith or their respective legal representatives. The litigation category also includes work relating to the proceedings in August 2021 referred to at [19]-[20] above and the preparation of evidence for the present application. This description of the work is consistent with the time sheets, which I have reviewed in a broad way. This work was undertaken principally by a senior manager, with considerable work also being done by staff of 3 years' experience or more. I consider that this was an appropriate approach to delegation having regard to the nature of the work and the extent of the dispute between the directors that the Receiver was navigating in an effort to implement the Rectification Plan in accordance with order 4 made on 21 May 2020. For all of those reasons, I am satisfied that the work included in the litigation category was reasonably necessary, was done in a reasonable manner and that the amount of $19,989.00 is a fair and reasonable reward for that work. The cap in order 7(b) made on 21 May 2020 should be increased to the extent necessary to permit the Receiver to recover the whole of the remuneration claimed for the litigation category.
The final category involves the small amount of work done to invest the funds paid out of Court into the receivership account and to monitor that investment. I am satisfied on the basis of the remuneration report and the time sheets that the work was necessary and was reasonably done and that the amount of $1,478.00 is fair and reasonable remuneration for that work.
I have considered the proportionality of the total remuneration of $100,681.25 now claimed for past work compared to the $848,515.42 funds that were transferred into the receivership bank account shortly after the appointment of the Receiver. The total past work remuneration claimed amounts to approximately 11.9% of those funds. In all the circumstances referred to at [14]-[22] above, I do not consider this to be a disproportionate amount of remuneration for the past work.
In reaching my conclusions above in respect of each category of the past work, I have considered and rejected Mr Smith's written and oral submissions. In substance, Mr Smith submitted that the amount of remuneration now claimed by the Receiver is unreasonable and excessive because: 1. the Receiver relies on only the most general evidence in support of the remuneration now claimed; 2. the Receiver's attempts to implement the Key Rectification Plan Items were destined to fail from the outset because the implementation of the Rectification Plan depended on cooperation between Ms Papadam and Mr Smith and it was obvious from the very fact of the Receiver's appointment that they were unable to cooperate and the appointment put the Receiver on notice of the disputes between them and their inability to cooperate; 3. the Receiver should have done no further work in relation to the Rectification Plan after September 2020 when Mr Saul expressed the opinion referred to at [15] above and the Receiver's work after September 2020 "flew in the face of" Mr Saul's recommendations; 4. the Receiver should have moved straight to winding up, noting that this was part of the recommended actions in the Rectification Plan; and 5. the Receiver should not be remunerated for any work undertaken in investigating a loan known as the "BOQ loan" in circumstances where the directors had reached a consensus about this loan.
I reject Mr Smith's first submission. As I have referred to above, the Receiver has put detailed time records into evidence, in addition to the summary of the time records by staff member and category of work and the description of the work in the remuneration report. The Receiver has also given evidence of the circumstances in which the work was undertaken, as summarised earlier in these reasons.
I reject Mr Smith's second submission. The parties to the proceedings, including Mr Smith and Ms Papadam, consented to the order appointing the Receiver and directing him to implement the Key Rectification Plan Items. In those circumstances, I do not consider that the Receiver's knowledge of disputes between directors meant that he was on notice that the disputes would prove incapable of resolution. On the contrary, a reasonable person in the Receiver's position would infer that the directors considered that their disputes were capable of resolution and that they had consented to his appointment with the specific power conferred on him to implement the Rectification Plan for that reason. It is apparent from the manner in which the Receiver and his staff set out about trying to identify and resolve the disputes that the Receiver did in fact draw this inference.
I reject Mr Smith's third submission. The Receiver was not bound to accept Mr Saul's opinion, particularly in circumstances where that opinion appeared to be contrary to the recommendations made in the Rectification Plan authored by Mr Saul. The fact that Mr Saul's opinion turned out to be correct is irrelevant. A court-appointed receiver is not deprived of remuneration for work undertaken in accordance with orders of the Court merely because, with the benefit of hindsight, that work has failed to produce any material benefit for the owners or beneficiaries of the relevant assets.
I reject Mr Smith's fourth submission. Winding up was recommended in the Rectification Plan after the financial discrepancies and disputes had been resolved and the financial statements put in order. Only then would any trustee be in a position to quantify each member's entitlement and wind up the Fund by distributing entitlements to the members or transferring their entitlements into alternative funds. The inclusion of winding up as one of the many recommendations in the Rectification Plan does not support Mr Smith's contention that the work undertaken by the Receiver was unnecessary.
I reject Mr Smith's fifth submission. The "consensus" achieved between the directors in relation to the BOQ loan did not absolve the Receiver of the need to investigate and consider the appropriate accounting treatment of the transaction in the financial statements for the Fund. Moreover, Mr Smith has made no attempt to identify from the time records in evidence that part of the work undertaken by the Receiver, and the amount of remuneration claimed, that relates to the BOQ loan.

Future work

The increase in the cap sought by the Receiver in respect of future work is predicated on the assumptions that the receivership will soon be terminated because an order will be made winding up the Company.
That assumption is unfounded. No order will be made winding up the Company for the reasons explained below. I consider that it would not be appropriate to make any order increasing the cap by reference to an estimate of the cost of future work that has been prepared on the basis of a mistaken assumption. That does not preclude the Receiver from making an application in the future in respect of remuneration for the period from February 2022 until the conclusion of the receivership.

Winding up

Both the Receiver's evidence [2] and the submissions of counsel for the Receiver [3] assumed that the proposed winding up of the Company would be the first step in the proposed winding up of the Fund and that a liquidator would be able to cause the Company (as trustee) to take steps to wind up the Fund without consulting further with Ms Papadam and Mr Smith.
Those assumptions are wrong for two reasons that were not addressed in the submissions made on behalf of the Receiver and by Mr Smith.
First, clause 4.6 of the Governing Rules of the Trust Deed exhibited to the Receiver's affidavit arguably means that the Company ceased to be the trustee of the Fund upon the appointment of the Receiver on 21 May 2020: contrast Deputy Commissioner of Taxation v The Mai Family Pty Ltd (in liq) (2019) 136 ACSR 638; [2019] FCA 865 at [17]; Re Stansfield DIY Wealth Pty Ltd (in liq) (2014) 103 ACSR 401; [2014] NSWSC 1484 at [34]-[36]. If so, the Company is no longer able to exercise the powers under the Trust Deed (including the power to wind up the Fund) and any liquidator appointed to the Company would be a liquidator of a bare trustee.
Second, if clause 4.6 of the Governing Rules were construed differently as having the effect of leaving the Company in office as trustee unless and until a new trustee is appointed after the appointment of a receiver or a winding up order, the Company would become a "disqualified person" upon the making of the proposed winding up order by reason of s 120(2)(e) of the SIS Act. It would be an offence under s 126K of the SIS Act for the Company to exercise any power as trustee of the Fund thereafter, including by taking steps to wind up the Fund. The liquidator may be liable as an accessory to any such offence: see Deputy Commissioner of Taxation v The Mai Family Pty Ltd (in liq) (2019) 136 ACSR 638; [2019] FCA 865 at [13]-[16]; Re Stansfield DIY Wealth Pty Ltd (in liq) (2014) 103 ACSR 401; [2014] NSWSC 1484 at [35].
For those reasons, the application for an order winding up the Company will be dismissed without prejudice to any party's right make any further application for a winding up order or such other application as they may be advised to make to facilitate a winding up of the Fund and distribution of each member's respective entitlements into an alternative compliant fund to be held on trust for that member.
Having regard to the Receiver's unchallenged evidence referred to at [22] above, it is appropriate that he be excused from further compliance with order 4 made on 21 May 2020, at least pending the parties' consideration of the matters referred to immediately above.
The proceedings will need to be stood over to a later date to accommodate any further applications. The evidence presently before the Court indicates that some step will need to be taken to bring the receivership to an end even if no other applications are made.

Costs

Although the Receiver's notice of motion filed on 1 March 2020 sought an order for costs in the event that the motion was opposed, neither the Receiver's submissions nor proposed minutes of order presented to the Court on 28 March 2022 made any mention of a costs order.
The Receiver's legal costs of the notice of motion are an expense. If the expense is reasonable and was properly incurred, the Receiver is entitled to pay the expense out of the net sale proceeds of the Hunter Street property in accordance with order 6 made on 21 May 2020. The amount of that expense is not known to the Court. It is of course incumbent on the Receiver to give careful consideration to whether the whole of that expense is reasonable and was properly incurred having regard to the matters referred to at [51]-[55] concerning that the application for orders winding up the Company and bringing the receivership to an end.
As things presently stand, the Receiver has effectively abandoned the application for a costs order in respect of the notice of motion and there is no application before the Court for a direction as to whether the Receiver would be justified in paying the whole or any amount of his costs of the notice of motion out of the net sale proceeds of the Hunter Street property.
For those reasons, there will be no order in relation to the costs of the notice of motion.

Conclusion and orders

For the foregoing reasons, the orders of the Court are as follows: 1. Order that order 7(b) made by this Court on 21 May 2020 in these proceedings be varied by increasing the cap for the Receiver's remuneration to the amount of $110,749.38. 2. Order that, pending further order of the Court, Daniel John Frisken be excused from further compliance with order 4 made on 21 May 2020. 3. Order that the notice of motion filed on 1 March 2020 is otherwise dismissed. 4. Direct that any further application by any party for orders relating to the termination of the receivership or the remuneration of the receiver appointed on 21 May 2020, the winding up of the Smidam Superannuation Fund or the winding up of the First Defendant be made by interlocutory process filed and served by 14 June 2022. 5. List the matter for directions before the Corporations List Judge at 10am on 20 June 2022.

Endnotes

See Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth (2019) 268 CLR 524; [2019] HCA 20 at [26]-[27] (Kiefel CJ, Keane and Edelman JJ) and [82]-[90] (Bell, Gageler and Nettle JJ).
See [22] above.
T12.25-14.25; Receiver's Outline of Submissions, paragraph 53. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 20 May 2022

Corporations Act 2001(Cth)ss 420(2)(u)

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