Solicitors:
Johnson Winter & Slattery (Applicants)
Kemp Strang (First and Second Respondents)
E Schick (Director) (Fifth Respondent)
File Number(s): 2013/313137
[2]
Judgment - ex tempore
By my judgment delivered on 24 October 2014 ([2014] NSWSC 1516) I made orders on the application of Messrs Fraser and Honey in their capacity as liquidators of Wine Investment Services Pty Ltd ("WIS") relating to the delivery of wine stock held at Denman, New South Wales, by Court appointed receivers to that stock, Messrs Cussen and Strawbridge, to Messrs Fraser and Honey. I also made orders for delivery of wine stock held at Homebush by receivers and managers appointed to several companies by a secured creditor, Messrs Merryweather and Hall, to Messrs Fraser and Honey. I also made orders appointing Messrs Fraser and Honey as Court-appointed receivers to that wine stock and approving a process for adjudication of claims to, and other dealings with, that wine. The effect of those orders was to permit a process to go forward for assessment of claims to that wine stock, which was summarised in paragraph 4 of that judgment as follows:
"The process for assessment proposed to be adopted in respect of claims to the wine stock is in turn set out in Annex A to the proposed orders and involves the giving of notice to potential claimants to ownership of that wine stock, the determination of which claims are admitted and whether bottles of wine from the Denman wine stock or the Homebush wine stock are attributable to claimants, subject to rights of appeal under s 1321 of the Corporations Act 2001; the attribution of bottles of wine to particular claimants where appropriate, subject to a "Recovery Charge", as defined, and the delivery of wine stock to a claimant on payment of that charge; and the sale of the wine stock to the extent that it cannot be attributed to particular claimants and the distribution of the pooled proceeds of that sale in a specified manner.
The "Recovery Charge" is in turn defined as an amount referable to the costs, disbursements, expenses and remuneration of holding the wine stock, the adjudication of claims and delivery expenses. One of the relevant claims, which would be the subject of the "Recovery Charge", is that of Messrs Cussen and Strawbridge, including their legal costs and remuneration of defending a particular application. Annex B to the proposed orders in turn provides a regime for the sale of the wine stock and unclaimed wine stock and the maintenance of that stock."
I addressed, in that judgment, several submissions made by Mr Schick, a director of Tragopans Investments Pty Ltd ("Tragopans") which represents investors in the wine stock. I recorded my view (at [11]) that the proposed Recovery Charge was appropriate, and the proposed procedures were consistent with the exercise of an equitable lien in respect of the receivers' and liquidators' costs of realising the relevant assets, and I referred to authority including the High Court's decisions in Re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171 and Stewart v Atco Controls Pty Ltd (in liq) [2014] HCA 15; (2014) 307 ALR 562 supporting that approach. I held (at [12]) that the costs incurred by the then receivers to the wine and to be incurred by Messrs Fraser and Honey, after their appointment as Court-appointed receivers to the wine, fell within categories that were properly subject to such a lien. I also held that the costs of Messrs Cussen's and Strawbridge's resisting an application brought by another entity, Douglas Hawkins Pty Ltd, for their removal as Court-appointed receivers over property fell within the scope of that lien.
I had reserved liberty to apply in respect of the judgment to Messrs Fraser and Honey, who have now restored the matter before the Court to seek directions that they are justified in calculating the Recovery Charge, for the purposes of paragraphs 4 and 8 of annexure A to the Orders made on 24 October 2014 at a specified amount. Paragraph 4 of those orders deals with notification to claimants to the wine of stock attributed to them, the amount of an estimated Recovery Charge, and an ability for those claimants to take up that wine on payment of the Recovery Charge. Paragraph 8 provides for the manner in which the Recovery Charge is to be calculated, and indicates particular items which are to be included in it. The amount of the proposed Recovery Charge was originally calculated by Messrs Fraser and Honey at $17.50 per bottle, but was reduced to $14 per bottle as a result of higher than expected proceeds achieved in respect of the sale of unclaimed wine, to which I will return refer below.
In the course of submissions before me, Mr Sulan, who appeared for Messrs Fraser and Honey, indicated that they also proposed a further amendment to the orders made on 24 October 2014, so far as the proposed Recovery Charge is based on estimates of recoverable remuneration which have yet to be approved by the Court, and estimates as to the likely sale proceeds of wine not claimed by investors who choose not to pay the Recovery Charge, to provide for a rebate to persons who had paid the proposed Recovery Charge if the recoverable costs are less than estimated, or the sale proceeds of the wine are higher than estimated. I will return to the detail of that proposal below. Mr Schick has accepted, in the course of submissions, fairly in my view, that that proposal improves the proposed distribution mechanism, although Mr Schick nonetheless opposes the proposed Recovery Charge for reasons to which I will refer below. It seems to me that the proposal for the rebate is plainly in the interests of those who would be required to pay the Recovery Charge, if they wish to reclaim their bottles of wine, and goes a significant way to addressing criticisms of the proposal made by Tragopans and another investor in correspondence with Messrs Fraser and Honey.
The application is supported, first, by an affidavit of Mr Fraser sworn 7 October 2014, which was read in support of the application for the orders that I made in October 2014 and which set out, inter alia, the proposed sale process of the wine and the then remuneration, costs and disbursements incurred by Messrs Fraser and Honey, of which part related to the wine stock which would fall within the lien claimed, and part related to the general liquidation of WIS, and fell outside the scope of that lien. I had regard to that affidavit in making the orders which I made in October 2014.
Messrs Fraser and Honey also rely on Mr Fraser's further affidavit dated 7 May 2015 and an exhibit to that affidavit (Ex A1). That affidavit sets out the steps which have been taken to give notice to persons who might have claims to the wine of their opportunity to make such claims and of the adjudication of proofs of debt in respect of the wine. No appeals were lodged in respect of Messrs Fraser's and Honey's conclusions in respect of the adjudication of those claims. Mr Fraser and Mr Honey admitted claims to 200,909 bottles of wine, out of the 212,031 bottles of wine to which claims were made, although a lesser number of bottles of wine are in their possession. Mr Fraser's evidence is that a third party, Grays, which is storing the wine on their behalf, has identified 199,157 bottles of wine in a stocktake, of which 166,289 are able to be distributed in specie to claimants, in the sense that they can be attributed to particular claimants and no need for prorating arises, and subject to the claim for Recovery Charge.
Mr Honey also sets out an estimate of the low value and high value of unclaimed wine stock, when sold at auction. The amount ultimately recovered for that wine was between those two values, and in turn allowed the reduction of the proposed Recovery Charge to which I referred above. Mr Fraser also sets out a calculation of the proposed Recovery Charge, taking account of costs, disbursements and expenses incurred within the categories specified in the October orders, both for Messrs Fraser and Honey and also for the former receivers for the Denman and Homebush wine respectively. That calculation is supported by detailed schedules in respect of the work done by each of those receivers. I have reviewed those schedules and I am satisfied that, prima facie, the categories of costs claimed fall within the orders. I am not required to determine whether the actual amount referred to in those schedules is recoverable in this application, since the Recovery Charge depends on an estimate of the recoverable remuneration, costs and disbursements which will ultimately be the subject of a separate remuneration application, or possibly an application for directions as to disbursements, brought before the Court.
Mr Fraser also notes the estimated low and high cases for the auction value of wine which would be distributed in specie, and the market value of that wine, and also notes that the costs, disbursements, expenses and remuneration of the three sets of receivers is in the order of nearly $1.6 million, inclusive of GST, and less than a quarter of the market value of the wine, but nearly two-thirds of the low case auction value of the wine. The amount of costs and disbursements is substantial, in monetary and proportionate terms, and one can well understand the concerns expressed by Tragopans and other investors as to that matter. However, the amount of remuneration, and potentially costs and disbursements that is ultimately recovered will ultimately be determined by the Court. Importantly, the size of those figures seems to me to reflect the complexity of the position facing the previous receivers, and Messrs Fraser and Honey, and the fact that, in the case of Messrs Cussen and Strawbridge, proceedings were brought by Douglas Hawkins Pty Ltd in an unsuccessful challenge to their role. It seems to me, with the greatest respect to Mr Schick, that Tragopan's submissions tended to give rather too little weight to the fact that the receivers did not create the position in which they found themselves, but were appointed by the Court to a position where significant difficulties already existed, in fact or in potential. That is a common incident of the role of an insolvency practitioner, who will often find himself or herself in a position which is complex, which will be difficult to resolve to the satisfaction of all of those who are adversely impacted by it.
Mr Fraser also points to modelling that was done by his staff to calculate the proposed Recovery Fee. Mr Schick, for Tragopans, and at least one other investor, have challenged the need, or appropriateness, of that modelling. The modelling, in effect, involves an alternative to a simple pro rata attribution of the amount of the costs claimed by the receivers to each bottle of wine. Tragopans well summarises its position in further submissions filed today, where it points out that, if the recoverable costs claimed by the receivers was divided by the number of bottles of wine in Grays' possession, the Recovery Charge would be $7.28 per bottle. Tragopans submits that the proposed Recovery Charge is too high, for reasons for which I will return below, but that no Recovery Charge should be set at a higher figure than that calculation.
The difficulty, however, as Mr Fraser's affidavit makes clear, and as one other investor has accepted in correspondence, at least to some extent, is that a simple pro rata calculation will almost inevitably have the result that the receivers do not recover the costs, disbursements and remuneration to which they are properly entitled. The result is almost inevitable, because of the reality that there are a number of bottles of wine within the receivers' control which are worth less than the proposed Recovery Charge, calculated on a simple pro rata basis. It is inevitable or virtually inevitable that persons who have claims to such bottles of wine will not exercise them, where they would be required to pay more than the value of the bottle of wine to do so, and Messrs Honey and Fraser will be forced to sell the bottles of wine at less than market value. It seems to me that it would not be consistent with the principles underlying a receiver's right of indemnity, where the receivers were appointed to the wine generally, not individual bottles of it, to leave them bearing that loss. That would also not give effect to the orders which the Court had made, after argument, including hearing submissions from Tragopans in October 2014. In principle, the proposed Recovery Charge must therefore be set at a level that is sufficient for Messrs Honey and Fraser, and the other receivers, to recover their properly recoverable remuneration, costs and disbursements across the whole of the wine, and notwithstanding that some claimants will not seek to recover their wine, because it will not be in their interest to do so. I therefore conclude that a pro rata calculation would not achieve that result and that a model of the kind that has been undertaken by Messrs Honey and Fraser is necessary for that purpose.
It remains to deal with certain criticisms, which have been made more widely of Messrs Honey and Fraser's entitlement to the remuneration, costs and disbursements generally and of the particular model. Mr Fraser's affidavit fairly discloses that the model adopted estimates of costs, disbursements, expenses and remuneration, where that had not yet been approved by the Court. I pause to note that there is no suggestion that it would be preferable to defer distribution of the wine to allow such an assessment to occur. The evidence indicates that there is a risk of deterioration of the wine while it remains in storage, particularly if it remains in storage over a further Australian summer. For reasons for which I will return, Mr Fraser also assumes a lower auction value for remaining stock, that is, that stock which is not claimed by investors in specie. There is a prospect that a better result will be achieved, and the submissions of Tragopans and other investors to that effect are to some extent supported by the better result actually achieved for unclaimed stock. I accept, however, that as Messrs Honey and Fraser contend, that matter is uncertain because the mix of bottles of wine in the unclaimed and remaining stock is different, and the volume of remaining stock will potentially exceed the volume of the unclaimed stock. In principle it seems to me that the risk that arises from those matters is not a risk that should be borne by the receivers, where that would be inconsistent with their right to indemnity and to a lien. Equally, the risk of overestimation of the recoverable remuneration and recoverable costs and disbursements or underestimation of recovery from wine not distributed in specie can be addressed by the amendment to the orders now proposed by Messrs Fraser and Honey, which will allow investors the benefit of a correction of the matter, if Tragopans is correct as to the conservative character of those estimates.
Messrs Honey and Fraser also considered a variable Recovery Charge, the value of which varied by reference to the value of the bottles of wine. It seems to me that such a charge might potentially have been open, at least on a staged basis distinguishing between higher and lower valued bottles of wine, on the authorities. However, Messrs Honey and Fraser did not adopt that approach, on the basis that the actual costs referable to the dealing with the wine do not differ depending on the value of the wine, and that that approach would also make it more difficult to model an accurate Recovery Charge. I accept that that view is reasonably open to them.
Mr Fraser's further affidavit dated 12 July 2015 refers to correspondence with, inter alia, Mr Schick on behalf of Tragopans in respect of the proposed orders, and also identifies a further issue raised by one of the persons who had claims to wine, as to whether it had, both before the receivers took control of it, and while it was held at Grays, been in a temperature controlled environment and as to the consequential risks to the quality of the wine. It appears that the wine was held in a temperature controlled environment at Denman, but possibly not at Homebush, before Messrs Honey and Fraser took control of it. It has not been held in a temperature controlled environment since Messrs Honey and Fraser took control of it in October 2014. There are issues as to whether it would have been feasible to hold the wine in such an environment because the number of bottles of wine involved substantially exceeded the capacity of Grays to store such bottles in a temperature controlled environment, and there is evidence that the costs of such storage elsewhere would have been substantial. One difficulty with that assertion, which Tragopans and other investors make, that the receivers should have attended to storage in that manner, is that they do not address the question who would have funded that course. I will return to that issue below.
Finally, Mr Fraser relies on a further affidavit dated 7 September 2015 which updates evidence in relation to the receivers' costs, disbursements, expenses and remuneration and refers to further correspondence in respect of the storage of the wine, and a suggestion is made that the auction value of the wine adopted in his model was excessively conservative and had given rise to a higher Recovery Charge than would otherwise be the case. In particular, at least one investor had suggested the use of the median between Grays' estimated low case and high case auction value, reducing the recovery rate.
The approach proposed by that investor, and at least implicitly supported by Tragopans, is one of several available approaches and is not illogical. The difficulty is, however, that both the receivers' and that investor's suggested approach depend on a forecast of the unknown, with the risk that the Recovery Charge is set too low and that the receivers' right of indemnity is not satisfied, or that it is set too high and investors, at least initially, are required to pay too much. The issue is further complicated because, as Mr Schick rightly points out, the point at which the Recovery Charge is set may well affect the take-up of the delivery of wines in specie, so that, the higher the Recovery Charge, the fewer bottles of wine will be collected and the more will have to be sold. I recognise the complexity of these issues. However, it seems to me that the former risk, that the receivers will not be compensated for remuneration, costs and disbursements which they are properly entitled to recover, is difficult to address once the risk has come home. The latter risk, that the Recovery Charge is set too high, may at least to some extent be addressed, so far as investors choose to pay it, by a rebate mechanism of the kind the receivers now propose.
Mr Fraser's further affidavit also dealt with the higher result that had been achieved in the sale of the wine reducing the Recovery Charge, as I have noted, and the effect of using different estimated auction values in the calculation of the Recovery Charge. Mr Fraser also pointed to the desirability of the distribution of the wine by the end of this year to avoid further deterioration if it remained in an uncontrolled temperature environment over summer.
Mr Sulan, who appears for Messrs Honey and Fraser, summarised the work done by them to date, the approach adopted in modelling the Recovery Charge, including the use of the alternative variation as raised in the investors' correspondence with them. Mr Sulan points firstly to the case law and matters of supporting the principle imposition of a Recovery Charge and the need to ensure that receivers are able to recover their proper remuneration, costs and disbursements, not least to avoid the risk that qualified persons will not accept appointment as Court-appointed receivers if that does not occur. I accept Mr Sulan's submissions, although strictly it is not necessary for me to do so, because I had already determined this issue, in October 2014, in making orders that provided for a Recovery Charge.
The question that then arises is whether that Recovery Charge should properly be set as a flat figure per bottle, in the manner for which Tragopans contended, or at a higher figure for which another investor contended, using the median between Grays low case and high case valuations, or at alternative points modelled by Messrs Honey and Fraser, or at the amount of $14 per bottle which they now seek by way of Recovery Charge. That, however, is a matter of practicality, which does not affect the question of whether a Recovery Charge should be ordered as a matter of principle.
Mr Schick, in turn, attacked the circumstances in which Messrs Merryweather and Hall took possession of wine stock at Homebush, as receivers appointed by a secured creditor, prior to their appointment as Court-appointed receivers which he characterised as "theft" or "piracy". I do not accept that submission, because Messrs Merryweather and Hall were appointed as Court-appointed receivers in a properly made application, and their appointment is not open to collateral challenge in a claim for their remuneration. Further, their entitlement to remuneration and the mechanism of a Recovery Charge is by the October orders which were made after a hearing at which Tragopans had the opportunity to make submissions, and did make submissions, and which are also not open to collateral challenge in this application.
Mr Schick also contends that the Recovery Charge is not a proper charge but is a "ransom" for the return of investors' own property. One can sympathise with the concern which underlies this submission. I accept that it must be, to say the least, disturbing for an investor to face the proposition that wine which they owned, which, as Mr Schick points out, may have been acquired in superannuation funds to fund retirement, can only be recovered on payment of an additional fee. However, recognising that investors can fairly be disturbed by that result, one must again also recognise that the receivers did not create the situation in which their appointment was necessary and the case law has long recognised the circumstances in which an indemnity and lien is available to those who protect and realise property. I recognise that the Recovery Charge may well give rise to hardship to investors, including Tragopans, and some may ultimately be unable to pay it and unable to recover their wine. It does not follow, however, that the Court, having appointed Court-appointed receivers to preserve and realise the property, in circumstances where it had found that that property was otherwise at risk, should now deprive those receivers of their costs, remuneration and disbursements, notwithstanding that there may be hardship to investors in contributing to those costs. Once again, the position in which the investors now find themselves is not the product of the receivers' conduct, but the result of the fact that the wine was in the possession of companies placed in receivership, and subject to contested claims of ownership, and there was a need to take steps to preserve and realise that wine.
Mr Schick also contends that the suggested Recovery Charge is excessive, and it is plainly large. I have referred to the issue of whether that Recovery Charge should be on a flat per bottle basis, and have accepted and have noted above that that course does not seem to be feasible. Mr Schick also refers to other occasions on which other lower charges have been imposed. I am not persuaded that those other situations provide any real assistance in this matter, because it is not shown that those other situations are comparable, as involving corresponding issues, complexities or indeed litigation of the kind that was involved in this matter. In any event, the amount of remuneration, costs and disbursements that is ultimately properly recoverable by the receivers will be determined by the Court, and that provides sufficient control for the reasonableness of that remuneration, costs and disbursements.
Mr Schick also points to a difference between the number of bottles of wine stored at the Homebush and Denman premises, as previously advised by the respective receivers, and the number of bottles identified in the stock take by Grays of 2478 bottles against a total of about 200,000 bottles. That discrepancy is not explained by the evidence, and may involve counting errors, or possibly theft. It is not, as Mr Schick contends, a debt owed by the receivers, not least because it is not presently established whether the bottles were lost, stolen or had merely been miscounted, or if so, that there was any lack of reasonable care by any one or more of the three sets of receivers which have had responsibility for the wine at relevant times.
Tragopans also contends that the recovery charge should be zero, because of the fact that the wine was not stored in a temperature controlled environment. Tragopans contends that, by removing the wine from such an environment, the receivers have damaged the wine, and reduced the value which will be recovered for it. I pause to note that submission may have force in respect of the Denman wine, so far as it was removed from a temperature controlled environment but whether it has any force in respect of the Homebush wine turns upon whether that wine had previously been stored in a temperature controlled environment, which is not presently established. If not, there is no room for criticism of the receivers for damage which had previously been done.
In any event, it does not seem to me that this matter is properly raised in this application, for several reasons. First the question of the extent to which bottles of wine require storage in that manner may depend upon the nature of the particular wine. Second, importantly, it is not established that the use of a temperature controlled environment could have been achieved at reasonable cost or that the receivers were obliged to pay that cost from their own funds. Third, the extent of any reduction in sale proceeds is speculative, particularly if the wine at Homebush was not previously held in a temperature controlled environment when the receivers took possession of it. Mr Schick approached that matter by pointing to the comparison of retail sale prices and auction sale prices in respect of one of the wines in issue, and then extending that submission to a second wine in issue. However, it is not established that the difference between the two has anything to do with storage conditions, since retail sale prices and auction sale prices may be very different, and Grays have estimated auction values which are significantly less than market value. It is also not established that any error by the receivers in this respect, if there was one, is of a character that would warrant depriving them of the right to indemnity in its entirety. Finally, to the extent that investors have claims in this regard, it is open to them to pursue them in a court or tribunal with appropriate jurisdiction, in a manner that would likely lead to a more accurate determination of the particular facts, than could be achieved in an application of this kind.
In principle, notwithstanding the criticisms that have been advanced of the $14 Recovery Charge proposed by the receivers, and notwithstanding Tragopans' submission that a lower Recovery Charge might well lead to a higher take-up of wine collection and reduce losses on the sale of wine in the market, it seems to me that I should accept the receivers' calculation of the Recovery Charge, on the basis that any other course would impose upon them a risk which is not properly imposed upon them, that their model is correct and that they are left without indemnity for costs and remuneration to which they are entitled to be indemnified. I have also had regard to the factors set out in paragraph 34 of Mr Sulan's submissions in that respect, which I need not repeat, although they seem to me to support that conclusion. In expressing that view, I have also had regard to the importance of the adjustment mechanism which is proposed by the receivers, which will bring about rebate to investors if the amount of the receivers' remuneration, costs or disbursements has been overstated, or the sale proceeds of wine not distributed in specie have been understated.
The receivers have circulated proposed orders to give effect to that amendment, and the structure of those orders has been addressed in submissions. As I noted above, Mr Schick acknowledges that they are an improvement on the previous approach, although he still opposes them. The proposed amendments to order 4(e) include notification to claimants to the wine of the Recovery Charge and rebate arrangement. Paragraph 7(a) will provide for the proceeds of wine to be applied, first, to costs now extended to include the costs of making the rebate payments. Paragraph 7(e) provides for the rebate, which is distributed between those who have not taken up the in specie distribution of wine and whose wine has been sold, and those that have paid a Recovery Charge and taken up that distribution. The rebate arrangement contemplates that that rebate would only be given to those who are entitled to $25 or more in respect of a rebate. That approach seems to me to be appropriate, so as to avoid wasted costs of distribution of relatively small monetary amounts, where the costs may well exceed the amounts involved, and is consistent with the liquidator's discretion, arising under s 553E of the Corporations Act, by the application of s 140(9) of the Bankruptcy Act 1966 (Cth) and reg 6.21 of the Bankruptcy Regulations not to pay a creditor a dividend in an amount of less than $25.
Messrs Fraser and Honey submit, and I accept, that this mechanism provides a practical and desirable means of addressing the concerns raised by Tragopans and others that the valuations underlying the Recovery Charge are unduly conservative, as well as addressing the risk that the estimate of the recoverable remuneration, costs and disbursements may overstate the amount that is actually obtained.
In summary, I am satisfied that a Recovery Charge should be imposed for the reasons indicated in the October 2014 judgment. I am satisfied that the proper course is not to expose Messrs Fraser and Honey or the other receivers, to the risk of under-recovery by setting the charge at lower than the amount of $14 which they have modelled, where there is no evidentiary basis that would allow me to be satisfied that they would be indemnified in that situation, but that investors should be protected against the risk of an excessive recovery charge, to the extent that they can be, by the proposed rebate mechanism. An order should be made, as sought, that the costs of this application be paid in accordance with paragraph 7(b) of annexure A to the October orders. I also propose to hear the parties as to steps which might be taken to bring about an early determination of the question of costs, since that is plainly to the benefit not only of Messrs Fraser and Honey and the other receivers, but also to the investors, so far as it will bring certainty to their position, and the potential for a rebate, if one arises, from the determination of such remuneration.
I make orders in accordance with the Short Minutes of Order, as submitted by Messrs Fraser and Honey on 10 September 2015, as initialled by me and placed in the file.
[3]
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Decision last updated: 21 January 2016