In the matter of Fynfan Pty Ltd (in liq)

[2024] NSWSC 594

Supreme Court

New South Wales

Medium Neutral Citation:

In the matter of Fynfan Pty Ltd (in liq) [2024] NSWSC 594

Hearing dates:

13 May 2024

Date of orders:

13 May 2024

Decision date:

13 May 2024

Jurisdiction:

Equity - Corporations List

Before:

Black J

Decision:

Orders made as to distribution of surplus and liquidator’s remuneration.

Catchwords:

CORPORATIONS — Winding up — Liquidators — Remuneration — Where liquidators seek orders relating to the distribution of a surplus in respect of the liquidation and as to their remuneration

Legislation Cited:

- Corporations Act 2001 (Cth) s 488

- Insolvency Practice Schedule (Corporations), Division 60 Subdiv B, s 60-12, s 90-15

Cases Cited:

- Equititrust Ltd (in liq) (rec apptd) (recs and mgrs apptd) (No 4) [2017] FCA 1133

- Re DS Millard & Son Pty Ltd (1997) 24 ACSR 71

- Re FAI Car Owners Mutual Insurance Company Pty Ltd (2009) 76 ACSR 164

- Re Hawden Property Group Pty Ltd (in liq) (2018) 125 ACSR 355

- Re Octaviar Administration Pty Ltd (in liq) [2017] NSWSC 1556

- Re RCR Tomlinson Ltd (admins apptd) [2020] NSWSC 735

- Re Sakr Nominees Pty Ltd [2017] NSWSC 668

Category:

Procedural rulings

Parties:

Edward Francis Lazzaroni (Plaintiff)
John Joseph Lazzaroni (First Defendant)
Elizabeth Lazzaroni (Second Defendant)
Paul William Gidley in his capacity as liquidator of Fynfan Pty Ltd (in liq) (Third Defendant/Applicant)
Tiamarelle Pty Ltd (Fourth Defendant)
Gone Green Australia Pty Ltd (Fifth Defendant)
Gosford Stone & Terrazzo Pty Ltd (Sixth Defendant)

Representation:

Counsel:
A Reid (Applicant)

Solicitors:
Aubrey Brown Lawyers (Applicant)

File Number(s):

2021/248777

Judgment – ex tempore (revised 14 may 2024)

Nature of application

1. By Amended Interlocutory Process filed by leave on 6 May 2024, Mr Gidley, in his capacity as liquidator (“Liquidator”) of Fynfan Pty Limited (in liq) (“Company”), seeks orders for distribution of a surplus and orders for remuneration, including a relatively small amount of remuneration in anticipation of completing the work of a distribution. He also sought a direction under s 90-15 of the Insolvency Practice Schedule (Corporations) (“IPSC”) that he was justified and acting reasonably in taking certain steps so far as they involve notionally allowing for the amount of debts not repaid to the Company, by Mr John Lazzaroni and Mr Edward Lazzaroni, and then, in effect, recouping those amounts on a distribution of trust assets, which are to be distributed by Mr Gidley in his capacity as trustee of a trust to those persons. The basis on which that will occur is now recorded in the form of a Setoff Agreement dated 9 May 2024 between the relevant parties. I had originally indicated reservations as to whether such a direction should be made but, on reflection, I am satisfied that such a direction could properly be made, where the issue there raised is the appropriateness of the setoff arrangements documented by the Setoff Agreement, and the Liquidator making a distribution on that basis. I will refer to that question below.

2. I have the benefit of detailed affidavit evidence and detailed submissions, to which I will briefly refer, but I note that the application is consented to by two of the contributories, and not opposed by a third contributory to the Company, who are the only remaining persons with economic interests in the matter, although those interests likely arise through the trust rather than through the Company.

Affidavit evidence

3. The Liquidator reads his affidavit dated 9 April 2024 which sets out the circumstances in which he was appointed liquidator of the company, by reason of a dispute between the two directors of the Company, Mr Edward Lazzaroni and Mr John Lazzaroni, which had arisen after they were both appointed directors on the death of their father. Mr Gidley exhibits a copy of the memorandum and articles of association for the Company which are relevant, for present purposes, because they confirm that the only contributory entitled to participate in a distribution of assets on a winding up is the trustee of the trust, now Mr Gidley in his capacity as trustee, as distinct from Mr Gidley in his capacity as liquidator of the Company. Mr Gidley also refers to the circumstances of the establishment of the trust. It is not necessary for me, in dealing with the directions sought in his application or the leave that is sought to distribute a surplus, to address what will be done with the assets once they are distributed to the trust, beyond the question of the treatment of the loans to the Messrs Lazzaroni in the distribution of the surplus by the Company.

4. Mr Gidley refers to several of the matters which have given rise to complexity in the liquidation, which are relevant to his claim for additional remuneration, and I bear in mind that none of the contributories have taken issue with his evidence as to the complexity of the matter or with his claim for additional remuneration. He refers to the steps which have been taken to meet the claims of Company’s creditors, and I am satisfied, having regard to his evidence, that those claims have been met.

5. Mr Gidley also addresses, in this affidavit, the position in respect of loans made by the Company to the Messrs Lazzaroni, which are to be repaid by the approach I have noted above, relying on the Setoff Agreement which has now been executed between the parties, so that, in effect, there will be a multi-party setoff, between the amounts owed by the Messrs Lazzaroni respectively to the Company, and the distributions that would be made to the Messrs Lazzaroni respectively out of the trust, funded by the payment of the surplus out of the Company. The practical advantage of that approach is obvious, so far as it avoids the need for the Messrs Lazzaroni to fund the repayment of moneys due to the Company, and then repay any borrowings made to do so from distributions received out of the trust, and incur any interest or fees on any such borrowings. .

6. Mr Gidley also addresses the amount of his remuneration previously approved by creditors, who have now had their debts repaid, and the additional remuneration claimed in his application. I need do no more here than note that Mr Gidley gives comprehensive evidence as to how that remuneration has been calculated, and that it has been recorded in the usual manner by reference to categories of work, and Mr Gidley gives evidence of the write-off of certain amounts which will not be claimed. As I have noted above, none of the contributories take issue with the amount of additional remuneration claimed or suggest that it is unreasonable for the task taken. So far as additional remuneration is sought to complete the distribution, it is often convenient in applications of this kind to approve modest amounts of remuneration of that character in advance, so as to avoid the costs of a further application to the Court.

7. Mr Gidley also there addresses the manner in which the estimated surplus has been calculated, taking into account, as I have noted above, the setoff between the parties.

8. By a second affidavit dated 2 May 2024, Mr Gidley makes a correction to his evidence of amounts paid by way of dividends and interest, which is not material for the purposes of the present application, and gives evidence of publication of a notice of this application in the Sydney Morning Herald. No additional creditors or claimants have appeared in the application. By a third affidavit dated 10 May 2024, Mr Gidley corrects the amount of the loan owed by Mr Edward Lazzaroni to the Company.

9. There is evidence of service of the proceedings upon the Messrs Lazzaroni and upon Ms Elizabeth Lazzaroni, and upon the Australian Securities & Investments Commission, which has not sought to be heard in respect of the application. As I noted above, Mr Gidley also tenders a Setoff Agreement between himself as liquidator of the Company, himself as trustee of the relevant trust, the Messrs Lazzaroni and Ms Lazzaroni, which records the arrangement which is proposed to be adopted in respect of the calculation of the surplus, based on a notional repayment of the loans owed by the Messrs Lazzaroni to be set off against their distributions from the trust. I have referred above to the commercial advantages of that approach.

10. Mr Gidley also tenders two consents to the relevant arrangement, by each of the Messrs Lazzaroni, and a text message from Ms Lazzaroni which indicates that she has no objection to the approach. Finally, Mr Gidley tenders an exhibit which records the amounts of time written off in determining his remuneration, to which I have referred to above.

Leave to distribute the surplus

11. Ms Reid, who appears for Mr Gidley in the application, mad detailed submission as to the distribution of the surplus and the calculation of remuneration, and also, by way of supplementary submissions, as to the setoff arrangement which is proposed. While Mr Gidley puts the basis of setoff alternatively by reference to a contractual setoff and by reference to the application of equitable principles, it is sufficient to address the former which have a straightforward application here.

12. Ms Reid addresses the principles which are applicable to special leave to distribute a surplus in submissions. A liquidator requires the Court’s “special leave” to distribute a surplus, under s 488(2) of the Corporations Act 2001 (Cth), and that requires that a special application be made to the Court, as has occurred here, rather than the matter being dealt with as part of some other administrative procedure: Re DS Millard & Son Pty Ltd (1997) 24 ACSR 71 . In Re FAI Car Owners Mutual Insurance Company Pty Ltd (2009) 76 ACSR 164, a decision which has been applied on many subsequent occasions by this Court, Barrett J in turn noted that the purpose of the application was to, in effect, direct attention to the steps necessary to be taken by the liquidator to verify that a surplus in truth exists and that members’ entitlements have been ascertained. Ms Reid also refers to the decision of Gleeson JA in Re Hawden Property Group Pty Ltd (in liq) (2018) 125 ACSR 355, to which I have regard. I am here satisfied that there is, in reality, a surplus to be distributed, and the correct relativities amongst the contributories have been observed, where there is evidence of repayment of creditors, so as to give rise to the surplus, and that the distribution to the trustee as the legal owner of the A Class ordinary shares reflects the terms of the Company's constitution.

Application under IPSC s 90-15

13. As I noted above, the Liquidator also sought a direction that he was justified and acting reasonably in taking certain steps so far as they involve notionally allowing for the amount of debts not repaid to the Company, by Mr John Lazzaroni and Mr Edward Lazzaroni, and then, in effect, recouping those amounts on a distribution of trust assets, which are to be distributed by Mr Gidley in his capacity as trustee of a trust to those persons. The basis on which that will occur is now recorded in the form of the Setoff Agreement dated 9 May 2024.

14. I should expand my oral ex tempore judgment to briefly note the principles applicable to such a direction. I summarised the circumstances in which such a direction can be given to an insolvency practitioner in Re Octaviar Administration Pty Ltd (in liq) [2017] NSWSC 1556 and Re RCR Tomlinson Ltd (admins apptd) [2020] NSWSC 735 at [6] as follows:

“The Court’s power to give a direction under s 90-15 of the [IPSC] at least allows the Court to give a liquidator advice as to the proper course of action for him or her to take in a liquidation, and may give directions that provide guidance on matters of law and the reasonableness of a contemplated exercise of discretion, although it typically will not do so where a matter relates to the making and implementation of a business or commercial decision, where no particular legal issue is raised and there is no attack on the propriety or reasonableness of the decision. The power to give directions under this section is wider than its power to give such directions under former s 479(3) of the Act… .”

15. In Equititrust Ltd (in liq) (rec apptd) (recs and mgrs apptd) (No 4) [2017] FCA 1133 at [7], in considering the analogous power to give judicial advice to a trustee under the trustee legislation of each State, Jagot J observed that that:

“(a) the jurisdiction or power to give judicial advice is not constrained by any implications or limitations not found in the express words of the section;

(b) the Court’s discretion is confined only by the subject matter, scope and purpose of the legislation, and there are no implied limitations on the discretionary factors that may arise or rules governing the relative importance of such factors;

(c) the judicial advice procedure is intended to be summary in character;

(d) a judicial advice application is in the nature of ‘private advice’ and a departure from usual Court proceedings in which there are multiple, adversarial parties. Accordingly, a person served with documents in respect of a judicial advice application is not thereby a ‘party’ to the application;

(e) the right to obtain judicial advice protects the trustee, but it thereby also protects the interests of the [t]rust, by enabling the trustee to act in the interests of the [t]rust without fear of being personally liable for costs;

(f) the function of the Court in a judicial advice application is to determine what should be done in the best interests of the trust;

(g) the usual form of order is that the trustee “would be justified” in taking the relevant course of action;

(h) in order to ensure the protection of the trustee, it is necessary that the statement of facts fully discloses the relevant matters, but it is not necessary for the trustee to “prove” the facts to a certain standard of proof as would be the case in adversarial litigation; and

(i) the practice of the Court has been to look for, and in appropriate cases, rely upon, a memorandum of opinion from counsel …” [citations omitted]

16. I recognise that a court will generally refrain from giving a direction in relation to a commercial or business judgment within an insolvency practitioner’s discretion where no particular legal issue is raised for consideration and there is no attack on the propriety or reasonableness of the decision in respect of which the direction is sought. This application raises the propriety of the setoff arrangement, although there is no dispute as between the contributories as to that matter.

17. I am satisfied that the Liquidator is justified in adopting the setoff arrangement which is proposed, where that brings about no disadvantage to the Company or any of the contributories, and has the advantage for the contributories that it will avoid the need for the Messrs Lazzaroni to fund interest any on short-term borrowings that would otherwise be necessary in order to repay amounts to the Company which would then be distributed to them out of the trust. I am satisfied that the Company's interest in that respect are properly addressed by the Setoff Agreement that has now been executed between the parties.

Remuneration

18. The principle application to a determination of a liquidator's remuneration are now likely too familiar to require further summary, and are addressed at length in Ms Reid's submissions. By way of brief summary, I should add to my oral ex tempore judgment that Division 60 Subdiv B of the IPSC permits an external administrator (including a liquidator) to claim remuneration determined, inter alia, by the Court. In determining the amount of that remuneration, the Court must have regard to the matters specified in IPSC s 60–12. I summarised relevant matters in Re Sakr Nominees Pty Ltd [2017] NSWSC 668 at [23]ff, in dealing with 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 above, 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.

19. The Court must apply an independent mind to whether the remuneration sought relates to necessary work which was properly performed and consider the proportionality between the remuneration claimed and the benefit received by creditors in relation to the work, although it is not the Court’s function to undertake a line-by-line review of the narratives in the time schedules, but to review the evidence in a broad way to satisfy itself that it supports the other evidence that is led: Re Banksia Securities Ltd (in liq) (recs and mgrs apptd) [2017] NSWSC 540 at [48]; Re Aberdeen All Farm Pty Ltd (in liq) [2020] NSWSC 770 at [36].

20. I am satisfied that the evidence establishes, here, that the further remuneration claimed by the Liquidator is reasonable, and the Court will accept, in an appropriate case, such remuneration calculated on a time basis. I have regard to the fact that the contributories, who are here familiar with the manner in which the Liquidation has been conducted, either consent to, or do not oppose, the relevant distribution on a basis that includes payment of the Liquidator's remuneration, which is taken into account in calculating the surplus that is available for distribution. I will also make an order that is sought dispensing with notice under r 9.2(2) of the Corporations Rules, where it is plain that contributories have been given notice of the application in the course of its preparation for hearing.

Orders

21. I will, accordingly, make the orders that are sought by Mr Gidley, amending paragraph 1 so that it adopts the traditional formulation that the Liquidator "is justified", and deleting the additional words "and acting reasonably" which are not necessary for a direction under s 90-15 of the Insolvency Practice Schedule (Corporations). I will, as I have noted above, also make the orders that are sought in respect of leave to distribute the surplus and the payment of the Liquidator's remuneration. I will reserve liberty to apply, which is sought, on the basis that, once the distribution is complete, it is to be satisfied that Mr Gidley will seek his release as liquidator, with a view to the Company being deregistered. I make a further order 7 that the exhibits be returned. I make orders in accordance with the short minutes of order initialled by me and placed in the file.

**********

Decision last updated: 23 May 2024