Re Traditional Values Management Ltd (In Liq) (No 3)
[2016] VSC 475
•12 August 2016
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
S CI 2011 01355
IN THE MATTER of TRADITIONAL VALUES MANAGEMENT LIMITED
(IN LIQUIDATION) (ACN 055 106 100)
| GEOFFREY NIELS HANDBERG AND BRENT LEIGH MORGAN (in their capacity as joint and several Liquidators of Traditional Values Management Limited (in liquidation) (ACN 055 106 100)) | First Plaintiffs |
| v | |
| TRADITIONAL VALUES MANAGEMENT LIMITED (in liquidation) (ACN 055 106 100) | Second Plaintiff |
---
JUDGE: | GARDINER AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 15 July 2016 |
DATE OF JUDGMENT: | 12 August 2016 |
CASE MAY BE CITED AS: | Re Traditional Values Management Ltd (In Liq) (No 3) |
MEDIUM NEUTRAL CITATION: | [2016] VSC 475 |
---
CORPORATIONS – External administration – Application by liquidators of responsible entity of managed investment scheme for remuneration – Further application – Whether liquidators entitled to be reimbursed for costs and remuneration incurred in defending legal proceedings commenced against them personally.
---
APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr J Moore QC | Mills Oakley Lawyers |
| For the Defendant | Ms A Tuziak, solicitor | K&L Gates Lawyers |
HIS HONOUR:
Introduction
By an interlocutory process dated 18 May 2016, the first plaintiffs, Messrs Handberg and Morgan (‘the liquidators’) seek orders determining their remuneration and expenses for the performance of their responsibilities as the liquidators of Traditional Values Management Limited (in liquidation) (‘TVM’).
The application follows two earlier applications in that regard which were the subject of reasons and orders of 14 December 2012 (‘the first remuneration judgment’),[1] and 9 April 2015 (‘the second remuneration judgment’).[2] Those applications dealt with earlier periods in the insolvency administration of TVM. On 15 July 2015, I also determined the remuneration of Mr Andrew Hewitt, who was appointed as a special purpose liquidator of TVM by Ferguson J, for part of the work Mr Hewitt had performed in that role.
[1]IMO Traditional Values Management Ltd (in liq) [2012] VSC 650.
[2]Re Traditional Values Management Ltd (In Liq) (No 2) [2015] VSC 126.
The present application seeks determination of remuneration and expenses for the period 1 January 2014 to 30 September 2015. This application also seeks directions in relation to remuneration and expenses incurred in a proceeding in which the liquidators were joined as defendants. That proceeding shall be referred to in these reasons as the Personal Liability Proceeding.[3]
[3]Proceeding S CI 2014 3254.
The liquidators have sought leave to file an amended interlocutory process which corrects typographical errors. The application is supported by an affidavit of Geoffrey Niels Handberg, one of the first plaintiffs, sworn 13 May 2016 (‘Mr Handberg’s affidavit’). Mr Handberg has sworn nine previous affidavits in support of the earlier applications.
The background to the insolvency administration of TVM is contained in the reasons provided by me in the first remuneration judgment.[4] This series of applications are made consequent of orders made by Ferguson J (as she then was), on 14 June 2011 in respect to the remuneration and expenses of the liquidators (‘the 14 June 2011 orders’). The effect of those orders is summarised in paragraphs [1] to [5] of the reasons that I gave in regard to the first remuneration judgment.
[4][2012] VSC 650 at [12]-[17].
On 26 August 2011, the liquidators filed an interlocutory process seeking determination of their remuneration in respect of the period when the company was under administration and for the period of the liquidation up to 8 July 2011. This application was the subject of the first remuneration judgment and orders made by me on 14 December 2012.
On 19 August 2014, the liquidators filed an interlocutory process seeking determination of their remuneration again both for when the company was in administration and for the period of the liquidation up to 31 December 2013. They are the subject of the second remuneration judgment and orders made by me on 9 April 2015.[5]
[5][2015] VSC 126.
The total remuneration the liquidators have drawn to date is as follows:
(a) $36,952.50 for TVM related work for the period from 17 December 2009 to 31 March 2015;
(b) $178,634.82 for TVM and scheme related work for the period from 17 December 2009 to 2 February 2010;
(c) $1,519,886.50 for TVM and scheme related work for the period from 3 February 2010 to 8 July 2011; and.
(d) $1,546,124.00 for TVM and scheme related work for the period from 9 July 2011 to 31 December 2013.
The Current Remuneration Application
On 20 June 2016, Croft J ordered that any interested person wishing to be heard in this application must file and serve upon the liquidators:
(a) a Notice of Objection to the remuneration claimed by the liquidators; and
(b) an outline of submissions in support of the objection.
In this context, the ‘interested persons’ the subject of that order included Mr Neil Campbell (a representative unit holder in the scheme for which TVM was the responsible entity), the five largest unit holders who were also creditors and ASIC. These persons were required to be served under the terms of the 14 June 2011 orders.
On 22 June 2016, in accordance with the 14 June 2011 orders, the liquidators served on each of those interested persons:
(a) the order made by Croft J on 20 June 2016;
(b) the order of Croft J made in the Personal Liability Proceeding; and
(c) the original version of the proposed amended interlocutory process.
In an affidavit of Ken Lin of Mills Oakley Lawyers, the solicitors for the liquidators, sworn 14 July 2016, Mr Lin deposes to the service of the required documentation on the parties required to be served under the terms of the 14 June 2011 orders.
On 11 July 2016, the liquidators’ solicitors served an updated version of the proposed amended interlocutory process on the interested parties.[6]
[6]The proposed amended interlocutory process seeks to correct typographical errors in the interlocutory process.
In his affidavit of 14 July 2016, Mr Lin deposes that, as at the date of swearing his affidavit, the solicitors for the liquidators, Mills Oakley, had not received any objections from any party in relation to this application.
Mr Lin has made enquiries of the liquidators and been advised by Mr Handberg that on 9 June 2016, Mr Davine of ASIC contacted him in relation to the application. Mr Davine suggested that the report to unitholders dated 3 May 2016, which includes details of the total remuneration approved and drawn by the liquidators along with a summary of the work conducted to date by the liquidators, should be brought to the Court’s attention. Mr Davine informed Mr Handberg that ASIC would otherwise not appear at the hearing of the application.
The legal principles relevant to be applied to applications of the present character were summarised in the first remuneration judgment[7] and in the second remuneration judgment.[8]
[7][18]-[25], [40], [63]-[69].
[8][18], [20]-[21], [43]-[44], [48], [66].
At the hearing of this matter on 15 July 2016, Ms Alysha Tuziak, a solicitor from K&L Gates Solicitors, appeared on behalf of Mr Campbell, the contradictor appointed under the 14 June 2011 orders. Ms Tuziak indicated that K&L Gates had been provided with the materials upon which the liquidators relied in this application and she had spent some ten hours reviewing that material for the purpose of advising Mr Campbell as to whether he should oppose or object to the current application. She has provided the Court with copies of several letters she has written to Mr Campbell, together with two file notes which she compiled when carrying out her review of the remuneration report for the purpose of advising Mr Campbell. It is obvious by reference to her detailed file notes that Ms Tuziak has examined the material quite closely. In the previous applications, Mr Campbell did make objections to the applications and was represented by Mr Galvin of Counsel. On this occasion, after the consideration of the material relied upon by the liquidators, Mr Campbell decided not to object to the application. The Court takes comfort from the fact that the contradictor’s advisors have reached this view after conducting a close consideration of the liquidators’ material.
The remuneration report, which is exhibited to Mr Handberg’s tenth affidavit,[9] is in very similar form to the previous reports of that type respectively exhibited to his fifth and seventh affidavits. The nature of that documentation is described in paragraph 19 of my reasons given in relation to the second remuneration application. I consider that the material contained within the remuneration report exhibited to Mr Handberg’s tenth affidavit enables me to assess the ‘prima facie’ criterion described in Venetian Nominees Pty Ltd v Conlan[10] and the other authorities referred to in my reasons given in the first remuneration application.
[9]Exhibit ‘GNH-48’ in Mr Handberg’s tenth affidavit.
[10](1998) 20 WAR 96.
In the course of considering the liquidators’ evidence, I selected 60 entries in the spreadsheets contained in the remuneration report. These items, which were selected randomly from within each of the separate job code or task categories, claimed an amount in excess of $1,000 for that item. I have reviewed those items more closely and consider that the tasks performed were necessary, that the time taken to perform them appeared to be reasonable and that the person who performed them appeared to be of the appropriate level within the liquidators’ firm to carry out such tasks.
The remuneration report is divided into the following three sections:
(a) an overview of total remuneration claimed;
(b) detailed summaries of the remuneration claimed under each of the following nine job codes (‘job codes’) with the ninth of the categories being divided into four sub categories of task;
(i) BDT[11]/TVM general activities;
[11]Blue Diamond Trust.
(ii) BDT/TVM remuneration application;
(iii) Personal loan assets;
(iv)Alma Group;
(v) ADF[12] loans;
[12]Advantage Direct Finance.
(vi)Spencer and Perovich;
(vii) BDT general activities;
(viii) Legal claims;
(ix) (a) Philistin Fraud;
(b) Special Purpose Liquidator proceeding;
(c) the Personal Liability proceeding;
(d) Terms of Settlement proceeding; and
(c) a breakdown of staff members’ hourly rates from the date of the appointment and their various qualifications (‘Rates and Qualifications Section’).
The overview sets out the overall quantum of remuneration claimed and the total quantum claimed under each of the job codes. It also sets out a description of each of the seven categories of tasks performed by the liquidators and their staff, within the Australian Restructuring Insolvency and Turnaround Association’s (‘ARITA’) recommended format for remuneration reports to creditors.
I consider that the rates charged by the liquidators for their time and that of the various members of their staff are reasonable, having regard to the prevailing rates charged by liquidators in this State. Ms Tuziak accepted that the rates charged were appropriate.
Application of Statutory Criteria
As I indicated in my first remuneration judgment,[13] I consider it appropriate, in this series of applications, to apply the statutory criteria prescribed by s 473(10) of the Corporations Act 2001 (Cth) (‘the Act’). I have previously held that the administration and liquidation of TVM were ‘at the higher end of complexity and involve considerable responsibilities on the part of the liquidators’.[14] These responsibilities included the following:
[13][2012] VSC 650 [9], [10] and [11].
[14]The first remuneration judgment at [64].
(a) TVM is the responsible entity of a registered managed investment scheme, and the liquidators have been required to attend to all matters relating to the winding up of the scheme;
(b) the liquidators have had to conduct a detailed review of the books and records of TVM, which comprise approximately 456 boxes and over 100,000 digital documents. The events referred to in those records, and which have been the subject of proceedings instituted by the liquidators, span several decades;
(c) the liquidators have had to preserve and realise assets of the BDT, including enforcing various securities granted to TVM;
(d) the liquidators have investigated the validity of the charge held by the secured creditors of TVM over the timeshare loans, and the issues relating to that charge were the subject of legal proceedings;
(e) the liquidators have reported to the secured creditors of TVM in respect of their security and administering payments to the secured creditors of TVM;
(f) the liquidators have had to investigate fraud perpetrated by Ms Philistin, a former employee of TVM, out of which the following occurred:
(x) proceedings were initiated against two directors and a service company of TVM for their failure to identify the fraudulent conduct;
(xi) a special purpose liquidator, Mr Andrew Hewitt, was appointed over TVM due to potential conflict of interest issues arising from the fraudulent conduct;
(xii) proceedings were initiated by two secured creditors against the liquidators personally for their failure to identify the fraudulent conduct earlier;
(xiii) the secured creditors initiated proceedings under s1321 of the Act challenging the liquidators’ decision to reject unsecured claims on the basis of terms of settlement executed prior to the discovery of the fraudulent conduct;
(g) the liquidators have also instituted or defended numerous legal proceedings in relation to:
(i) the winding up of the BDT;
(ii) compelling the release of books and records from TVM’s former directors and former service provider, Dantay Pty Ltd;
(iii) relief sought from the Australian Securities and Investments Commission in relation to TVM’s compliance with the requirements of s 601HG of the Act;
(iv) transfer of units of BDT;
(v) the validity of the charge held by TVM’s secured creditors over the timeshare loans;
(vi) public examinations of 11 different examinees over 25 administrative and hearing days in the Federal Court of Australia;
(vii) legal claims against various parties, including:
(a) secured creditors relating to the validity of a charge over certain timeshare loan book assets;
(b) unit holders seeking repayment of moneys arising out of overpayments of distributions and redemptions (including counterclaims initiated by some unitholders for, inter alia, misleading and deceptive conduct TVM’s behalf);
(c) a variety of claims against the auditors, accountants, directors and personnel associated with the management of the BDT relating to, inter alia, the audit or accounting services provided to TVM and the mismanagement of TVM generally;
(viii) the liquidators’ remuneration applications; and
(ix) the liquidators have assessed and quantified losses suffered by BDT, based on the books and records of TVM and BDT, for the purposes of the various legal proceedings.
On my review of the remuneration report, I am satisfied that it complies with the requirements of r 9.4(7) of the Supreme Court (Corporations) Rules 2013 and establishes that the remuneration sought is, prima facie, fair and reasonable. The remuneration report also addresses the matters mentioned in s 473(10)(a) to (l) of the Act, and the same factors which led me to conclude that the remuneration claimed should be allowed without reduction in the previous applications, are also apposite for consideration in this application.
The Personal Liability Proceeding
There is one feature of this application which sets it apart from the previous applications. The liquidators seek orders that their remuneration and expenses incurred in relation to the Personal Liability Proceeding should be paid from Scheme Assets as that expression is defined in the 14 June 2011 orders.
In that proceeding, the liquidators were sued personally and TVM was not a defendant in the proceeding. No claim was made in the Personal Liability Proceeding against the Scheme Assets. As such, the work performed in relation to defending the proceeding was not covered by the categories of work specified in the definition of ‘Remuneration’ in the 14 June 2011 orders. The Personal Liability Proceeding was not commenced until 2014 and its existence could not have been contemplated by the liquidators or Ferguson J.
Under the orders of Croft J, the question as to whether the liquidators are entitled to be indemnified out of the Scheme Assets for their expenses and remuneration in respect of the Personal Liability Proceeding has been referred to me.
The insurance held by the liquidators in connection with their practice as insolvency practitioners covered all of the legal costs incurred in defending the Personal Liability Proceeding, subject to the payment of a deductable of $60,000. The liquidators have paid that deductible out of their own funds and they apply for an order that they be indemnified for that payment.
There is a well-established general rule that liquidators who are acting as such and are defendants in proceedings will be entitled to recourse to the assets of the company to fund their costs and to satisfy any costs order against them.
In Re Wilson Lovatt & Sons Ltd[15] Oliver J said:
I can quite see that there may be very powerful reasons of policy for a rule that a liquidator, when carrying out his functions and thus subjecting himself to the possibility of proceedings against him by parties who are discontented with the way in which he has carried out those functions, must be entitled to defend himself without being subjected to the risk of having costs awarded against him personally, because of course he cannot protect himself against claims being made.
Unless there were some such rule it might be very difficult to get persons to take on the heavy responsibility of the liquidation of companies.[16]
[15][1977] 1 All ER 274.
[16]At [285].
Re Wilson Lovatt, and the general principle for which it stands, has been cited and applied on many occasions.[17]
[17]Cuthbertson & Richards Sawmills Pty Ltd v Thomas (No 2) [1999] FCA 1789 (Full Crt) at [9]; Silvia v Brodyn Pty Limited [2007] NSWCA 55 at [52]; Lardis v Free [2014] FCA 304 at [39].
That entitlement is based on the fact that the position of a liquidator is analogous to that of a trustee, including a trustee in bankruptcy. In Adsett v Berlouis,[18] a case involving this principle in a bankruptcy setting, the Full Federal Court in a joint judgment,[19] approved the following passage from In re Beddoe; Downes v Cottam:[20]
I entirely agree that a trustee is entitled as of right to full indemnity out of his trust estate against all his costs, charges, and expenses properly incurred: such an indemnity is the price paid by cestuis que trust for the gratuitous and onerous services of trustees; and in all cases of doubt, costs incurred by a trustee ought to be borne by the trust estate and not by him personally. The words “properly incurred” in the ordinary form of order are equivalent to “not improperly incurred”.
[18](1992) 37 FCR 201.
[19]At [211].
[20][1893] 1 Ch 547 at 558 per Lindley LJ.
Similarly, Bowen LJ said at 562:
A trustee can only be indemnified out of the pockets of his cestuis que trust against costs, charges, and expenses properly incurred for the benefit of the trust – a proposition in which the word “properly” means reasonably as well as honestly incurred. While I agree that trustees ought not to be visited with personal loss on account of mere errors in judgment which fall short of negligence or unreasonableness, it is on the other hand essential to recollect that mere bona fides is not the test ....
In Silvia v Brodyn Pty Ltd,[21] Hodgson JA (with whom Ipp JA and Basten JA agreed) summarised the principles in relation to costs orders against a liquidator at [51]-[54] as follows:
The liquidator would generally be entitled to an indemnity from the assets of the company, although that may be denied if the liquidator has acted unreasonably ...
If proceedings brought against the liquidator are successful, generally a costs order will be made in such a way that the liquidator does not incur any personal liability...
However, if the liquidator has acted unreasonably in defending the litigation, the liquidator may be made personally liable.
[21][2007] NSWCA 55.
In many of the relevant cases concerning costs orders, it is observed that:
[w]hen a liquidator is sued as such, he does not instigate the litigation, has no real choice about whether to take part in the litigation, and in the vast majority of cases in opposing the litigation he is seeking to protect the fund.[22]
[22]Hypec Electronics Pty Ltd (in liq) v Mead (2004) 61 NSWLR 169 at [86] per Campbell J.
It is irrelevant to a liquidator’s right of indemnity that, in defending the litigation brought against him or her, the liquidator was at the same time ‘defending his own character’.[23]
[23]Kirwan v Cresvale Far East Ltd (In liq) (2002) 44 ACSR 21 (NSWCA) at [259].
In SingTel Optus Pty Ltd v Weston (Costs),[24] Bergin CJ in Eq said that the discretion to deny an indemnity should be exercised with great caution and only in exceptional circumstances.[25]
[24][2012] NSWSC 1002 at [14].
[25]At [14].
As a general principle, the same approach which governs the entitlement of a trustee or liquidator to an indemnity for costs and expenses properly incurred, applies to a trustee’s or liquidator’s right to remuneration: ‘That is, the trustee’s right to remuneration is limited to work properly undertaken.’[26]
[26]Adsett v Berlouis (1992) 37 FCR 201 at [212].
The relevant litigation the subject of the Personal Liability Proceeding, was directly related to the work the liquidators performed in administering and winding up the affairs of TVM and the scheme for which it is the responsible entity. The liquidators were joined as defendants and had no choice other than to take part in it.
In defending the proceeding, it could be said the liquidators were not protecting the funds of TVM or the Scheme Assets. Instead, the plaintiffs sought to make the liquidators personally liable for losses they alleged they had suffered as a result of the liquidators’ conduct. If the proceeding had been successful, the liquidators would have paid any damages awarded personally, not TVM.
Mr Moore, senior Counsel for the liquidators, submits that in a real sense, the liquidators were in fact seeking to protect TVM’s position. Part of the claim involved an allegation that the plaintiffs, as secured creditors, were misled into entering into a settlement agreement of 10 April 2013. As pleaded, the plaintiffs did not seek to set aside the settlement agreement, but such a claim was open to the secured creditors, and could have been brought by either an amendment to the Personal Liability Proceeding or by a new proceeding. If the secured creditors had been successful, it is said they would be much more likely to go on to claim that the settlement agreement should be set aside. Any such claim would have been adverse to the interests of TVM's other creditors as the secured creditors’ claim might have impacted on the quantum of the Scheme Assets available for distribution to those other creditors.
In this respect, then, it is said that it was indirectly in the interests of creditors that the liquidators defend the Personal Liability Proceeding. Mr Moore submitted that the case is therefore similar to an application to remove a liquidator, where the benefit to the creditors might be similarly characterised as an indirect benefit (by seeking to save the additional costs that would be incurred if a new liquidator was appointed).
Mr Moore submitted that, in any event, it could not be said that the liquidators acted other than reasonably in defending the proceeding. The claim was based on an alleged failure by the liquidators to uncover earlier a fraud that had been perpetrated on TVM by Ms Philistin, an employee, and hidden by her from the directors and auditors for several years prior to liquidation. The special purpose liquidator, Mr Hewitt, concluded that the liquidators had not acted negligently, nor could the proceeding against the liquidators be said to have succeeded. Instead, the proceeding was settled for a very modest sum.[27]
[27]In confidential exhibit GNH-51.
For these reasons, it is submitted that the $60,000 in legal expenses incurred by the liquidators were properly and reasonably incurred and thus the liquidators ought to be indemnified out of the Scheme Assets for that sum. I agree with that submission and I will make an order in that regard.
Equally, it was submitted that the work performed by the liquidators in relation to the Personal Liability Proceeding was reasonably undertaken. That work[28] gives rise to a relatively modest amount of remuneration of just over $78,000. That too should, it is submitted, be met out of Scheme Assets and again, I agree and I will so order. I consider that the amount claimed for remuneration by the liquidators appears to be fair and reasonable in the circumstances and, on an application of the discretionary criteria mentioned in s 473(10)(a) to (l) of the Act, no reduction in the amount claimed is warranted. I will hear counsel on the form of order required to effect these reasons.
[28]Category 9(c) of the second part of the remuneration report.
4
10
0