Sanderson as liquidator of Sakr Nominees Pty Ltd (in liq) v Sakr

Applicable principles

1. I summarised the matters which are relevant to an application of this character in Re NR Wolli Creek Pty Ltd (recs and mgrs apptd) [2019] NSWSC 313, to which Mr Smith, who appears for the provisional liquidators, refers. In particular, s 60-16 of the Insolvency Practice Schedule (Corporations) provides that a provisional liquidator is entitled to receive remuneration, by way of percentage or otherwise as determined, relevantly, by the Court. Rule 9.3 of the Supreme Court (Corporations) Rules in turn provides for the process to be adopted in an application for approval of a provisional liquidator's remuneration, and for the kind of evidence that is required in support of the application.
2. I also noted in Re NR Wolli Creek above (at [6]), and Mr Smith also points out, that the Court will typically have regard to factors of the kind that were formerly specified in s 473(10) of the Corporations Act 2001 (Cth), including, relevantly, whether the work performed was reasonably necessary; the period over which it was performed; the quality and complexity of the work; and whether the provisional liquidator was required to deal with extraordinary issues or accept a higher level of responsibility than was ordinarily the case. The value of the property dealt with is also of relevance, although I also observed in Re NR Wolli Creek above that it may be less relevant in a provisional liquidation where the relevant property has, for example, passed under the control of a receiver appointed by a secured creditor. The position here differs, because the relevant property remained under the control of the provisional liquidators, who were given active management and sale powers, and to that extent the scope of their responsibilities was increased. The principles applicable to the amount of remuneration are now established by the decision of the Court of Appeal in Sanderson as liquidator of Sakr Nominees Pty Ltd (in liq) v Sakr [2017] NSWCA 38; (2017) 118 ACSR 333. As I noted in Re NR Wolli Creek above (at [6]), and as Mr Smith also points out, it is now established that, at least in some circumstances, time costing may be an appropriate starting point for a calculation of remuneration, although an assessment of proportionality will be important in testing the reasonableness of time-based remuneration.
3. I pause to note that, here, there was originally a suggestion that the application for remuneration would be contested by one of the contributories of the companies, who sent a detailed letter to the provisional liquidators' solicitors outlining a series of matters, which seem to some extent to have been directed to the substantive conduct of the provisional liquidation. That contributory elected not to press that contest, and I have noted those matters and the provisional liquidators' outline of the conduct of the provisional liquidation in the affidavit evidence. It is, of course, not necessary to deal seriatim with the matters raised, where the contributory who initially raised them did not seek to press them, and has expressly not sought to be heard in respect of the remuneration application.

Affidavit evidence

1. The provisional liquidators lead detailed affidavit evidence, in particular by the affidavit dated 27 August 2019 of Mr Cameron Gray, one of the provisional liquidators. Mr Gray sets out the nature of the companies' business, which involved one company, Bonny Glen Fruits Pty Ltd ("Bonny Glen Fruits") which was the main trading entity for a fruit growing and selling business, two companies which were labour hire companies in respect of the business, and a fourth company which was the registered proprietor of one of the properties from which the business was situated. Mr Gray summarises the events leading to the appointment of the provisional liquidators, primarily as a result of discord between two substantial shareholders in the companies, and the steps taken by the provisional liquidators prior to the delivery of a report required by the Court, and, subsequently, after that report was delivered.
2. As I have noted above, the provisional liquidators were specifically given power to conduct the business conducted by the companies, so far as necessary to preserve the value of the assets of the companies and maximise the return to creditors and shareholders in a winding up, and to sell and otherwise realise assets of the companies. It has been necessary for them, in that respect, to conduct the ongoing business of the companies, and in this period they advanced a sale process which ultimately went to completion after the period covered by this application. The provisional liquidators also refer to a number of Court orders and hearings in the period, although they were largely not contested, and to the reasons why the provisional liquidation has extended over a reasonably lengthy period. They point, in particular, to the complexity of the work required and the range of issues which were involved, and also to requests for time made by the contributories, where a sale process was being undertaken, and it was always possible, and has in fact occurred, that one or other of the contributories would be a natural purchaser of the business.
3. In particular, Mr Gray points to matters which have given rise to complexity in the conduct of the business, including the need to trace proceeds of the sale of certain fruit; the need to respond to an audit of payroll tax obligations of several companies undertaken by Revenue NSW; the need to respond to a regulatory notice issued in respect of the companies' fruit growing activities; and the need to address the mechanism for sale of the current year's harvest, in determining which channel should be adopted for the sale of fruit. Mr Gray also points to conduct of the contributories, each of whom were in dispute with the other, which has at least generated further disputes which the provisional liquidators needed to address.
4. Mr Gray in turn notes that a time costing methodology has been adopted by the provisional liquidators, and explains the mechanism by which their firm maintains time records. He sets out the employees who have worked on the matter, the level of their experience and their hourly rates. Mr Gray, appropriately, exhibits time records for the relevant period and I have, in accordance with the approach contemplated by the case law, undertaken a broad review of those time records, but not an exhaustive entry-by-entry review.
5. The provisional liquidators have, helpfully, also provided the Court with summaries of professional fees incurred in respect of each of the companies, organised by employee and by task category, within the ARITA task categories that are widely used by insolvency practitioners. Those summaries indicate that the bulk of the costs incurred by the provisional liquidators relate to work done by one of the provisional liquidators, Mr Gray, and another employee at "Senior 2" level, Mr Singh, who has a significantly lower charge-out rate and has therefore been able to undertake more work for much the same cost as Mr Gray, adopting a higher hourly rate. Those summaries allow the Court to assess the distribution of work between staff of different seniority, and to satisfy itself that here work has been undertaken in areas where it would be expected to be incurred, particularly in respect of assets, creditors and trade-on in respect of Bonny Glen Fruits, which was conducting the ongoing trading business; primarily in respect of trade-on in respect of the Third Defendant, which was conducting a labour hire business; and in respect of assets, as would be expected, in respect of the property-holding company; and also in respect of trade-on in respect of the Fifth Defendant, which was also conducting a labour hire business.
6. These summaries indicate significant work was done by Mr Gray, as one of the provisional liquidators, which is not surprising in a contentious provisional liquidation where the shareholders were in dispute, and that work was also delegated to other employees, particularly Mr Singh, who was a Senior 2. As I have noted above, that approach should allow an averaging down of the total costs incurred, where work was done at a lower hourly rate. Mr Gray expresses the view that, apart from administrative tasks, it was necessary for the work to be undertaken by appropriately qualified and experienced practitioners and he considers that the persons involved were sufficiently and appropriately qualified to assist him. While that observation is not, of course, conclusive, it is important that the provisional liquidators be prepared to confirm matters of that kind in their affidavit evidence.
7. Mr Gray also notes, importantly, that there was an agreement, at the point of the provisional liquidators' appointment, to apply a discount of 20% of their remuneration, which reduces the overall costs incurred on a time costing basis. Mr Gray also expresses, on affidavit, his assessment that the remuneration claimed in the provisional liquidation to date is in respect of necessary work that was properly performed. Mr Smith fairly points out that, while that also is not conclusive, the provisional liquidators' expression of that view is a matter that allows the Court more readily to form that view, supported by other evidence.
8. The provisional liquidators also rely on the affidavit dated 23 September 2019 of the other provisional liquidator, Mr Anthony Elkerton, which identifies the major creditors of each of the companies and the contributories in respect of each of the companies. An affidavit dated 23 September 2019 of Ms Laura Thorne in turn indicates that those creditors, including Revenue NSW and the Australian Taxation Office, have been given notice of the application, and that contributories have also been given notice of the application. I referred above to the fact that one contributory foreshadowed, but did not press, opposition to the application. An affidavit dated 29 November 2019 of Ms Farmer, the provisional liquidators' solicitor, in turn deals with that matter, and exhibits consent orders which have been signed by the two contributories, dealing with the approval of the provisional liquidators' remuneration. Rightly, this application was heard as an application on the merits, since orders of this kind cannot be made merely by consent, although the absence of opposition by creditors or contributories allows the Court more readily to reach the conclusion that the orders sought are appropriate.

Submissions

1. In submissions, Mr Smith in turn addresses the background to the provisional liquidators' appointment, to which I have referred above, and to the relevant considerations in the assessment of remuneration, some of which I have addressed above. He also refers to the recent consideration of those matters by Perram J in Sallway, Re Mossgreen Pty Ltd (in liq) (Remuneration of Liquidators) [2019] FCA 1771 at [12], pointing to the relevance of matters specified in s 60-12 of the Insolvency Practice Schedule (Corporations), including the connection between the work performed and the external administration, proportionality, and the reasonableness of the billing method adopted. Mr Smith addresses each of those matters in submissions, and I referred to a number of relevant matters above.
2. I am satisfied, having regard to the detail of the evidence of Mr Gray, and the summary of the work done and associated time sheets, that the work performed had the necessary connection with the provisional liquidation and the powers conferred on the provisional liquidators. I am satisfied that the remuneration sought by the provisional liquidators is not disproportionate, either in percentage terms by reference to the assets of the companies, or, perhaps more importantly in present circumstances, by reference to the nature of the work which was required for the conduct of an ongoing business in a situation where the two shareholders were in dispute. I am satisfied that time-based costing is a legitimate starting point for a calculation of this kind, and is likely to be more rather than less appropriate in circumstances where the work done was directed, as here, to the conduct of an ongoing business, rather than simply the realisation of assets on a once and for all basis. I am satisfied that the evidence establishes, as Mr Smith points out, that the remuneration sought is proportionate to the nature and complexity of the work that was carried out by the provisional liquidators.

Disbursements

1. I should note, for completeness, that the provisional liquidators initially sought orders under s 60-20 of the Insolvency Practice Schedule (Corporations) in respect of disbursements including facsimile, stationery, photocopying, printing and telephone costs which had an element of profit. That application was not pressed today, and has been deferred to allow further consideration of the issues raised.
2. Section 60-20 of the Insolvency Practice Schedule (Corporations) relevantly provides that an external administrator of a company must not directly or indirectly derive any profit or advantage from the external administration of a company. Section 60-20(3) creates an exception where, inter alia, the Court grants leave to the external administrator to derive that profit or advantage. The subsection does not apply to profits or advantages of a kind that are prescribed, although there was no consideration of the extent of any such exception in the course of the application before me.
3. The application of s 60-20 in present circumstances, to disbursements such as those to which I have referred, would raise issues of principle that are potentially of wide application. Prior to the introduction of the Insolvency Practice Schedule (Corporations) applications of this kind were directed to remuneration, because there was no requirement for the approval of disbursements under the Corporations Act. A change in approach was noted in a recent case, Re Traditional Values Management Ltd (in liq) [2019] VSC 281 at [45], where Matthews JR observed that liquidators now seek Court approval in respect of internal disbursements, due to changes arising as a result of the Insolvency Law Reform Act 2016 (Cth) and observed that: "As a result of these changes, external administrators and their firms are now prohibited from receiving a profit or advantage from the external administration of a company, unless (among other things) the Court grants leave. [The liquidator in that case] deposes that [his firm] charges disbursements at rates which may recoup both fixed and overhead costs, which are items of expenditure which may lead the liquidators to derive a marginal profit or advantage." Matthews JR there granted leave under s 60-20 of the Insolvency Practice Schedule (Corporations) to derive a profit or advantage to the extent that Internal Disbursements (as defined) caused that to occur, although without detailed consideration of the basis on which that order should be made.
4. As I noted above, it seems to me that the provisional liquidators' application under s 60-20 of the Insolvency Practice Schedule (Corporations) in respect of disbursements potentially raises several significant questions, which I have not struck in a previous application before this Court. The first question is whether it is appropriate for the Court to approve disbursements structured with a profit element, where the Insolvency Practice Schedule (Corporations) appears to adopt a starting point that a profit or advantage should not generally be obtained by an insolvency practitioner. To put that question another way, what is the criteria for approving such a profit or advantage, by way of disbursements, and what is the point of prohibiting them if the Court will then regularly grant leave for them? Second, on what principled basis should the Court grant such leave? In particular, should it grant such leave for a mark-up of 10%, 50%, or 100% on disbursements, and should that depend upon whether the disbursements are photocopying, telephone charges or other disbursements, such that different mark-ups are appropriate for different charges? Or, on one view, should the Court leave the insolvency market now to move in the direction that at least some large law firms have moved, where disbursements are charged at cost, so that the users of insolvency services know that the disbursements charged are not a separate profit centre to the insolvency practitioners? I express no view as to these questions, beyond noting that they seem to me to raise relatively complex issues, and that I would not have made an order under s 60-20 without more detailed consideration of why it was appropriate, and at what level. It does not seem to me that a profit component in such disbursements should be approved, merely because it exists, as distinct from on the basis of some principled view that charges structured in that way are necessary or appropriate in the relevant circumstances.
5. I should emphasise that these observations are not critical of the provisional liquidators, and their disbursement structure may well be characteristic of the industry generally. Those observations are instead intended to identify a wider question which may now arise following the changes made by the Insolvency Practice Schedule (Corporations). It may well be appropriate that there be wider industry consideration of that issue, and I will reserve liberty to the provisional liquidators to bring a further application in that regard, if they ultimately consider it is appropriate to do so, either in respect of this particular matter, or because they think it desirable to have that issue resolved in a manner that may guide other practitioners in applications in this Court relating to disbursements.

Payment of remuneration and costs

1. I note that Mr Gray's affidavit had originally raised a question whether amounts of remuneration payable in respect of several entities should be paid from the assets of Bonny Glen Fruits. Mr Gray in turn pointed to features of the manner in which the business had been conducted, which might have supported that application. That application is ultimately not pressed and I need not address it. An order is sought that the Applicants' costs and expenses of the application be costs and expenses of the First Defendant. It seems to me that that order is appropriately made, both because that entity is far and away the largest of the relevant entities, and much of the evidence has addressed the conduct of its business, and because of the manner in which the entities have historically been structured.

Orders

1. For these reasons, I make orders 1-4 and 5 (which was formerly order 9) in the short minutes of order initialled by me and placed in the file. I also make a further order 6 that there be liberty to restore on two business days' notice, including in respect of any application in relation to disbursements under s 60-20 of the Insolvency Practice Schedule (Corporations). I make order 7 that the exhibits be returned.

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