Mohamed v Hurstville Tower Medical Clinic Pty Ltd [2018] NSWSC 356 | Case summary

The evidence read in the application

By way of background, when the Administrators were appointed as voluntary administrators, the Company operated a business of providing mobile and static guard patrols, security and fire alarm monitoring, electronic security and personal investigations. After the Administrators' appointment, Mr Ward had the day-to-day conduct of the Company's voluntary administration, although Mr Calabretta was involved in some issues. A question arises as to the extent to which it would be appropriate for both of the Administrators to record reasonably significant costs, at partner rates, in the conduct of the administration.
The parties have approached this application on the basis that Mr Potter, so far as he sought the review, contends that the Administrators' remuneration should be reduced, but that, at least in the context of the arrangement the parties have now reached, a reduction of the amount agreed between them is sufficient to address his concerns. Mr Potter has relied on his affidavit dated 30 January 2017 which refers, inter alia, to the Administrators' notice convening the first meeting of creditors under s 439A of the Corporations Act and to an estimate of remuneration of $30,000 contained in that document. Mr Potter also refers to the second meeting of creditors scheduled for 14 November 2016, which was adjourned, and to the then remuneration estimate of $150,000 for administration and $50,000 for the Company's liquidation.
The Administrators in turn rely on Mr Ward's affidavit dated 20 July 2017 and a further affidavit dated 18 November 2017, and relies on detailed narratives of the time spent, in chronological order and by work categories. By his affidavit dated 20 July 2017, Mr Ward refers to the process adopted by his firm in respect of time recording and identifies the persons who worked on the administration, including himself and Mr Calabretta as the joint appointees and their hourly rates. He expresses the view, which is plainly not determinative, that each task undertaken was reasonably necessary taking into account the issues that arose during the voluntary administration and liquidation; each task was carried out by a person at the appropriate level of experience; and each task was charged in accordance with the hourly rates of his firm that were applicable at relevant times (Ward 20.7.17 [20]). That affidavit annexed a detailed record of the work done, in chronological form, which was tendered in larger format (Ex A1).
By a further affidavit dated 18 November 2017, Mr Ward referred to the Company's financial position at the time of the Administrators' appointment, which, after their staff had reassessed the Company's balance sheet, showed a significant excess of liabilities over assets, and referred to the Administrators' finding that a significant portion of "debtors" recorded in the Company's management accounts were prepayments made by customers for services which were yet to be performed. Mr Ward referred to the benefit obtained from a sale of the Company's business to a third party purchaser who allowed significant value for the Company's goodwill and assumed liability to carry out those prepaid services. Mr Ward expressed his belief that the efforts and risk undertaken by the Administrators during the administration period had maximised the value of the business and trademark for the benefit of creditors including Mr Potter. Mr Ward also there assessed the options available to the Administrators following appointment, and led evidence, which seems to me to be convincing, that creditors would have received no return had the Administrators elected to close the business rather than continue to trade it at their personal risk. Mr Ward's evidence also explained the initial estimate of costs of $30,000 set out in the first notice to creditors, which he says was made when he had obtained limited information from Mr Potter and when he was not aware of several issues which increased the risk of trading on the business, particularly in respect of the Company's ability to pay its operating expenses.
Mr Ward's further affidavit also addressed a scenario by which the business had continued to trade and a conditional contribution toward a deed of company arrangement of $100,000 had been made, reflecting a proposition which at one point had been raised by Mr Potter but ultimately not pursued by him. Mr Ward also analysed the position in respect of continued trading of the business and sale of the business, which would ultimately have allowed a modest return for priority creditors in respect of employee entitlements, after the remuneration claimed by the Administrators and liquidators, but no return to the balance of priority creditors. Mr Ward also led evidence of the personal liabilities assumed by the voluntary administrators in trading the business, including reasonably significant amounts in respect of gross wages, superannuation and PAYG withholding tax.
Mr Ward's further affidavit also exhibited a further schedule of time spent, arranging that time by reference to the categories designated by the Australian Restructuring Insolvency and Turnaround Association ("ARITA"), namely assets, creditors, employees, trade-on, investigation and administration. Mr Ward pointed out, and that schedule indicated, that the significant bulk of the remuneration claimed by the Administrators related to the category of "trade-on/debtor recoveries", and particularly to costs incurred in respect of trading-on the Company's business and significant costs incurred in dealing with expressions of interests and interested buyers and with the sale of the Company's assets. Mr Ward also refers to difficulties that increased the costs of the sale process, including the fact that the Company's master security licence was revoked by NSW Police during the course of the administration, requiring that urgent steps be taken to licence the monitoring business to the potential purchaser of that business in order to seek to preserve its value.
Mr Ward also pointed (Ward 18.11.17 [107]) to the risks to the voluntary administrators of assuming the appointment, including the risk involved in trading and selling the business and the risk of personal liability if the business did not generate sufficient income or sufficient asset recovery during the appointment to cover those expenses. Mr Ward also outlined (Ward 18.11.17 [108]) the particular issues that made the sale of the business more difficult than would ordinarily be the case, again including the revocation of the Company's master security licence to which I have referred above. Mr Ward also led evidence that the hourly rates charged by his firm were broadly comparable with those of other firms and responded to specific criticisms made by Mr Potter, several of which are no longer pressed.

Submissions and analysis as to remuneration

In oral submissions, Mr Marshall, who appears with Mr Durack for Mr Potter, narrowed the range of criticisms which were put, beyond those which were initially advanced before Brereton J, in the course of the application today. Mr Marshall fairly makes clear that it is not put that the Administrators did not do the work which they claim to have done, or that the time recorded both by persons and by timing is not accurate, but the claim is rather that the remuneration claimed was excessive in the particular circumstances. Mr Marshall points to relevant factors, which include that the business traded on for about three weeks under the Administrators' control; the nature of the business, namely (as I noted above) a security business which provided back to base alarm services and guard services, and a burglar alarm installations business which was not continued through the administration; the sale price achieved on the sale of the business; the amount of profit obtained from continuing the business over that period, of about $30,000; the expense incurred by way of remuneration by the Administrators over that period, which Mr Marshall submits is disproportionate to the realisations; and some specific criticisms as to the conduct of the work, of which the most significant, also raised before Brereton J, was the suggestion that the use of two administrators, both of whom recorded time on the matter, was a "luxury" in the administration of a smaller company of this character.
Mr Marshall in turn identified several criticisms advanced in Mr Potter's first affidavit that were pressed, amongst a range of wider criticisms that were not, namely that the amount of time spent was not reasonable in the circumstances, recognising that there is now no challenge to the fact that the work was done and it took the time spent; the business was sold for a particular price, but recognising that I do not understand Mr Potter now to pursue any criticism as to the amount of the sale price; the relatively small number of creditors of the Company, and the lack of controversy as to their claims; the suggested lack of complexity in the work carried out by the Administrators; and the amount of their claim for remuneration, by comparison with their original estimate.
Mr Golledge reasonably points out that the Administrators' early estimate of costs was given at a time that there was at least a prospect that a deed of company arrangement would be proposed by Mr Potter and approved by creditors, although that ultimately did not occur. Mr Golledge also provided a detailed outline of the subsequent history of the administration, in submissions prepared when the consensus that now exists between Mr Potter and the Administrators had not yet arisen, and it is not necessary to review the detail of that history for the purposes of the application. Mr Golledge reasonably pointed out, however, that the Company had few "hard" assets which could be realised for value at the time of the Administrators' appointment, and substantial liabilities including unknown tax debts, and was trading at a loss, and those matters contributed to the level of personal risk assumed by the Administrators in continuing to conduct the Company's business in order to seek to maintain its goodwill. Mr Golledge also submitted, and I accept, that had the Administrators ceased that business, the value of the Company's goodwill would have been lost, the recovery of debts owed by existing customers made more difficult, and it would unlikely have been possible to sell the Company's business to a third party.
Mr Golledge submits, and I also accept, that the Administrators' section 439A report and the Administrators' time records indicate that the amount of the remuneration claimed by the Administrators reflects not only time spent in the sale of the Company's business, but also in securing the Company's assets, collecting debts, supervising the operation of the Company's business during the trade-on period and undertaking a range of other tasks, including tasks required by statute, such as the conduct of meetings of creditors. Mr Golledge also points out that, at the second meeting of creditors held on 14 November 2016, the majority in number and value of creditors voted in favour of the Administrators' claim for remuneration, including the Company's then two major creditors, Westpac and the Australian Taxation Office, and that result would not have changed even if proofs of debt submitted by Mr Potter and his parents had been admitted in full for voting purposes. Mr Golledge also recognises that a further resolution put to a meeting on 28 November 2016, seeking approval for the Administrators' remuneration for work done between 15 and 28 November 2016 was not passed, where there was a deadlock on voting, although creditors approved future remuneration for the liquidator in the amount of $30,000 which is addressed by the compromise now agreed between Mr Potter and the Administrators.
Mr Golledge refers to my summary of the principles applicable to the assessment of remuneration in Re Sakr Nominees Pty Ltd [2017] NSWSC 668 at [23]-[25], in the context of a liquidator's remuneration, as follows: "A liquidator is entitled to reasonable remuneration for his or her services and the liquidator bears the onus of establishing that the amount of remuneration they seek is fair and reasonable and, in determining a liquidator's reasonable remuneration, the Court will have regard to the factors specified in s 473(10) of the Corporations Act, to which I refer further below. The Court must bring an independent mind to bear on the question whether the remuneration sought by a liquidator is fair and reasonable; the liquidator must lead evidence in sufficient detail that the Court can determine that question; and the Court will generally need to be provided with an account in itemised form, setting out at least the details of the work done; the persons who did the work; the time taken to perform the work; the remuneration claimed; and, to the extent relevant, the expenses incurred by the liquidator: Venetian Nominees Pty Ltd v Conlan (1998) 20 WAR 96 at 102-103. 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: Thackray v Gunns Plantations Ltd [2011] VSC 380; (2011) 85 ACSR 144 at [64]; Macks v Maka [2015] SASC 200; (2015) 110 ACSR 279 at [52]-[66]; Warner, Re GTL Tradeup Pty Ltd (in liq) [2015] FCA 323; (2015) 104 ACSR 633 at [70]-[71]; Templeton v Australian Securities and Investments Commission [2015] FCAFC 137; (2015) 108 ACSR 545. Most decisions in both State Supreme Courts and in the Federal Court of Australia have applied time costing as at least the starting point for a calculation of remuneration, although those decisions also emphasise the need for proportionality between the cost of the work done and the value of the services provided: Venetian Nominees Pty Ltd v Conlan above; Templeton v Australian Securities and Investments Commission above; Warner, Re GTL Tradeup Pty Ltd (in liq) above. There has been a degree of concern as to time-based remuneration, over a considerable period, although it must be accepted that remuneration on that basis is now more common. I reviewed the relevant authorities, including the observations of Finkelstein J in Re Korda; Re Stockford Ltd [2004] FCA 1682; (2004) 140 FCR 424, and subsequent decisions in this Court echoing the same concern, in Re Idylic Solutions Pty Ltd atf Super Save Superannuation Fund [2016] NSWSC 1292; (2016) 115 ACSR 581 at [27]-[50] and Gleeson JA has similarly viewed those cases in Re Banksia Securities Ltd (in liq) (recs and mgrs apptd) [2017] NSWSC 540 at [38]ff. Several recent decisions, of which the previous decision of Brereton J in this case was one, have emphasised the significance of the percentage that a liquidator's remuneration bears to the level of asset realisations achieved, and applied percentages of recoveries where time-based calculations would have led to unreasonable results: Re AAA Financial Intelligence Ltd (in liq) (No 2) [2014] NSWSC 1270; Re Gramarkerr Pty Ltd [2014] NSWSC 1299; Re Gramarkerr Pty Ltd (No 2) [2014] NSWSC 1405; Re Independent Contractor Services (Aust) Pty Ltd (in liq) (No 2) [2016] NSWSC 106; (2016) 305 FLR 222; Re Sakr Nominees Pty Ltd above. A percentage of realisations can also be used as a test of whether remuneration claims brought by a liquidator on a time costing basis are reasonable: Re Clout (in his capacity as liquidator of Mainz Developments Pty Ltd) (in liq) [2016] NSWSC 1146; (2016) 115 ACSR 459; Re Idylic Solutions Pty Ltd atf Super Save Superannuation Fund above. In Sanderson, as liquidator of Sakr Nominees Pty Ltd (in liq) v Sakr [[2017] NSWCA 38; (2017) 93 NSWLR 459; (2017) 343 ALR 524; (2017) 118 ACSR 333], Bathurst CJ (with whom the other members of the Court of Appeal agreed) observed (at [54]) that the onus is on a liquidator to establish that the remuneration claimed is reasonable, and it is the Court's function to determine that remuneration by considering the material provided to it and bringing an independent mind to bear on the relevant issues; that many of the factors specified in s 473(10) of the Corporations Act have the concept of proportionality as an underlying theme, and that concept is an important consideration in determining whether remuneration is reasonable, so that the work done must be proportionate to the difficulty and importance of the task in the context in which it needs to be performed (at [55]); and that the fact that work does not increase the funds available for distribution to creditors or contributories does not mean that the liquidator is not entitled to be remunerated for it, where it was reasonable to carry out that work and the amount charged is reasonable (at [57]-[58]). The Court of Appeal's decision in Sanderson, as liquidator of Sakr Nominees Pty Ltd (in liq) v Sakr above does not prefer any of the particular approaches to remuneration to which I have referred above to any other of those approaches and, in particular, does not require a time-based approach to remuneration to be adopted in preference to percentage-based approach to remuneration. 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; in part, on the view taken by any persons who oppose the remuneration application; and, in part, the view taken by the Court."
Mr Golledge also points to the observations of Griffiths J in Royds v Royds, In the Matter of Caloola Holdings Pty Ltd (in liq) [2017] FCA 731, also in respect of a liquidator's remuneration. Mr Golledge submits that, as the Full Court of the Federal Court observed in Templeton v Australian Securities and Investments Commission [2015] FCAFC 137; (2015) 108 ACSR 545 at [23], the assessment of remuneration requires an evaluative judgment by reference to several factors. Mr Golledge also accepted the importance of "proportionality" in fixing a practitioner's remuneration, referring to the observations of the Court of Appeal in Re Sakr Nominees above and to those of the Full Court of the Federal Court in Templeton v ASIC above at [31]-[33], and emphasised the cautionary observation of the Full Court of the Federal Court in Templeton v ASIC above at [52] that: "More generally, in considering the question of proportionality one also has to bear in mind two other points that may be overlooked. First, in performing some work, it may not be entirely clear ex ante what the precise benefit might be. A situation where work was being performed to preserve property of known value is quite different to the situation where work was being performed to achieve a return to creditors that was unclear. In the latter case, it might be inappropriate to use a hindsight analysis of known returns after the event to assess whether the work performed was proportional to the task; in such a situation one would look at the expected realistic return at the time the work was performed rather than actual outcomes. Second, some work may be sufficiently complex and labour intensive such as to justify a cost/benefit ratio of 6/10. After all, if the duty of the Receivers is to maximise returns and it is necessary to spend $0.60 to achieve $1.00, then proportionality is satisfied even if the ratio might be high."
Mr Golledge recognised that the case law has accepted that, at least in some circumstances, time costing records can provide a useful starting point for the calculation of remuneration, although it will at least be necessary to test that remuneration for proportionality against the size of recoveries and the property dealt with by the practitioner, and may be appropriate to discount that remuneration in the light of that matter: Re Clout (in his capacity as liquidator of Mainz Developments) (in liq) [2016] NSWSC 1146 at [134]-[135]; Re Idylic Solutions Pty Ltd atf Super Save Superannuation Fund [2016] NSWSC 1292; (2016) 115 ACSR 581 at [5], [35].
Mr Golledge also submits, and I accept, that the Court must bear in mind that there are differences in the role of a voluntary administrator and that of a liquidator, including that a voluntary administration will generally not secure the recovery of assets in the manner that may be achieved by a liquidation; a voluntary administrator is required to undertake several tasks, including the convening of meetings, that will not lead to the recovery of property, but the voluntary administrator would ordinarily be entitled to remuneration for the work done in undertaking tasks that the Corporations Act requires that he or she undertake; and that the Court should not approach remuneration in a way that would create a substantial disincentive to a voluntary administrator determining to trade-on a business, so as to seek to maximise recovery for creditors, as distinct from immediately closing the business and selling its "hard" assets, to minimise his or her risk of personal liability and the time that he or she will spend in respect of the administration, for which he or she may not be remunerated.
Mr Golledge also addressed the work done by the Administrators, as described in Mr Ward's affidavits and in the detailed time schedules, and rightly pointed out that the bulk of the time spent, and remuneration claimed, related to trading the business between the date of their appointment and the completion of the sale process in early November 2016, the negotiation of the sale and the completion and documentation of the sale. Mr Golledge submits, by reference to the factors specified in s 449E of the Corporations Act, that that work done by the Administrators was reasonably necessary to maintain the Company's business for sale, although that proposition should be qualified by recognising the extent of time, at a relatively high hourly rate, spent by both Mr Calabretta and Mr Ward in that area; that there was a degree of complexity involved in managing a competitive sale process, which was plainly increased by the cancellation of the Company's security licence while that process was ongoing, and that matter in turn required a significant amount of work by the Administrators which would not otherwise have been required; and that there was a significant amount of risk faced by the Administrators, so far as they accepted personal liability in respect of debts incurred in continuing to trade the Company's business.
The case law to which I have referred above has recognised, of course, the significance of proportionality, and the possibility that, in an appropriate case, the remuneration of insolvency practitioners may be reduced to achieve proportionality. The case law also recognises that time charging may often provide at least an appropriate starting point for the analysis of remuneration, and that the reasonableness of work done is to be assessed by reference to whether it was necessary, and not only by reference to the financial benefits obtained from it, and caution will need to be exercised in applying hindsight in such an assessment. The case law recognises that, in an appropriate case, these matters may require a reduction of the costs claimed by insolvency practitioners. One way of approaching that matter is to recognise that, although it may well be appropriate to charge on a time costing basis, it should not always be assumed that the time charges which would be appropriate in a large administration, or a complex administration, by way of an hourly rate, should properly also be applied at the same hourly rate, rather than a reduced hourly rate, in a less complex administration. In a competitive market, it would hardly be unknown for service providers to discount their rates, in respect of the provision of professional services in less complex rather than more complex settings. However, as Mr Golledge points out, it is also important to recognise that the hourly rates which are charged by administrators can properly reflect the risk involved in the provision of their services which, as here, in trading-on a company which is exposed to significant financial difficulty, in order to maximise recoveries for creditors, may well be substantial.
The principles relevant to an application of this kind were also helpfully summarised by Gleeson JA in Re Banksia Securities Ltd (in liq) (recs and mgrs apptd) [2017] NSWSC 540, in dealing with a court-appointed receiver's application for remuneration. His Honour there noted that common bases for calculation of remuneration included time-based charging and a commission based on percentage of recoveries and that the approach to be adopted is directed to securing reasonable remuneration in the circumstances. His Honour referred (at [39]) to the often-quoted observations of Young CJ in Eq in Ide v Ide [2004] NSWSC 751; (2004) 184 FLR 44 as to the role of the Court in dealing with such an application, and to the further observations of Branson J in Wenkart v Pantzer [2005] FCA 1572 and of Barrett J in Mohamed v Hurstville Tower Medical Clinic Pty Ltd (in liq) [2006] NSWSC 4 at [9]. His Honour also referred to the Court of Appeal's decision in Sanderson, as liquidator of Sakr Nominees Pty Ltd (in liq) v Sakr [2017] NSWCA 38; (2017) 93 NSWLR 459; (2017) 343 ALR 524; (2017) 118 ACSR 333 and summarised the principles which arose from Bathurst CJ's judgment in that case (at [44]-[46]) as follows: "First, the onus is on the special purpose receivers to establish that the remuneration claimed is reasonable. It is the function of the Court, here under s 283HB of the Corporations Act, to determine the remuneration by considering the material provided and bringing an independent mind to bear on the relevant issues: Sakr at [54]. Second, many of the factors in s 425(8), in particular, pars (d)-(e) and (g)-(h) can be seen to have as their unifying theme the concept of proportionality. The question of proportionality in terms of work done as compared with the size of the property the subject of the insolvency administration or the benefit to be obtained from the work, is an important consideration in determining reasonableness: Templeton v Australian Securities and Investments Commission (2015) 108 ACSR 545; (2015) FCAFC 137. The work done must be proportionate to the difficulty and importance of the task in the context in which it needs to be performed. This is what is encompassed in assessing the value of the services rendered: Sakr at [55]. Third, the mere fact that the work performed does not lead to augmentation of the funds available for distribution does not mean that the special purpose receivers are not entitled to be remunerated for it. In the present case, the Trustee fee application and the time spent consulting with the committee of creditors on various issues, including obtaining approval of the special purpose receivers' remuneration will not result in the augmentation of the funds available for distribution. Provided it was reasonable to carry out the work and the amount charged is reasonable, there is no reason a liquidator should not recover remuneration for undertaking the work: Sakr at [57]-[58]."
It seems to me that the question in this case reduces to a narrower question, whether there is any realistic prospect that, in applying considerations of proportionality, and having regard to the narrower range of criticisms now put by Mr Potter, the Court would reduce the remuneration to which the Administrators were entitled to, less than the amount of $120,000 which the parties have agreed. That discount is, as Mr Golledge points out, a significant discount to the amount of time recorded by the Administrators, at their usual hourly rates, so far as there was some discount from the amount originally claimed by them, and the further discount implicit in the reduction to $120,000 would reduce their remuneration to 67% of the amount which they could have claimed, at full hourly rates.
It seems to me that there is no realistic prospect that the application of principles of proportionality would reduce the amount of the Administrators' remuneration below that which the parties have agreed between themselves. In reaching that conclusion, I recognise that there was a significant degree of risk involved in the relevant sale process, and trading on the Company in order to maximise returns to creditors; the fact that the sale process was plainly a complex one, in the way in which it developed in the particular circumstances, and perhaps more complex than might originally have been anticipated; the sale of a smaller business is not necessarily less complex than the sale of a larger business in the same industry, where the documentation and practical steps involved would be the same; and the extent of the discount which is now contemplated. I also have regard, in reaching that conclusion, to the fact that creditors generally had previously approved the remuneration claimed by the Administrators at the higher amount and that Mr Potter, who is now a significant creditor of the Company so far as he is subrogated to the rights of a substantial unsecured creditor of the company, who he has paid out, plainly supports the arrangement that is now proposed. It is not necessary to that conclusion, but it plainly supports the orders which are proposed, that creditors will obtain further benefits from the arrangement, so far as the liquidators will not press their existing claim for remuneration approved in respect of the liquidation and will not claim any further remuneration for acting as liquidators of the Company.

Mohamed v Hurstville Tower Medical Clinic Pty Ltd

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Cases Cited (25)

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