Re HRL Limited (in liq) & Anor

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE
COMMERCIAL COURT

CORPORATIONS LIST

S ECI 2022 02033

IN THE MATTER of HRL LIMITED (IN LIQUIDATION) (ACN 061 930 756) and HRL INFRASTRUCTURE SERVICES PTY LTD (IN LIQUIDATION) (ACN 166 922 292)

BETWEEN:

CRAIG DAVID CROSBIE AND STEPHEN GRAHAM LONGLEY IN THEIR CAPACITY AS LIQUIDATORS OF HRL LIMITED (IN LIQUIDATION) AND HRL INFRASTRUCTURE SERVICES PTY LTD (IN LIQUIDATION)	First Plaintiffs
HRL LIMITED (IN LIQUIDATION) (ACN 061 930 756)	Second Plaintiff
HRL INFRASTRUCTURE SERVICES PTY LTD (IN LIQUIDATION) (ACN 166 922 292)	Third Plaintiff

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JUDGE:	Matthews AsJ
WHERE HELD:	Melbourne
DATE OF HEARING:	23 August 2022
DATE OF JUDGMENT:	16 November 2022
CASE MAY BE CITED AS:	Re HRL Limited (in liq) & Anor
MEDIUM NEUTRAL CITATION:	[2022] VSC 693

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CORPORATIONS – External administration – Application by liquidators of companies for determination of remuneration pursuant to s 473(3)(b)(ii) of the Corporations Act 2001 (Cth) – Application for orders that in addition to remuneration approved by committee of inspection on a time-based costing method, the liquidators’ remuneration include a success fee calculated as a percentage of a recovery made in a separate court proceeding – In the matter of Sakr Nominees Pty Limited [2017] NSWSC 668 – Idylic Solutions Pty Ltd as trustee for Supersave Superannuation Fund [2016] NSWSC 1292 – Application granted.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiffs	Mr H N G Austin KC with Mr E Gisonda	Norton Rose Fulbright Australia

TABLE OF CONTENTS

Introduction........................................................................................................................................ 1

Nature of the application and material relied upon................................................................ 1
Notification of required persons................................................................................................. 2

Background......................................................................................................................................... 5

Appointment of the Liquidators and relevant conduct of the liquidation of the HRL Companies................................................................................................................................................ 5
Existing approvals of remuneration for the Liquidators........................................................ 9
Funding arrangements with CFA............................................................................................... 9
Liquidators’ Success Fee............................................................................................................ 10
The need for Court approval..................................................................................................... 11

Applicable principles...................................................................................................................... 12

Statutory provisions.................................................................................................................... 12
The Court’s approach when considering applications for approval of the liquidators’ remuneration...................................................................................................................... 14

The Liquidators’ submissions....................................................................................................... 16

Availability of remuneration calculated by a percentage of realisations........................... 17
The ARITA Code............................................................................................................... 17
The IPS................................................................................................................................. 20

Addressing the factors referred to in s 473(10) of the Act..................................................... 20
Extent to which work is reasonably necessary.............................................................. 21
The period of work............................................................................................................ 21
The quality of work........................................................................................................... 21
Level of risk accepted by the Liquidators...................................................................... 21
The nature of the property being dealt with................................................................. 22
The behaviour of creditors............................................................................................... 23

Addressing the objections raised by the Objectors................................................................ 23
Creditors will receive less than 60% of the gross amount........................................... 23
Joint Parliamentary Committee recommendation at 70%........................................... 24
No consultation with creditors........................................................................................ 25
The Liquidators’ rates already include a profit............................................................. 26
Rack-rates............................................................................................................................ 26
Historically low insolvency appointments.................................................................... 26

Consideration.................................................................................................................................... 27

Conclusion......................................................................................................................................... 34

HER HONOUR:

Introduction
Nature of the application and material relied upon

By originating process filed 31 May 2022, the plaintiffs apply, inter alia, for approval of the remuneration of David Crosbie and Stephen Longley in their capacity as liquidators of HRL Limited (in liquidation) and HRL Infrastructure Services Pty Ltd (in liquidation) (together, ‘HRL Companies’). I shall refer to Mr Crosbie and Mr Longley as the Liquidators.

Specifically, the plaintiffs sought approval under ss 60-10)1)(c), 90-15 and 90-20 of the Insolvency Practice Schedule (‘IPS’) at Schedule 2 of the Corporations Act 2001 (Cth) (‘Act’) for their remuneration to include an uplift fee equal to 5% of any property that is recovered (whether by way of settlement, judgment or order made) by the HRL Companies in specified legal proceedings (‘Success Fee’), which I will later explain.

At the hearing before me, I gave leave to the plaintiffs to amend the originating process. Amongst other things, an amendment was required so as to ensure that the remuneration application was brought under the correct sections of the Act. The plaintiffs had mistakenly brought that application under the provisions mentioned above, however the now-repealed s 473 of the Act continues to apply (by virtue of s 1581 of the Act) as the Liquidators were appointed as liquidators of the HRL Companies prior to 1 September 2017.[1] The plaintiffs filed the amended originating process on 24 August 2022, as ordered.
[1]See Re Tuscan Property Development Pty Ltd (in liq) [2018] VSC 511, [22], where I explain the workings of the transitional provisions and amendments introduced by the Insolvency Law Reform Act 2016 (Cth).

In support of the remuneration application and in addition to the oral submissions made at the hearing, the plaintiffs rely on the following materials:

(a) the affidavit of Craig Crosbie dated 29 April 2022 (‘First Crosbie Affidavit’);

(b) the second affidavit of Craig Crosbie dated 31 May 2022 (‘Second Crosbie Affidavit’);

(c) the third affidavit of Craig Crosbie dated 22 July 2022 (‘Third Crosbie Affidavit’);

(d) the fourth affidavit of Craig Crosbie dated 18 August 2022 (‘Fourth Crosbie Affidavit’);

(e) the affidavit of Carl Hoerner dated 31 May 2022 (‘Hoerner Affidavit’);

(f) the affidavit of Peter Pham dated 31 May 2022 (‘Pham Affidavit’);

(g) the affidavit of Allan Knight dated 6 June 2022 (‘Knight Affidavit’);

(h) the affidavit of Stefan Hass dated 9 June 2022 (‘Hass Affidavit’);

(i) the affidavit of Natasha Toholka dated 17 August 2022 (‘Toholka Affidavit’); and

(j) the written outline of the Liquidators’ counsel dated 12 August 2022 (‘Written Outline’).

For the reasons set out below, the remuneration application is approved.

Notification of required persons

Before making an application for approval of their remuneration, r 9.2 of the Supreme Court (Corporations) Rules 2013 (‘Corporations Rules’) requires the Liquidators to serve certain persons with a copy of the principal affidavit in support of the application and a notice in accordance with Form 16 of the Corporations Rules stating that it is the Liquidators’ intention to apply to the Court for an order determining their remuneration.

The persons required to be served under the Corporations Rules are, relevantly:[2]
[2]Corporations Rules, r 9.2(2).

(a) each creditor who attended (whether in person or proxy) any meeting of creditors;

(b) each member of any committee of inspection; and

(c) each member of HRL Limited or HRL Infrastructure Services whose shareholding of one of those companies represents at least 10% of the issued capital of the company.

The First Crosbie Affidavit lists who these persons are.[3] Mr Crosbie states that HRL Limited is the sole member of HRL Infrastructure Services and that as HRL Limited is also a plaintiff to this application, he does not propose to serve HRL Limited in its capacity as a member of HRL Infrastructure Services.
[3]First Crosbie Affidavit, [40]-[42].

The persons listed by Mr Crosbie were served with the Form 16 Notice and the First Crosbie Affidavit by mail,[4] with the exception of one creditor, Warwick Mahoney. The mail sent to Mr Mahoney was returned ‘not at this address’. Attempts were made to personally serve Mr Mahoney, but these were unsuccessful.[5] I am satisfied that reasonable attempts were made to serve Mr Mahoney and the fact that these were unsuccessful do not impede the application from being heard.
[4]Pham Affidavit, [3]-[5].
[5]Knight Affidavit; Hass Affidavit.

The only secured creditor of the HRL Companies is the Commonwealth Bank of Australia (‘CBA’).[6] The Form 16 Notice and First Crosbie Affidavit were served on CBA, who informed the Liquidators that it did not object to the remuneration order sought by them.[7]
[6]First Crosbie Affidavit, [39].
[7]Hoerner Affidavit, [4]-[5].

The Australian Securities and Investments Commission (‘ASIC’) was also served with the Form 16 Notice and the First Crosbie Affidavit.[8] ASIC responded to the Liquidators’ solicitors, stating that it did not propose to intervene in this proceeding.[9]
[8]Toholka Affidavit, [4]-[6].
[9]Toholka Affidavit, [7].

The Liquidators or their solicitors received objections to the remuneration application from Alf Ottrey, John Virgona and Barry Richards, who are all members of the committee of inspection for HRL Limited (‘COI’).[10] In addition, two substantively identical objections signed by John Mulqueen on behalf of Zeus Power Investments Pty Ltd (‘Zeus’) and on behalf of Laurium Investments Pty Ltd (‘Laurium’), members of HRL Limited, were received.[11]
[10]Hoerner Affidavit, [7]-[8].
[11]Hoerner Affidavit, [9].

I will deal with the content of the objections later in these reasons, however it is convenient to note here what became of these objections.

On 20 June 2022, Hetyey AsJ made orders listing the matter for final hearing before me on 23 August 2022 and that:

(a) the plaintiffs were to file and serve any further evidence they wished to rely upon by 22 July 2022;

(b) Mr Virgona, Mr Ottrey, Mecrus Pty Ltd (the company with which Mr Richards was associated), Zeus and Laurium (‘Objectors’) were to file and serve any evidence they intended to rely upon by 5 August 2022;

(c) the plaintiffs were to file and serve a written outline by 12 August 2022; and

(d) the Objectors were to file and serve a written outline by 19 August 2022.

The solicitors for the Liquidators and the Objectors corresponded with each other and after providing confidentiality undertakings, Mr Ottrey and Mr Virgona were given access to the confidential exhibits relied upon by the plaintiffs.[12]
[12]Toholka Affidavit, [8]-[15]. Mr Richards was also offered the same, however it appears he did not take this up: Toholka Affidavit, [8]-[15].

By emails sent to my Associate on 17 August 2022, Mr Ottrey, Mr Richards and Mr Virgona confirmed that they withdrew their objections to the remuneration application. By email on the same date, Mr Mulqueen confirmed on behalf of Zeus and Laurium that they also withdrew their objections to the remuneration application.[13]
[13]These emails were tendered at the hearing and marked as exhibits: the email from John Virgona on 17 August 2022 at 5.19pm to my Associate was marked as Ex-1; the email from Alf Ottrey on 17 August 2022 at 5.27pm to my Associate was marked as Ex-2; and the email from John Mulqueen on 17 August 2022 at 8.47pm to my Associate was marked as Ex-3.

Hence by the time of the hearing, there were no objections to the remuneration application. The plaintiffs submitted that while creditors are seen as better judges of their commercial interests, based on the statement of Lindley LJ in re English Scottish & Australian Chartered Bank[14] that “if the creditors are acting on sufficient information and with time to consider what they are about and are acting honestly, they are, I apprehend, much better judges of what is to their commercial advantage than the court can be”, the opinion of creditors is by no means determinative although it is a relevant factor.[15] The weight to be given to that factor will depend on the circumstances.[16] In this instance, there has been no contradictor to the application.
[14][1893] 3 Ch 385, 409.
[15]Buiscex Ltd v Panfida Foods Ltd (in liq) (1998) 28 ACSR 357; cited with approval in Hall v Poolman [2009] NSWCA 64 [135].
[16]Hall v Poolman [2009] NSWCA 64 [140].

Background
Appointment of the Liquidators and relevant conduct of the liquidation of the HRL Companies

At a meeting of creditors convened under s 439A of the Act, on 2 June 2016 Ian Carson, Mr Longley and Mr Crosbie were appointed as joint and several liquidators of HRL Infrastructure Services. At the reconvened meeting of creditors held on 8 June 2016, they were also appointed joint and several liquidators of HRL Limited. In February 2020, Mr Carson resigned as a liquidator of the HRL Companies, and Mr Longley and Mr Crosbie remained as joint and several liquidators of them.[17]
[17]First Crosbie Affidavit, [2]-[3].

Mr Crosbie deposes that the Liquidators consider that the HRL Companies have claims for breach of duty against certain of their respective officers and have commenced a proceeding in this Court in that regard (‘Proceeding’).[18]
[18]First Crosbie Affidavit, [12]. The Proceeding number is S ECI 2020 01792.

The essence of the claims made in the Proceeding is that in 2013 and 2014, the defendants failed to exercise due care and diligence in relation to the acquisition by HRL Infrastructure Services of the shares in a number of companies owned by Vemco Australia Pty Ltd (later, Zeus Power Investments Pty Ltd) (collectively, ‘Vemco’).

On 17 October 2014, the purchase agreement for the acquisition of Vemco was executed by HRL Infrastructure Services as purchaser and HRL Limited as guarantor, and completion occurred on 24 October 2014. The purchase consideration of $36.8m was lent from HRL to HRL Infrastructure Services.[19]
[19]Amended Statement of Claim, [57]-[64] (see Exhibit CDC-1 to the First Crosbie Affidavit, pp 86-87).

The performance of the Vemco business rapidly deteriorated following completion. In October 2015, voluntary administrators were appointed to the HRL Companies. In June 2016, pursuant to a resolution of the HRL Companies’ creditors, the voluntary administrators were appointed liquidators to the HRL Companies.[20]
[20]First Crosbie Affidavit, Exhibit CDC-1, pp 10-11 (HRL), 48-49 (HIS). See, also, Amended Statement of Claim, [1]-[4], [65] (Exhibit CDC-1 to the First Crosbie Affidavit, pp 62, 63, 87).

HRL Limited claims $36,803,030.45 in damages or compensation, whilst HRL Infrastructure Services claims a minimum of $25,803,030.45.[21]
[21]Amended Statement of Claim, [75] (Exhibit CDC-1 to the First Crosbie Affidavit, pp 95-96).

The HRL Companies have already filed their lay evidence in chief and their expert report and orders for lay evidence and expert reports from the defendants and the third parties are due at different times but by 25 November 2022, and a mediation is to be completed by 17 February 2023.[22]
[22]Orders made by Delaney J in the Proceeding on 12 August 2022.

Mr Crosbie deposes that the HRL Companies had no assets or access to funds that would enable them to further their investigations and pursue the Proceeding, and so it was necessary to obtain litigation funding.[23] Mr Crosbie later corrected his statement that the HRL Companies had no assets, stating that he should have stated there were insufficient assets, as the HRL Companies have approximately $10,000.00 in assets.[24] While he does not state so, the chose in action which are the HRL Companies claims in the Proceeding are an asset of the companies.
[23]First Crosbie Affidavit, [13].
[24]Fourth Crosbie Affidavit, [14]-[15].

To this end, the HRL Companies and the Liquidators entered into funding agreements with:

(a) Claims Funding Australia Pty Ltd atf the Claims Funding Australia Discretionary Trust (‘CFA’) dated 21 August 2020 (‘CFA Funding Agreement’), pursuant to which (among other things) CFA has agreed to fund in part the HRL Companies’ costs of the Proceedings;[25] and

(b) the Commonwealth of Australia (‘Commonwealth’) dated 14 September 2020 (‘Commonwealth Funding Agreement’), pursuant to which (among other things) the Commonwealth has agreed to provide funding in relation to adverse costs ordered against the HRL Companies in the Proceedings.[26]

[25]First Crosbie Affidavit, [13(a)]; Confidential Exhibit CDC-2, pg 1.

[26]First Crosbie Affidavit, [13(b)]; Confidential Exhibit CDC-2, pg 40.

On 30 October 2020, Gardiner AsJ made orders approving the Liquidators entering into and causing each of the HRL Companies to enter into the CFA Funding Agreement and the Commonwealth Funding Agreement (together, the ‘Funding Agreements’).[27]
[27]First Crosbie Affidavit, [14]; Exhibit CDC-1, pg 110.

As well as making the remuneration application, by the originating process filed in this proceeding, the plaintiffs also sought approval pursuant to s 477(2B) of the Act of the following agreements:

(a) a Deed of Acknowledgement between the Liquidators, the HRL Companies and the CBA dated 27 August 2021 (‘Deed of Acknowledgment’). As already noted, CBA is the sole secured creditor of the HRL Companies, and it has elected not to provide any financial assistance to the HRL Companies in relation to the Proceeding.[28] By the Deed of Acknowledgment, the CBA effectively yields its priority rights in favour of the rights to payment and recovery under the Funding Agreements;

(b) a Security for Costs Deed between the Liquidators, the HRL Companies, the Commonwealth, Boyd, Deppeler, McCammon and Woskoboenko dated 13 April 2022 (‘Security for Costs Deed’).[29] The key operative terms of the Security for Costs Deed effectively provide that any claim made by the specified defendants in relation to any adverse costs order made in their favour in the Proceeding be dealt with pursuant to the Commonwealth Funding Agreement, as well as imposing certain obligations on the Commonwealth if the Commonwealth Funding Agreement is terminated; and

(c) a Second Amendment Deed to the existing Commonwealth Funding Agreement, which shall be entered into by the Liquidators, the HRL Companies and the Commonwealth (‘Second Amendment Deed’). The Second Amendment Deed amends the Commonwealth Funding Agreement as contemplated by the Security for Costs Deed.

[28]First Crosbie Affidavit, Confidential Exhibit CDC-2, pg 164 (Recital C).

[29]Boyd, Deppeler, McCammon and Woskoboenko are some of the defendants to the Proceeding.

At the hearing on 23 August 2022, I made orders approving the Liquidators entering into those three agreements.

Existing approvals of remuneration for the Liquidators

On 8 June 2016, the forecast future remuneration of the Liquidators for the period from 2 June 2016 to the conclusion of the liquidation of HRL Limited was approved by the meeting of creditors in the amount of $154,673.50 (plus GST).[30] A further amount of $136,984 (plus GST) in relation to HRL Infrastructure Services was also approved.[31]
[30]First Crosbie Affidavit, [27(b)]; Exhibit CDC-1, pp 206ff; Confidential Exhibit CDC-2, pg 105.
[31]See, inferentially, First Crosbie Affidavit, Exhibit CDC-1, pg 235ff.

On 22 June 2021, the remuneration of the Liquidators for the period from 26 May 2017 to 30 April 2021 in relation to HRL Limited was approved by the COI in the amount of $783,890.50 (plus GST).[32] The COI also approved estimated future remuneration for the period from 1 May 2021 to 30 April 2022 in the amount of $631,402.50 (plus GST).[33] The estimate of future remuneration to 30 April 2022 assumed that the Liquidators would complete all of the work required of them in relation to discovery, expert witness reports and the preparation for, and attendance at trial, in the Proceeding. As this work has not yet been completed, the actual remuneration drawn by the Liquidators was $98,327.80 (excluding GST).[34]
[32]First Crosbie Affidavit, Exhibit CDC-1, pp 112ff; Confidential Exhibit CDC-2, pg 91. (25 May 2017 was the date at which the previously approved remuneration had been exhausted — see First Crosbie Affidavit, Exhibit CDC-1, pg 115).
[33]Third Crosbie Affidavit, [13]; First Crosbie Affidavit, Exhibit CDC-1, pp 112ff; Confidential Exhibit CDC-2, pg 91.
[34]Third Crosbie Affidavit, [14].

Funding arrangements with CFA

The CFA Funding Agreement is confidential and orders have been made to preserve that confidentiality. It has been made available to the Court,[35] I have inspected it, and as noted above orders were made in October 2020 approving the Liquidators’ entry into it.
[35]A copy of the CFA Funding Agreement is at pp. 1-39 of Confidential Exhibit CDC-2 to the First Crosbie Affidavit.

Thus in describing the CFA Funding Agreement, I am somewhat circumscribed by the confidentiality orders and I have sought to describe, in general terms, its key features so far as the Success Fee is concerned.

The Liquidators are dependent upon CFA for payment of their remuneration.

The CFA Funding Agreement deals with matters such as CFA’s obligations to fund the litigation in terms of legal fees, disbursements, and the Liquidators’ remuneration and disbursements. It also deals with payments to CFA arising out of any recovery. In effect, the CFA Funding Agreement contains provisions setting out the priority of payments to be made to CFA, the solicitors, the Liquidators, and the HRL Companies from any recovery in the Proceeding.

Unless there is sufficient recovery in the Proceeding, CFA’s liability under the CFA Funding Agreement for any work undertaken by the Liquidators after the date the CFA Funding Agreement commenced is capped at 60% of the Liquidators’ remuneration based on their standard hourly rates. The Liquidators are only entitled to be paid the 40% balance of their accrued remuneration if a sufficient recovery is made.[36] I shall refer to this 40% of accrued remuneration as the ‘Unpaid Accrued Remuneration’. In addition, the Liquidators have not yet been compensated for the costs (approximately $100,000) they incurred in negotiating and entering into the CFA Funding Agreement, and their costs incurred in seeking other sources of litigation funding, including conducting due diligence in respect of same and consulting with the CBA (and Zeus, which the Liquidators were wrongly advised to be a secured creditor).[37] I shall refer to this as the ‘Unpaid Litigation Funding Cost’. The Unpaid Litigation Funding Cost is not included in the costs funded by CFA, and the Liquidators may recover it only if there is a sufficient recovery in the Proceedings.
[36]First Crosbie Affidavit, [34].
[37]Third Crosbie Affidavit, [16(e)]; First Crosbie Affidavit, [35].

Therefore, under the CFA Funding Agreement, payment of the Unpaid Accrued Remuneration and the Unpaid Litigation Funding Cost are contingent on the outcome of the Proceeding and the level of recovery made.

Liquidators’ Success Fee

To further explain the Liquidators’ application, should the HRL Companies recover, say, $6m in the Proceeding, the Liquidators would then receive an extra $300,000.00 following payment of the amounts owing to CFA under the CFA Funding Agreement, the Commonwealth under the Commonwealth Funding Agreement, the solicitors acting for the HRL Companies, and the Unpaid Accrued Remuneration owing to the Liquidators and the Unpaid Litigation Funding Cost, and provided there was enough funds left over to pay the Success Fee.[38]
[38]I have chosen to use the defined term ‘Success Fee’ for the Liquidators’ entitlement under the CFA Funding Agreement to 5% of the recovery from the Proceeding, payable in accordance with the priority regime set out in that agreement, rather than the term used in the CFA Funding Agreement and in submissions, being ‘Uplift Fee’ or ‘Liquidators’ Uplift Fee’. Nothing turns on this distinction: it is merely a defined term used for convenience. In saying so, however, I found it helpful to approach it this way so as to distinguish the arrangement here, which is a percentage of the recovery, from other uplift arrangements such as those applicable under the Legal Profession Uniform Law for uplift fees for solicitors which typically are a percentage of their fees.

Mr Crosbie provided with his first affidavit, a confidential exhibit setting out an estimate of the effect which a recovery of various amounts made by the HRL Companies would have on the Success Fee and the net funds available for distribution to creditors (‘Estimated Distribution Waterfall’). The Estimated Distribution Waterfall was one of the confidential exhibits to which Mr Ottrey and Mr Virgona were granted access.

The Estimated Distribution Waterfall was subsequently revised and updated with the Fourth Crosbie Affidavit.[39] The Revised Estimated Distribution Waterfall shows the level of recovery at which it is anticipated there would be sufficient funds available to pay the Success Fee.
[39]Fourth Crosbie Affidavit, [12]; Confidential Exhibit CDC-1, pg 7-15.

The need for Court approval

Prior to making this application, the Liquidators sought to obtain approval from the COI for the Success Fee payable to the Liquidators in the event that HRL Limited succeeds in making a recovery in the Proceedings. The Liquidators provided their Remuneration Approval Report dated 1 June 2021 to the COI members, being Mr Ottrey, Mr Virgona and Mr Richards. At the meeting of the COI on 22 June 2021, the COI members approved the Liquidators’ remuneration sought in the resolution proposed by the Liquidators,[40] but abstained from voting on the aspect of the resolution dealing with the Success Fee.[41]
[40]See paragraph 31 above.
[41]First Crosbie Affidavit, [19]-[22].

Accordingly, an application to the Court was necessary in respect of the Success Fee insofar as HRL Limited is concerned.

There was no COI established in relation to HRL Infrastructure Services, so it was not open to the Liquidators to seek COI approval for the Success Fee. While the CBA holds security over the assets of both HRL Companies, the only known unsecured creditor of HRL Infrastructure Services is HRL Limited.[42] Thus obtaining creditor approval for the Liquidators’ remuneration in respect of HRL Infrastructure Services would effectively result in the Liquidators approving it themselves. The Liquidators have taken the prudent and cautious approach of seeking Court approval in respect of HRL Infrastructure Services for the Success Fee in these circumstances.
[42]First Crosbie Affidavit, [22].

It is important to note that the only aspect of the Liquidators’ remuneration which is the subject of this application is the Success Fee.

Applicable principles
Statutory provisions

This application is made under the now repealed s 473(3)(b) of the Act. That section provides:

(3)A liquidator is entitled to receive such remuneration by way of percentage or otherwise as is determined:
(a)if there is a committee of inspection – by agreement between the liquidator and the committee of inspection; or
(b)if there is no committee of inspection or the liquidator and the committee of inspection fail to agree:
(i)by resolution of the creditors; or
(ii)if no such resolution is passed – by the Court.

In this case, the Remuneration Application has been brought pursuant to s 473(3)(b)(ii) of the Act.

In exercising the power to determine the Liquidators’ remuneration, s 473(10) of the Act prescribes the matters which the Court must take into account when exercising that power:

(10)In exercising its powers under subsection (3), (5) or (6), the Court must have regard to whether the remuneration is reasonable, taking into account any or all of the following matters:
(a)the extent to which the work performed by the liquidator was reasonably necessary;
(b)the extent to which the work likely to be performed by the liquidator is likely to be reasonably necessary;
(c)the period during which the work was, or is likely to be, performed by the liquidator;
(d)the quality of the work performed, or likely to be performed, by the liquidator;
(e)the complexity (or otherwise) of the work performed, or likely to be performed, by the liquidator;
(f)the extent (if any) to which the liquidator was, or is likely to be, required to deal with extraordinary issues;
(g)the extent (if any) to which the liquidator was, or is likely to be, required to accept a higher level of risk or responsibility than is usually the case;
(h)the value and nature of any property dealt with, or likely to be dealt with, by the liquidator;
(i)whether the liquidator was, or is likely to be, required to deal with:
(i) one or more receivers; or
(ii) one or more receivers and managers;
(j)the number, attributes and behaviour, or the likely number, attributes and behaviour, of the company’s creditors;
(k)if the remuneration is ascertained, in whole or in part, on a time basis:
(i)the time properly taken, or likely to be properly taken, by the liquidator in performing the work; and
(ii)whether the total remuneration payable to the liquidator is capped;

(l)any other relevant matters.

While the criteria in s 473(10) of the Act direct the Court to the factors that are to be taken into account, the ultimate question is whether the remuneration claimed by the Liquidators is reasonable.

The Court’s approach when considering applications for approval of the liquidators’ remuneration

The principles concerning applications for approval of the remuneration incurred by insolvency practitioners are well established and have been referred to in many decisions of this Court. Gardiner AsJ summarised the relevant principles in IMO Traditional Values Management Limited (in liq)[43] (‘Traditional Values’) at paragraphs [18] to [25].
[43][2012] VSC 650 (14 December 2012).

For convenience I adopt his Honour’s summary,[44] which referred to the principles identified by Davies J in Thackray v Gunns Plantations:[45]
[44]Ibid [20].
[45](2011) 85 ACSR 144 (‘Thackray’).

At [60], her Honour summarised the principles to be applied by reference to the decision of the Full Court of the West Australian Supreme Court in Venetian Nominees v Conlan as follows:
(a)A summary procedure was involved, not unlike that applicable to the taxation of solicitor’s costs, which is not necessarily subject to all the rules that would apply in an action.
(b)The initial task of the Court is to consider whether the liquidator has made out a prima facie case on the evidence before the Court that the remuneration claimed is fair and reasonable. The Court must make that assessment ‘bringing an independent mind to bear on the relevant issues’ even though at that point there is no objector.
(c)There is no absolute rule regarding the amount of detail required to support a remuneration claim. But the evidence relied on should be sufficient to enable potential objectors to review the amounts claimed and to ascertain whether there are matters to which objection should be taken. If there is inadequate evidence supporting the claim, no order should be made.
(d)If the liquidator establishes a prima facie case, the Court should allow for an objection procedure to enable objections to be made.
(e)If there are objectors to the claim or any part, the Court should then establish the validity of those objections.

At [63] and [64] of Thackray, her Honour stated:
…. the receivers accepted that the principles set out Venetian Nominees Pty Ltd v Conlan are persuasive and that they should put sufficient evidence before the Court to enable the Court to determine that the amounts claimed are fair and reasonable. That involved providing sufficient detail of the work that was done and the expenses claimed for the Court to assess the reasonableness of the remuneration claimed for that work and the reasonableness of the expenses incurred by the receivers. The reasonableness of remuneration may be adduced by evidence for example of an appropriate benchmark, such as the Insolvency Practitioners Association of Australia rates, for comparative work by persons with the relevant status and qualifications for that kind of work and justification of the hours spent. That amount can then be adjusted up or down to reflect other factors including:
(a)       complexity above the norm for the kind of work involved;
(b)       novelty and difficulty of the issues faced;
(c)       the ultimate outcome obtained by the claimant.
The Court is looking for evidence of overcharging. Excessive charging may be indicated if there is a lack of proportionality between the cost of the work done relative to the value of the services provided. But there is no universal approach applicable in all circumstances by which the “reasonableness” of remuneration claimed or expenses incurred should be measured. The size, importance and complexity of the tasks performed are all factors to be taken into account. What is needed is sufficient information for the Court and any objector to have a clear view about what was done so that an assessment can be made about the reasonableness of the claim.[46]

[46]Traditional Values, [20], citing Thackray (2011) 85 ACSR 144, [60], [63]–[64] (citations omitted).

Black J of the New South Wales Supreme Court also summarised the applicable principles in In the matter of Sakr Nominees Pty Limited.[47]In addition to the matters referred to above, his Honour stated the following propositions:

[T]he 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[48].
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.[49]

[47][2017] NSWSC 668 (‘Sakr’).

[48]Sakr, [23].

[49]Sakr, [23].

His Honour also canvassed a number of authorities regarding the method for calculating the remuneration, such as time costing or remuneration based on a percentage of realisations, concluding that:[50]

Most decisions … 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 costs of the work done and the value of the services provided.

[50]Sakr, [24].

On this point, his Honour concluded by referring to the New South Wales Court of Appeal decision in Sanderson, as liquidator of Sakr Nominees Pty Ltd (in liquidation) v Sakr[51] which he said did not prefer any particular approach over another. Black J then stated:

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; and, in part, the view taken by the Court.[52]
[51][2017] NSWCA 38.
[52]Sakr, [25].

The Liquidators’ submissions

Counsel for the Liquidators informed the Court that they had not been able to find any cases dealing with an application for an order of this type, noting that it was possible that creditors or committees of inspection may have approved such arrangements but clearly these would not have found their way to a court.[53] By an application of this type, I apprehend the Liquidators to be referring to the payment of an amount based on a percentage of recoveries on top of remuneration on a time-costing basis at the liquidators’ usual hourly fees. I say this because I am aware that applications for remuneration based on a percentage of recoveries or realisations have been approved.[54]
[53]By way of example, and noting that the arrangement was not the same as that here as it was an uplift on fees rather than a percentage of recoveries, see Factory 5 Pty Ltd (in liquidation) v State of Victoria [2008] FCA 1952. This decision concerned an application regarding legal professional privilege in a proceeding involving a company in liquidation. At [10], it was noted by Sundberg J that at a creditors’ meeting on 24 Marcy 2006, resolutions passed at the meeting included approving an uplift of the liquidators’ fees at 25% in the event of successful recoveries by them.
[54]As stated by Black J in Idylic Solutions Pty Ltd as trustee for Supersave Superannuation Fund [2016] NSWSC 1292 (‘Idylic Solutions’) at [26], “The courts have, at different times and in different cases, allowed remuneration of insolvency practitioners on either a percentage of recoveries or time-based approach”.

That being the case, the Liquidators submitted that the Court would need to consider the application by recourse to first principles, being the terms of s 473 of the Act and the statements of principles set out in the various authorities.

Availability of remuneration calculated by a percentage of realisations

The Liquidators submit that the terms of s 473 of the Act provide for a percentage amount or an amount as otherwise determined, such that it is of wide import and permissive of different charging methods. They also submit that a mixture of methods is consistent with Sakr but was not determined by Sakr.

The ARITA Code

The Liquidators referred to the Code of Professional Practice: Insolvency Services (‘Code’)[55] of the Australian Restructuring Insolvency & Turnaround Association (‘ARITA’). The Code notes that there are several bases by which remuneration can be calculated and states that ARITA has no preference as to the method of calculating fees.[56]
[55]The version provided to me was approved on 16 September 2019 and was effective for insolvency services provided on or after 1 January 2020.
[56]Code, [5.1].

The Liquidators also referred to ARITA’s Practice Statements Insolvency 8: Remuneration, which describes at paragraph 8.4 a number of different bases for calculating liquidators’ remuneration. One of these is described as a success or contingency fee, in these terms:

A success or contingency fee provides for a specified bonus, success fee, super-profit or additional percentage as Remuneration, in the event that a specified contingent future event occurs or particular circumstances arise.

The Code expressly contemplates insolvency practitioners entering into an arrangement to receive a contingent fee for insolvency services, and provokes consideration of various matters before entering into such arrangements.

Paragraph 5.5 of the Code provides as follows, which appears to be geared towards any potential conflict for Liquidators:

A Member must not enter into an arrangement to receive a Contingent Fee for Insolvency Services if that arrangement:
(a) impairs the Member’s Independence;
(b) results in the receipt of a Contingent Fee for performing Insolvency Services that the Member is required to complete under the relevant legislation governing an Appointment;

(c) is inconsistent with the fiduciary obligations of the Member; or
(d) results in the perception that the Member is acting solely in the Member’s interests, rather than in the best interests of the creditors.

By way of explanation, paragraph (b) above refers to such matters as statutory filings.

The Liquidators submit that the Success Fee arrangement here would not offend these considerations. They say that their independence is not affected in any way, as their interests in this respect are not different to those of creditors. The Liquidators only receive the benefit of the arrangement if there is a recovery, such that it is linked to success. In this regard, the Liquidators’ interests and those of creditors are aligned.

Paragraph 5.5 of the Code goes on to provide the following, which appears to be geared towards the suitability of a contingent fee arrangement:

When considering whether a proposed Contingent Fee arrangement in a particular Administration meets the requirements of this section of the Standard, a Member must consider the following:
(a) funds available to the Administration;
(b) funding from alternative sources such as creditors or a litigation funder;
(c) the costs of the alternative sources of funds in comparison to the Contingent Fee arrangement;
(d) the risk associated with the tasks to be undertaken for the Contingent Fee; and
(e) the appropriateness of the amount of the proposed Contingent Fee in relation to the nature of the Administration and the risk associated with the task to be undertaken.

The Liquidators submit that these matters are dealt with in the evidence. There are no funds apart from $10,000 to pursue any recovery. The litigation funders are on board and the funding agreements have received court approval. The Liquidators submit that paragraph (d) above is the principal issue here: they face a significant payment risk in prosecuting the Proceeding, in that payment of the Unpaid Accrued Remuneration and the Unpaid Litigation Funding Cost will not occur unless there is a recovery in the Proceeding and that recovery is at an amount sufficient to meet these based on the priority regime in the CFA Funding Agreement. In addition, the Liquidators submit that even if they ultimately receive these two amounts, they face a significant delay risk, as any recovery may take some time. They say that they also must take account of the opportunity cost, in that by undertaking the work associated with the Proceeding on the funding terms set out in the CFA Funding Agreement, they are foregoing the opportunity of undertaking other work at their full rate. These arguments were further developed in other parts of the Liquidators’ submissions, which I will return to.

Finally, paragraph 5.5 of the Code provides the following in respect of disclosure:

Where a Member enters into an arrangement to receive a Contingent Fee for Insolvency Services, the Member must obtain approval from the Approving Body prior to commencement of Insolvency Services after having disclosed the following information:
(a) details of the arrangement including the nature of the contingency and how achievement of the contingency will be assessed;
(b) the Member’s remuneration in the event the contingency is or is not achieved;
(c) when the Member’s remuneration is expected to be drawn; and
(d) except in the case of an Appointment as a Controller, why the arrangement to receive a Contingent Fee is in the best interest of the creditors.

The ‘Approving Body’ referred to in this section is the committee of inspection, creditors or the court. The Liquidators submit that the arrangement has been disclosed to the COI and to the Court. They say that the agreement providing for the Success Fee has been entered into, being the CFA Funding Agreement, and approved by the Court, but that payment of the Success Fee is only possible if approval is obtained either from the COI (which, as noted above, did not do so when it was presented with a resolution to that effect in June 2021) or from the Court.

The IPS

The Liquidators submit that while the IPS does not apply in this instance,[57] it is worth noting certain aspects of it since it embodies what they describe as the modern approach. Section 60-10(3) of the IPS provides that a determination of an external administrator’s remuneration[58] may specify an amount and/or a method for working out an amount of remuneration. Section 60-10(4) refers to remuneration which may be worked out wholly or partly on a time-cost basis.
[57]See paragraph 3 above.
[58]An external administrator includes a liquidator, and the determination may be made by a resolution of creditors or the committee of inspection or by the court.

Addressing the factors referred to in s 473(10) of the Act

The Liquidators submit that while s 473(10) refers to a ‘melange’ of factors, these all go to the question of reasonableness, as this is the touchstone of the section.

The Liquidators contend that this application has different features to most normal applications and that an approach of analysing time sheets or statements of account is inapt.

The Liquidators submit that the key question is whether the Success Fee is reasonable in all of the circumstances of the case. They submit that the Liquidators’ natural desire is to maximise the outcome for creditors, and the fact that the Liquidators have ‘skin in the game’ in the form of the Success Fee is not in conflict with the interests of creditors.

Set out below are the Liquidators’ submissions specifically addressing the factors set out in s 473(10), conveniently grouping like factors together.

Extent to which work is reasonably necessary

First, in assessing the proposed remuneration, the Court needs to begin from the premise that there has been sufficient recovery in the Proceedings. Without recovery, there would be no entitlement to the Success Fee.

Assuming there is recovery, the work performed and likely to be performed by the Liquidators can only be described as critically important for the simple reason that without the work, there would be no Proceeding at all and no potential recovery for anyone.

The period of work

Second, this is a lengthy liquidation. The Liquidators were appointed in June 2016, having previously served as voluntary administrators.[59] This means that the Liquidators have now been performing work for over six years as liquidators. If the Proceeding settles at the upcoming mediation, the Liquidators will have performed work for at least six and a half years. If the Proceeding goes to trial, the period of work will most likely surpass seven years.
[59]First Crosbie Affidavit, Exhibit CDC-1, pp 10-11 (HRL), 48-49 (HIS). See, also, Amended Statement of Claim, [1]-[4], [65] (Exhibit CDC-1 to the First Crosbie Affidavit, pp 62, 63, and 87).

The quality of work

Third, in assessing the quality of the work performed or likely to be performed by the Liquidators, the Court again needs to start from the premise that there has been recovery in the Proceeding.

From that starting premise, the work performed and likely to be performed by the Liquidators can properly be described as high-quality in the sense that it has achieved the desired outcome of recovering funds for distribution in circumstances where there otherwise would have been no recovery at all and it has done so despite the HRL Companies otherwise having no funds to undertake litigation.

Level of risk accepted by the Liquidators

Fourth, the main supportive factor is the high level of risk that the Liquidators have assumed.

The Liquidators have embarked upon complex Supreme Court litigation in pursuit of recovery. The Proceeding has been on foot since April 2020. There is a risk that the Proceedings will not be settled at mediation. There is a risk that the Proceeding will run to trial. There is a risk of an appeal in the Proceeding following determination of the trial. There is a risk that the Proceeding could continue for many more months or even years. There is a risk that the HRL Companies are unsuccessful in the litigation and there is no recovery. There is a risk that any recovery will be small and therefore would not cover the Liquidators’ fees.

Taken together, the Liquidators have undertaken the risk of delay as well as the risk of non-payment for their work. The Liquidators are only funded to the level of 60% of their fees incurred since they entered into the CFA Funding Agreement, and they have not been paid for their work in relation to obtaining funding at all. If there is an adequate recovery from the Proceedings, the Liquidators may receive the Unpaid Accrued Remuneration and the Unpaid Litigation Funding Cost, but only after significant delay following the performance of the work. If there is no recovery at all, or only a small recovery, then the Liquidators may simply not be paid these unpaid fees at all.

The nature of the property being dealt with

Fifth, an equally important supportive factor concerns the nature of the property being dealt with and the Liquidators’ funding contribution. The property of the HRL Companies as it stands is a chose in action and litigation is required. To repeat a point made earlier, the Proceeding would not have been possible without funding from CFA, which is being provided on the terms set out in the CFA Funding Agreement. The terms of the CFA Funding Agreement require the Liquidators to forgo 40% of their approved fees despite performing work that is necessary for the conduct of the Proceeding. Put simply, the Liquidators are partly funding the Proceedings. It is not unreasonable for the Liquidators to be compensated for their part in funding the claim by way of a success fee.

The Liquidators submit that the Proceeding creates the possibility of secured and unsecured creditors being paid in full, or for unsecured creditors a substantial proportion of their debts. Pursuing this opportunity has only been able to occur by the Liquidators entering into the Funding Agreements, with the Liquidators, their solicitors, CFA and the Commonwealth all taking risks as they all stand to be out of pocket if the Proceeding fails or the recovery is not substantial. They submit that this is a high value insolvent estate but that can only be realised by undertaking high risk litigation.

The behaviour of creditors

Sixth, the CBA is the sole secured creditor of the HRL Companies.[60] Although not obliged to do so, it nevertheless has elected not to provide any financial assistance to the HRL Companies in relation to the Proceeding.[61]
[60]First Crosbie Affidavit, [39].
[61]First Crosbie Affidavit, Confidential Exhibit CDC-2, pg 164 (Recital C).

Addressing the objections raised by the Objectors

The evidence and the Liquidators’ Written Outline, all prepared prior to the Objectors withdrawing their objections, address the objections raised by the Objectors.

At the hearing, I indicated that my preliminary view was that although the objections had been withdrawn, in the absence of a contradictor it was appropriate for the Court to have regard to the objections and to the Liquidators’ responses to them. Counsel for the Liquidators agreed with that proposition.

Mr Ottrey, Mr Richards and Mr Virgona, the COI members, made a joint objection.[62] Laurium and Zeus provided separate but substantially identical objections.[63]
[62]Hoerner Affidavit, Exhibit CRH-1, pp. 327-8.
[63]Hoerner Affidavit, Exhibit CRH-1, pp. 329-335.

The objections are summarised below, along with the Liquidators’ response to them.

Creditors will receive less than 60% of the gross amount

The Objectors say that creditors will receive less than 60% of the gross amount awarded by the Court.

The Liquidators acknowledge that this is correct, but say that this is a necessary means to an end. The creditors only have a chance of recovering something because of the expenses that are being incurred. Without those expenses, there would be no recovery at all. Importantly, the expenses are being incurred without risk to the creditors in the sense that even if there is no recovery, the creditors will not be left out of pocket.

Mr Crosbie deposes that while the percentage of the total amount recovered available to creditors is less than 60%, the proportion of their debts which would be paid differs according to the amount recovered.[64] As well, the Revised Estimated Distribution Waterfall confirms that there are some scenarios where the creditors recover all of their entitlements.
[64]Third Crosbie Affidavit, [17(a)].

Joint Parliamentary Committee recommendation at 70%

Connected with the previous objection, the Objectors complain that the percentage available for creditors is less than that recommended by the Commonwealth’s Joint Parliamentary Committee on Litigation Funding and the Regulation of the Class Action Industry (‘JPC’), which had recommended that a minimum gross return of 70% to class members be considered. The Objectors contend that a class action is somewhat analogous to litigation on behalf of creditors.

The Liquidators note that the full text of the recommendation made by the JPC was as follows: [65]

(Recommendation 20) The committee recommends the Australian Government consult on whether a minimum gross return of 70 per cent to class members, as endorsed by some class action law firms and litigation funders, is the most appropriate floor.

[65]The report can be found online at:

The Liquidators referred to a minority report issued by the Australian Labor Party members of the JPC, which disputed some of the facts embedded in the recommendation and did not support the recommendation. The Liquidators submitted that the Court should not place any reliance on the majority’s recommendation.

No consultation with creditors

The Objectors complain that there was no consultation with the COI or creditors generally prior to entering into the CFA Funding Agreement.

The Liquidators acknowledge that this is the case. However, they rely on the following evidence from Mr Crosbie:[66]
[66]Third Crosbie Affidavit, [16].

(a) during the period from 2016 until 2019, the Liquidators spoke to at least four different litigation funders regarding the prospect of providing funding to pursue the claims. Despite prolonged discussions with some of these litigation funders, all four of them ultimately declined to provide funding in respect of the claims. Absent any other funding options, there have been no alternatives to the CFA Funding Agreement which could be put to the COI;

(b) given that no alternative funding proposal had been received by the Liquidators, and with the statutory limitation period on the claims in the Proceeding about to expire, the Liquidators formed the view that unless funding was obtained from CFA on the terms set out in the CFA Funding Agreement, the HRL Companies would otherwise have been without funds and therefore could not have pursued the claims in the Proceeding, with the consequence that the HRL Companies’ creditors and shareholders would be denied the benefit of any recovery that might otherwise have been made from the Proceeding;

(c) given the above circumstances, if the Proceeding was to be pursued, the Liquidators had little alternative but to accept the terms upon which CFA was prepared to provide funding, as set out in the CFA Funding Agreement; and

(d) the terms of the CFA Agreement are consistent with those upon which CFA would be willing to fund any similar such claim brought by a liquidator.

In addition, the Liquidators say that if there is no recovery, the creditors face no exposure.

The Liquidators submit that therefore there was no basis for consulting with creditors. There was no risk to the creditors. They would have had no rational basis for objecting to the proposal. And there was no scope for negotiation with CFA.

The Liquidators’ rates already include a profit

The Objectors assert that the Liquidators’ fees include a profit component, meaning that what is at risk is not entirely an expense.

In response, the Liquidators say that the time spent by them in relation to the Proceeding, at 60% of their ordinary rates, represents an opportunity cost for the Liquidators who could be spending their time on other matters at 100% of their ordinary rates.[67]
[67]Third Crosbie Affidavit, [17(b)].

Rack-rates

The Objectors assert that the Liquidators are charging rack-rates with no discount.

The Liquidators say that this is factually incorrect. Mr Crosbie deposes that the Liquidators are charging for their work in relation to this matter at hourly rates that are lower than PwC’s hourly rates for other insolvency matters, such as Court-appointed liquidations.[68]
[68]Third Crosbie Affidavit, [17(c)].

Historically low insolvency appointments

The Objectors assert that there are historically low insolvency appointments and that this should lower the compensation required.

The Liquidators submit that there is no evidence to support this assertion, which is irrelevant in any event.

Consideration

I have made numerous decisions regarding the remuneration of external administrators and I have to say that this is an unusual remuneration application. I too have been unable to identify reported cases which have awarded a success or uplift fee (however calculated) on top of remuneration calculated on a time-cost basis.

The only case I could find which seemed to be relevant was that of Australian Securities and Investments Commission v Letten (No 22).[69] That was one of numerous decisions in the Federal Court of Australia concerning the appointment by the court, at the instigation of ASIC, of receivers and managers to a number of inter-connected unregistered managed investment schemes. ASIC v Letten (No 22) concerned an application by the receivers for directions that they were justified in deploying funds from the common fund in order to fund proposed proceedings against former officers of the companies operating the schemes. The receivers and their solicitors were proposing to conduct the proposed proceedings on a ‘no win no fee’ basis, with the receivers and the solicitors to each receive an uplift of 25% on their usual rates (the usual rates for the receivers being the hourly rates previously ordered by the court). The application was opposed by one of the former officers. In ASIC v Letten (No 22), Gordon J (as her Honour then was) made orders and directions substantially in the form sought by the receivers, stating that:

If there is a Recovery, as that word is defined in the Orders, the Receivers will be entitled to reasonable remuneration and reasonable costs and expenses properly incurred (not exceeding the amount of the Recovery) as may be fixed by the Court on the application of the Receivers, such sum to be calculated on the basis of the time reasonably spent by the Receivers, their partners and staff, in the conduct of the Breach of Trust Litigation at the rates previously ordered by the Court multiplied by 1.25 as per the Proposed KPMG Fee Agreement.[70]

[69][2014] FCA 681 (‘ASIC v Letten (No 22)’).

[70]ASIC v Letten (No 22), [77].

The context for ASIC v Letten (No 22) was different to that obtaining here: it was in respect of an application for directions approving proposed conduct by the receivers, in effect an application by trustees for judicial advice, rather than a liquidators’ remuneration application; it was in respect of receivers, rather than liquidators; and it was an uplift on fees rather than a percentage of recoveries. While in some ways it might be seen as more akin to the earlier application by the Liquidators for approval of the CFA Funding Agreement, ASIC v Letten (No 22) goes further than that in that it specifically included orders approving remuneration calculated at 1.25 times the usual fees.

There is no discussion in ASIC v Letten (No 22) specifically about the uplift. However, there is nothing in that decision which suggests the application in this case ought not be granted.

In Idylic Solutions, Black J undertook an extensive survey of decisions which compared remuneration based on time-costing with that based on a percentage of realisations.[71] Various views about the advantages and disadvantages of both are canvassed in that survey, and in the end, Black J concluded that:

It seems to me that the recent case law suggests that a claim for remuneration based on hourly rates should at least be tested by reference to a percentage of realisations and possibly, in an appropriate case, displaced by remuneration on that basis or by a mixed approach. In my view, evidence as to the percentage that remuneration constitutes of realisations will at least provide a measure of objective testing of the proportionality of the remuneration claimed and will identify those cases in which there ought to be real concern in that respect.[72]

[71]Idylic Solutions, [26]-[50].

[72]Idylic Solutions, [50].

None of the decisions referred to by Black J are analogous to this application.

Further, those cases which discuss percentage-based remuneration are not particularly helpful in determining this application, since they are not considering that method in the context of a success or uplift fee.

There are, however, some matters which can be drawn from those cases which add to the discussion in paragraphs 49 to 53 above, and I have indicated this where relevant below.

As I have already pointed out, the only issue before me on the remuneration application is whether to approve that the Liquidators’ remuneration include the Success Fee, as the balance of the Liquidators’ remuneration has already been approved by the COI. In assessing the Success Fee, the question is whether the remuneration is reasonable, including by having regard to the factors set out in s 473(10) of the Act.

In the unusual circumstances of this case, I have come to the conclusion that the Success Fee should be approved. My reasons for doing so are set out below, and not in any particular order.

First, it is not an arrangement which places the Liquidators in conflict with their duties, including their duties to creditors. Both the Liquidators and the creditors benefit from a successful recovery in the Proceeding and there is no circumstance which I can see where their interests would conflict.

Secondly yet connectedly, it is not an arrangement which disadvantages creditors. It comes at no cost to creditors: if the Proceeding results in a successful recovery, then depending on the level of that recovery, the creditors benefit from it in terms of being paid some or all of their debts. If the Proceeding is unsuccessful, then that does not come at a cost to creditors since that risk is borne by CFA and the Commonwealth, as well as the Liquidators insofar as the Unpaid Accrued Remuneration and the Unpaid Litigation Funding Cost are concerned. True it is that if the Proceeding is unsuccessful the creditors will receive nothing, but that would also have been the case had the Proceeding not been pursued.

Thirdly, it is the only arrangement which the Liquidators were able to enter into so as to obtain funding to pursue the HRL Companies’ claims that are made in the Proceeding. It is not as if other arrangements were on offer: the Liquidators were confronted with the situation where it was this arrangement or no funding.

Fourthly, by commencing the Proceeding the Liquidators are attempting to achieve a substantial recovery for creditors and, on some scenarios, possibly even a return to shareholders. In the context of an insolvent liquidation, that is a significant achievement. However, litigation is inherently risky and here the risk is all borne by CFA, the Commonwealth, the Liquidators and their solicitors. The Liquidators have only been able to pursue this opportunity by obtaining litigation funding in the form of the Funding Agreements, which includes the Success Fee.

In this regard, it is helpful to note what was said in Conlan v Adams[73] by the Court of Appeal in Western Australia, when contemplating some of the disadvantages of time-based costing:
[73][2008] WASCA 61.

Mindful of the disadvantages associated with time-based costing, courts in England and Australia have identified the object to be achieved and criterion to be applied in determining what is reasonable remuneration when faced with a time cost remuneration claim: Mirror Group Newspapers plc v Maxwell; Re Korda; in the Matter of Stockford Ltd. Ferris J said in Maxwell:
In my judgment it is vital to recognise three things in this field. First, time spent represents a measure not of the value of the service rendered but of the cost of rendering it. Remuneration should be fixed so as to reward value, not so as to indemnify against cost. Secondly, time spent is only one of a number of relevant factors ... The giving of proper weight to these factors is an essential part of the process of assessing the value, as distinct from the cost, of what has been done.

The other relevant factors identified by Ferris J were the complexity of the case, the extra responsibilities on the liquidator, the effectiveness of the liquidation and the value and nature of the property involved in the liquidation.
The word ‘value’ in this context does not mean the net financial benefit to the creditors. Rather, it means the value of the services rendered by or on behalf of the liquidator which in turn is addressed by the question whether the time was reasonably expended in the circumstances of the particular liquidation.[74]

[74]Conlan v Adams, [39]-[41], citations omitted.

It is useful to consider these comments in terms of the value of the Liquidators’ work in respect of the Proceeding. If it results in a recovery at a level sufficient to invoke the payment of the Success Fee, then it will have been work which produced a high value outcome for the HRL Companies, from which creditors will benefit. If there is no recovery or it is at an insufficient level, then there will be no Success Fee payable and no detriment to creditors will have been caused.

Fifthly, in agreeing to the CFA Funding Agreement and commencing the Proceeding, the Liquidators have taken on significant risk. They have substantial fees at risk here, being the Unpaid Accrued Remuneration and the Unpaid Litigation Funding Cost. Their only guaranteed payment under the CFA Funding Agreement is 60% of their fees calculated on a time-cost basis. If the Proceeding is unsuccessful or not of a sufficient amount, then that is all they will receive.

Even if the Proceeding is successful, that will take some time to achieve and the Liquidators will have incurred significant risks in terms of deferment of payment of their Unpaid Accrued Remuneration and the Unpaid Litigation Funding Cost and the opportunity cost associated with performing this work at 60% of their usual rates instead of other work at 100%.

Further, even if the Proceeding is successful there is still the risk of the Liquidators not receiving some or all of the Unpaid Accrued Remuneration and the Unpaid Litigation Funding Cost if the level of recovery is not at an amount sufficient to cover those.

Sixthly, ASIC has had the opportunity to intervene in this case and has chosen not to do so. I note that as in Sakr, ASIC was given notice of this application. In Sakr, Black J stated:[75]

It is also appropriate to proceed on the basis that, where ASIC has been given notice of this application and has not intervened in it, nothing in Mr Sanderson’s claim for remuneration requires regulatory intervention or warrants the making of submissions by it before the Court.

[75]Sakr, [30], referring to Idylic Solutions and to Re Banksia Securities Ltd (in liq) (recs and mgrs apptd) [2017] NSWSC 540.

I therefore take the same approach: I assume that ASIC has taken the view that the Liquidators’ remuneration application for approval of the Success Fee does not require regulatory intervention or warrants ASIC making submissions about it to this Court.

Seventhly, the objections raised by the Objectors do not warrant the Court rejecting the application, for the following reasons:

(a) I do not regard the percentage of the recovery from the Proceeding which creditors will receive to be of any significance in this case. The claims made in the Proceeding are not the creditors’ claims: they are claims made by the HRL Companies against some of their former officers for breach of duty. If successful, the recovery from the Proceeding will provide an amount of money from which, depending on various matters, creditors’ claims can be partially or fully met. The percentage of the recovery from the Proceeding which creditors will receive bears no relation to their own claims.

(b) I do not regard the majority recommendation of the JPC to be of any assistance here. First, the full text of Recommendation 20 reveals that what is recommended is a consultation about setting a floor of 70% recovery to class action members; the recommendation does not state that that floor is recommended. Second and more importantly, I do not consider that in this instance creditors are analogous to members of a class action, primarily for the reasons set out in (a) above: the Proceeding does not concern the creditors’ claims and the analogy is inapposite.

(c) I accept Mr Crosbie’s evidence about the circumstances in which the Liquidators came to enter into the CFA Funding Agreement and his reasons for not consulting with the COI before doing so. I do not see any detriment caused to creditors by proceeding in this way and I do not regard the complaint as a factor in whether to approve the application. What is important is that the COI was subsequently informed about the CFA Funding Agreement and in particular the Success Fee, such that these have been disclosed prior to the Liquidators seeking approval of the Success Fee.

(d) I do not accept the complaint about the Liquidators’ rates already including a profit component, and have already set out my findings regarding the opportunity cost to the Liquidators above.

(e) Similarly, I do not consider the objection about rack-rates to have any substance.

(f) Finally, even if there was evidence that we were in a time of historically low insolvency appointments, I do not accept the Objectors’ complaint that this means the Liquidators should perform the work at lower remuneration.

Eighthly, it is significant that the Objectors withdrew their objections prior to the hearing of the application. While creditors’ opinions are not determinative and the weight to be given to them depends on the circumstances,[76] in my view here it ought to carry some weight.
[76]See paragraph 17 above.

As I noted above, I have considered the objections initially made by the Objectors because they were of assistance given that I did not have the benefit of a contradictor. But it is instructive that having made those objections, the Objectors subsequently withdrew them, after Mr Virgona and Mr Ottrey had had the opportunity to inspect the confidential exhibits, including the Estimated Distribution Waterfall.

What is particularly significant is that the members of the COI were amongst the Objectors and they withdrew their objections. They had abstained from voting on that part of the remuneration resolution dealing with the Success Fee at the COI meeting in June 2021. If they had not done so and had approved the resolution, then this application would never have needed to be made.

Approving the Success Fee is a decision which the COI could have made itself, but did not. In that context, the COI members withdrawing their objections to the application is significant.

True it is that although they withdrew their objections, the Objectors did not state that they approved of the application. But in the context of this case, having objected and been given the opportunity to put evidence and submissions before the Court, the fact is that they elected to withdraw their objections and take no part in the hearing.

While in the circumstances of this case I do not consider the lack of opposition by creditors, particularly the COI members, to be determinative, I do give it some weight. I do not consider it to be determinative as the other matters which I have referred to above all tend towards the Court approving the application.

Ninthly, the statutory provisions and the case law do not mandate a particular method of calculating a liquidator’s remuneration and they also contemplate a mixture of methods in some instances. Rather, whatever method or methods are chosen, the Court must be satisfied that the remuneration is reasonable. In this instance, while I have been unable to locate any cases which have involved a success fee calculated as a percentage of recovery plus time-based costing, nor have I located any cases which would preclude such an approach. In addition, remuneration that comprises or includes a success fee or uplift is contemplated by the Code applicable to insolvency practitioners.

For all of the reasons set out above, I consider it appropriate to make orders that the Liquidators’ remuneration include the Success Fee, since I regard the payment of the Success Fee in the manner contemplated by the CFA Funding Agreement, along with the Liquidators’ time-based remuneration, to be reasonable remuneration in all of the circumstances of this case.

Conclusion

It follows that the plaintiffs’ application that the Liquidators’ remuneration include the Success Fee will be granted.

The plaintiffs’ solicitors are to provide a draft form of order giving effect to this judgment to my Chambers.

[2022] VSC 693

16 November 2022