Commissioner of Inland Revenue v Apollo Bathroom and Kitchen Limited (in liq)
[2018] NZHC 18
•26 January 2018
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
Restricted access to certain affidavit evidence – see para [26].
CIV-2017-404-1056 [2018] NZHC 18
UNDER the Companies Act 1993 IN THE MATTER OF
the liquidation of APOLLO BATHROOM AND KITCHEN LIMITED
BETWEEN
COMMISSIONER OF INLAND REVENUE
Plaintiff
AND
APOLLO BATHROOM AND KITCHEN LIMITED (IN LIQ)
Defendant
CIV-2017-404-1057
UNDER the Companies Act 1993
IN THE MATTER OF the liquidation of AUNZ INVESTMENT GROUP LIMITED (In Liq)
BETWEEN COMMISSIONER OF INLAND REVENUE
Plaintiff
ANDAUNZ INVESTMENT GROUP LIMITED (IN LIQ)
Defendant
Hearing: On the papers Appearances:
M J Tingey and J E M Lethbridge for the Liquidators
Judgment:
26 January 2018
COMMISSIONER OF INLAND REVENUE v APOLLO BATHROOM AND KITCHEN LIMITED (IN LIQ) [2017] NZHC 18 [26 January 2018]
JUDGMENT OF ASSOCIATE JUDGE R M BELL
This judgment was delivered by me on 26 January 2018 at 2:00pm
pursuant to Rule 11.5 of the High Court Rules
………………………………………………….
Registrar/Deputy Registrar
[1] The liquidators, Messrs Bridgman and Sanson, apply for orders adjusting their rates of remuneration. When I ordered both companies into liquidation on
22 September 2017 and appointed them, I prospectively approved their remuneration at the following hourly rates (exclusive of GST and expenses):
Liquidators and directors $375.00-$450.00
Associate directors $300.00-$375.00
Managers $240.00-$300.00
Senior associates $190.00-$240.00
Associates $130.00-$190.00
Support staff $110.00
The approval of those rates was subject to the usual condition that at the end of the liquidation the liquidators are to apply for approval of their overall remuneration. The liquidators now propose these increased hourly rates:
Liquidator and partners $485.00-$550.00
Associate directors $395.00-$485.00
Managers $315.00-$385.00
Senior associates $250.00-$315.00
Associates $190.00-$250.00
Support staff $140.00
[2] The liquidators’ rates I approved are the same as those approved in 2004 in Commissioner of Inland Revenue v Summerset Contracting Ltd.1 The liquidators have not increased them since. Their case is that because of inflation over the last 13 years an increase is required to meet rising costs. The liquidators do not say that these two liquidations have special features that warrant an increase over their standard remuneration. Instead, if the court approves their application, they intend to seek approval of the new rates in all future liquidations.
The companies
[3] Both companies were ordered into liquidation because they were unable to pay their debts. Together, they owe the Commissioner of Inland Revenue approximately
$5 million in unpaid taxes. Both companies were associated with Mr York Yu, who was adjudicated bankrupt on 1 June 2017 on an application by the Commissioner. The liquidators say that AUNZ Investment Group Ltd operated as a commercial immigration consultant, in real estate development and funds management, and was used as a vehicle to attract wealthy Chinese to invest in or migrate to New Zealand. It was involved in a number of real estate developments. The Commissioner of Inland Revenue is not the only creditor. Apollo Bathroom and Kitchen Ltd operated as a kitchen and bathroom manufacturer and installer. Its business was allegedly sold before liquidation. The liquidators say that they have not been able to obtain business records of AUNZ Investment Group Ltd and that Mr Yu has not been helpful. They have limited information to work on. The liquidators say that they will need to spend significant time and resources investigating the circumstances relating to the failure of the companies and they cannot estimate the time required or the likely recoveries.
The law on liquidators’ remuneration – statute and case law
[4] The Companies Act 1993 has these provisions for remuneration of liquidators appointed by the court:
1 Commissioner of Inland Revenue v Summerset Contracting Ltd HC Auckland, CIV-2004-404-
1618, 29 November 2004.
276 Remuneration of liquidators
…
(2) Unless the court otherwise orders, every Official Assignee who is appointed a liquidator under paragraph (a) of subsection (2) of section
241 and every liquidator appointed under paragraph (c) of that subsection shall charge remuneration either—
(a) of an amount equal to the amount fixed under section 277; or
(b) at, or in accordance with, such rate or rates as may be prescribed under that section.
277 Rates of remuneration
(1) The Governor-General may from time to time, by Order in Council, for the purposes of section 276, make regulations fixing an amount or prescribing a rate or rates in respect of the remuneration of liquidators to which that section applies.
(2) Without limiting subsection (1), such regulations may—
(a) prescribe an hourly or other rate or rates of remuneration and different rates may be prescribed in respect of work undertaken in the liquidation by different classes of persons:
(b) prescribe a rate or rates by reference to the net value of the assets realised by the liquidator, together with such other amounts as may be specified:
(c) prescribe a rate or rates in respect of the exercise of a particular function or power:
(d) prescribe a rate or rates by reference to such other criteria as may be specified.
278 Expenses and remuneration payable out of assets of company
The expenses and remuneration of the liquidator are payable out of the assets of the company.
284 Court supervision of liquidation
(1) On the application of the liquidator, a liquidation committee, or, with the leave of the court, a creditor, shareholder, other entitled person, or director of a company in liquidation, the court may—
…
(e) in respect of any period, review or fix the remuneration of the liquidator at a level which is reasonable in the circumstances:
(f) to the extent that an amount retained by the liquidator as remuneration is found by the court to be unreasonable in the circumstances, order the liquidator to refund the amount:
[5] The Companies Act 1993 Liquidation Regulations 1994, Reg 28 provides:
Remuneration of certain liquidators
(1) Unless the court otherwise orders under s 276(2) of the Act, the remuneration of every Official Assignee who is appointed a liquidator under paragraph (a) of subs (2) of s 241 of the Act and every liquidator appointed under paragraph (c) of that subsection, is the greater of either –
(a) an amount of $2,000; or
(b) a fee calculated on an hourly rate in accordance with the following:
(i) for work undertaken by the liquidator, including any deputy Official Assignee where the liquidator is the Official Assignee, $230.00 per hour or part of an hour:
(ii) for work undertaken by an accountant or solicitor employed by the liquidator, $230.00 per hour or part of an hour:
(iii) for work undertaken by any other employee of the liquidator, $160.00 per hour or part of an hour.
(2) The amount and hourly rates specified in subclause (1) are exclusive of goods and services tax under the Goods and Services Tax Act 1985.
These rates were set by the Companies Act 1993 Liquidation Amendment Regulations
2016 (LI 2016/35) Reg 4(1).
[6] In Re Roslea Path Ltd (in liq)2 a Full Court reviewed the court’s approach on applications to approve liquidators’ remuneration. It noted that in many cases the number and value of individual creditors will not be sufficient to provide an incentive for any single creditor to apply to the court to review fees charged by the liquidators. This required the court to act in a more protective manner. The court determines the fairness and reasonableness of the charges. That is measured against the work undertaken and the result achieved. Fair and reasonable remuneration is reflected in the value of services to the creditors in the company liquidation, and possibly to shareholders if there is a surplus. Value goes beyond mathematical calculation of
hourly rates to hours spent by individuals involved in administering the company’s
2 Re Roslea Path Ltd (in liq) [2013] 1 NZLR 207 (HC).
affairs. The remuneration had to be proportionate to the nature, complexity and extent of the work undertaken. It noted the passing of the swings-and-roundabouts approach when remuneration was fixed by commission, with the associated cross–subsidisation between liquidations.
[7] Amongst other things, the court said:
[112] Insolvency law requires relevant principles to be applied in a pragmatic way. The fact that liquidators administer an insolvent company dictates the need for efficient and effective procedures to be in place to realise assets and distribute the net proceeds to creditors. A balance must be struck between the need for liquidators to comply with duties imposed (see ss 253-258A of the 1993 Act), while doing so in a cost-efficient manner. That is emphasised by s 253 which requires the liquidators’ primary duty (realising assets for distribution among creditors), to be carried out “in a reasonable and efficient manner”.
…
[115] The quest is for a predictable régime in which a proportion of cost is applied to obtain a judicial order fixing remuneration.
…
[118] The public policy reason for requiring court sanction is to protect creditors who may not, because of the likely return to them, have a sufficient incentive to challenge the legitimacy of the remuneration claimed.
…
[122] Nobody suggests that prospective applications should be discontinued. They are beneficial. They provide a certain basis on which liquidators can perform tasks at rates in excess of those set by the 1994 Regulations, as amended. Creditors are not prejudiced by the process because the court retains the right to fix the final remuneration at the time the liquidation is finalised. Even if the liquidators have distributed final dividends to creditors, the Court retains jurisdiction to order that any unreasonable remuneration retained be refunded, in such a manner as the Court thinks fit: see s
284(1)(f).
…
[125] We are attracted to the approach taken by Associate Judge Gendall … in which remuneration is approved at the time the company is put into liquidation. That approach can be justified on the application of principles of proportionality and professional integrity. It involves the approval of remuneration on a prospective basis, subject to s 284 of the 1993 Act. We interpret his approach as requiring a liquidator to
apply under s 284(1)(e) to “fix the remuneration of the liquidator” at the time the liquidator finalises the administration. That is the basis on which our views have been formed.
[126] The critical issue in relation to “proportionality” is to ensure that the assets of the company are not depleted unduly by a requirement to incur costs which is disproportionate to the benefits gained from a prospective order. …
[127] Application of the principle of “professional integrity” will require some changes to court processes. At present, individual creditors nominate liquidators, many of whom are known to and respected by the Court. …
[128] The discretion to appoint a liquidator is unqualified. In our view, confidence, integrity, independence and impartiality are the fundamental pre-requisites for liquidators appointed by the Court.
…
[130] If the person nominated has been frequently appointed by the Court, and the Court has gained knowledge of competence, integrity, independence and impartiality, the requisite trust and confidence is likely to be present. …
The liquidators
[8] The liquidators are members of PwC, which has a substantial insolvency practice across the country and is currently handling about 500 liquidations. The Auckland office is presently handling about 240 liquidations. PwC is one of three insolvency practices regularly proposed by the Commissioner of Inland Revenue as liquidators to be appointed by the court. The Commissioner of Inland Revenue brings far more liquidation applications than anyone else. In my experience, most court- ordered liquidations handled by PwC are for small to medium-sized businesses.
[9] I have considered many applications by PwC for approval of overall remuneration at the end of liquidations. I have invariably approved the remuneration sought, being satisfied that the amounts claimed were reasonable in the circumstances. PwC liquidators have a justifiable reputation for competence, integrity, independence and impartiality. Their reports show that they carry out their work efficiently.
The application for increased rates
[10] A starting assumption is that the rates approved in 2004 were reasonable then. Associate Judge Faire would not have approved them if they were not. There is nothing to suggest it would not be safe to work on that assumption. That leads to the question: what has changed since then which makes those rates unreasonable now?
[11] Some matters have not changed. Basic tasks undertaken by a liquidator remain broadly the same. Mr Sanson explains that the most likely areas of potential recovery typically involve overdrawn shareholder accounts, voidable transactions, or other suspect transactions with parties related to the company in liquidation. I note that following the decision of the Supreme Court in Allied Concrete Ltd v Meltzer,3 liquidators’ efforts have moved from voidable transactions to pursuing directors for alleged breaches of duty, for example, reckless trading, trading while insolvent and failing to keep proper books and records. Mr Sanson notes that the prospects of recovery need to be assessed on a cost-benefit analysis. There is an inherent uncertainty whether liquidators will be able to recover. He says it is a complex area requiring detailed understanding of technical rules, strong forensic accounting know- how experience and commercial judgment. The complexity of a liquidation will vary according to the availability of books and records, the co-operation of directors, the motivation of defendants to settle recovery action and the obligation to report to regulatory authorities.
[12] Mr Sanson also makes the point that in many liquidations there is little or no recovery and they cannot recover remuneration in full at rates approved by the court. On liquidation there may be few assets left in the company and no apparent claims against solvent entities. A substantial amount of work is still required to attend to administrative matters. But that has always been a feature of insolvency work. It has not changed since 2004.
[13] The liquidators have also raised certain matters which I do not regard as relevant to the present application. They refer to higher rates of remuneration (up to
$650 per hour) approved for complex liquidations – the Equiticorp group of companies
3 Allied Concrete Ltd v Meltzer [2015] NZSC 7, [2016] 1 NZLR 141.
and the New Zealand subsidiaries of the Australian HIH Group of insurers. As large- scale liquidations running for many years and involving real complexity they do not provide benchmarks for the more run-of-the-mill liquidations handled by these liquidators.
[14] They also refer to PwC’s work for the government on “All of Government rates” charged by PwC for any work for any government department. Those rates do not apply when PwC are appointed liquidators, because the work is charged to the company, rather than to the government. I am required to assess reasonable remuneration for an insolvency practitioner on the liquidation of small to medium- sized companies. That is distinct from other work undertaken for the government. Different measures of remuneration apply to different work. The rates paid by the government for other work do not bear on the present case.
[15] The liquidators say that there will be increasing regulation of insolvency practitioners. That may come under the proposed Insolvency Practitioners Bill,4 by the Restructuring, Insolvency and Turnaround Association of New Zealand or under proposals by the Insolvency Working Group.5 They say that will increase the costs of managing liquidations. I assume that these will be part of the costs of practice to be recovered from their remuneration generally, rather than specific expenses or tasks that may be charged directly to a liquidation. They do not say that any such costs have impacted on any liquidations yet. It is no more than an anticipated increased cost. Nor do they attempt to quantify the increased costs. This part of their case is premature. I am required to assess their remuneration on the basis of current costs of practice, not conjectural costs that they may not incur. If complying with increased regulation leads to significant increased costs that justify a review of rates of remuneration, the liquidators may of course apply for a review of their rates.
[16] More relevantly, the liquidators have shown that between the fourth quarter of
2004 and the third quarter of 2017 the general consumer price index has increased by
4 Insolvency Practitioners Bill 2010 (141-2). There has been no progress on this bill since its second reading in November 2013.
5 See Review of Corporate Insolvency Law, Report No 1 of the Insolvency Working Group, July
2016: group/insolvency-practitioner-regulation-and-voluntary-liquidations/report-no-1-insolvency- practitioners-regulation-and-voluntary-liquidations.pdf.
30 per cent. The wage consumer price index has increased by around 49 per cent in the same period. The liquidators say that salaries are their highest costs, and those have increased by 45 per cent since 2004 reflecting changes in the market.
[17] I accept the liquidators’ case that the increased costs in administering a liquidation give support for increasing the rates of remuneration. If insolvency practitioners are to continue to administer liquidations to the required standards of competence, integrity and efficiency, they need to retain skilled staff and receive a return adequate to allow them to continue in business. The risk in not adjusting remuneration to take account of increasing costs is that insolvency practitioners, unable to offer competitive salaries, will not attract staff or will lose staff. The increased costs therefore justify an increase in the rates of remuneration.
[18] That is supported by the Commissioner of Inland Revenue. By a letter of 1
December 2017, the principal adviser (collections) of the Inland Revenue Department has consented to the increased rates of remuneration. That consent is significant. The Commissioner of Inland Revenue brings far more liquidation applications than anyone else. She is an informed user of insolvency practitioners. On many applications for approval of remuneration, I have found that the Commissioner is invariably directly affected by any potential adjustment to the remuneration. In many cases the funds available for creditors may not be enough to pay off preferential creditors in full, let alone pay anything towards unsecured creditors. The Commissioner is invariably a preferential creditor in most insolvent liquidations: for PAYE, child support deductions, student loan deductions, KiwiSaver and GST. As a matter of practice, I tend to ask liquidators to refer their applications to the Commissioner for comment, as the creditor who will benefit from any reductions in remuneration claimed. The Commissioner has never objected to the remuneration sought by PwC liquidators. As an informed creditor, the Commissioner no doubt appreciates that any increase in remuneration for liquidators will result in less available for creditors, including herself as a preferential creditor, and she is more likely to receive reduced distributions than ordinary unsecured creditors.
[19] The liquidators also refer to rates of remuneration approved for other insolvency practices, whom the Inland Revenue regularly propose as liquidators –
KPMG and Deloitte. PwC’s rates are the lowest of the three. In the past, I have used the PwC rates as a benchmark to assess rates claimed by other insolvency practitioners. I have tended not to approve remuneration higher than $500 per hour exclusive of GST. I accept that if I approve increases to PwC, other insolvency practitioners may also request approval for corresponding increases. In short, I accept that this decision may apply more widely than to PwC.
[20] The liquidators have shown that the proposed increases are reasonable. If the
2004 rates were increased by either the general CPI increase or the wage CPI increase, the rates would be higher than those proposed.
[21] While the liquidators’ application is only for the liquidations of AUNZ Investment Group Ltd and Apollo Bathroom and Kitchen Ltd, there are no unusual features about these liquidations. The prospects of a substantial recovery for creditors may not look promising at this stage, but that is not uncommon. The liquidators have not identified any matters of special complexity. Instead they have made out a case for increased remuneration generally.
Outcome
[22] As I am satisfied that the liquidators’ application is appropriate, I approve the new rates as applied for. Those rates will apply for all work undertaken as from the date of this decision. The rates approved when the liquidation orders were made will apply up until the date of this decision. The liquidators asked for back-dated orders to take effect from the liquidation orders, but that would require a recall of the original orders. I see no basis for revisiting them.
[23] The liquidators will still be required to apply for approval of their overall remuneration at the end of the liquidations. The court’s determination of the overall remuneration will be the “order otherwise” under s 276(2) of the Companies Act, without which the liquidators will be held to the rates in that section and in reg 28 of the Companies Act 1993 Liquidation Regulations.
[24] I reserve leave to the liquidators to apply for review of the rates approved in this decision, but any such applications should not be made more frequently than every six months. They should be supported by evidence from another suitably qualified and experienced insolvency practitioner.
[25] The liquidators applied without notice. While the Commissioner of Inland Revenue, a major creditor in both liquidations, consented to the rates sought, other creditors do not know about the application or this decision. They should have the opportunity to seek a review of this decision, in addition to any review of the overall remuneration at the end of the liquidation under s 284(1). These applications are significant events in the liquidations and should be reported to creditors.6 I direct the liquidators to advise creditors in their next reports under s 255(2)(d) of the Companies Act of their applications, this decision and the creditors’ ability to seek a review of the rates of remuneration under s 284(1)(e). The liquidators are to file in court copies of their next reports to show that they have complied with this.
Suppression
[26] The liquidators also sought orders suppressing some of the information in
Mr Sanson’s affidavit. I accept that the information is confidential to PwC. I have not relied on it, as it is irrelevant. I find that the following parts of Mr Sanson’s affidavit are confidential: paragraphs 24(c), 27-29 and 34. I order that those parts are not to be published. For any application for access to the court file, those parts of his affidavit are to be redacted. Access to the court file will be allowed only by order of a Judge. I have considered the matters under r 12 of the Senior Courts (Access to Court Documents) Rules 2017. After the substantive decision, under r 13(c) open justice does not require access to documents that I have not relied on. The protection of confidentiality after the substantive decision has greater weight than while I considered the matter on the papers. The protection of confidentiality in the parts of Mr Sanson’s affidavit outweighs the principle of open justice under r 12(e) and the freedom to seek information under r 12(f). The restrictions on access are the minimum
required to protect the confidential information.
6 Companies Act 1993, s 255(2)(d)(i).
[27] On 22 September 2017 I made an order allowing a journalist with the National Business Review access to these files. That was before the present applications. The access restrictions in this decision apply to the liquidators’ applications only, not to the Commissioner’s liquidation applications.
……………………………….
Associate Judge R M Bell
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