Commissioner of Inland Revenue v Heera Horticulture Limited (in liquidation)
[2022] NZHC 2055
•18 August 2022
IN THE HIGH COURT OF NEW ZEALAND TAURANGA REGISTRY
I TE KŌTI MATUA O AOTEAROA TAURANGA MOANA ROHE
CIV-2020-470-42
[2022] NZHC 2055
UNDER the Companies Act 1993 IN THE MATTER
of the liquidation of HEERA HORTICULTURE LIMITED (in
liquidation)
BETWEEN
THE COMMISSIONER OF INLAND REVENUE
Plaintiff
AND
HEERA HORTICULTURE LIMITED (in
liquidation) Defendant
Hearing: On the papers Counsel:
Memorandum filed by the Liquidators dated 14 July 2022
Judgment:
18 August 2022
JUDGMENT OF ASSOCIATE JUDGE SUSSOCK
[Approval of Liquidators’ Remuneration]
This judgment was delivered by me on 18 August 2022 at 3.30pm pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors:
KPMG, Auckland
THE COMMISSIONER OF INLAND REVENUE v HEERA HORTICULTURE LTD (in liq) [2022] NZHC 2055 [18 August 2022]
Introduction
[1] The liquidators of Heera Horticulture Limited (in liquidation), Ms Elizabeth Helen Keene and Ms Janet Sprosen of KPMG, have applied for the approval of their overall remuneration of $46,478.50.
[2] Ms Vivian Judith Fatupaito of KPMG was appointed together with Ms Keene as liquidator on 8 March 2022. Ms Sprosen was appointed joint and several liquidator upon the resignation of Ms Fatupaito.
[3] The memorandum filed attaches a copy of the draft final report to the Registrar of Companies, prepared on the basis that all distributions have been made and the liquidators’ fees approved by the Court. Copies of the four six-monthly reports issued by the liquidators are also attached.
[4] I describe the background and work undertaken below before setting out the legal principles applying to approval of liquidators’ remuneration and applying those principles to the circumstances of this liquidation.
Background and work undertaken
[5] Heera Horticulture Limited (in liquidation) was incorporated on 24 June 2011. It supplied horticultural labour-hire services to orchards and farms in the mid North Island region.
[6] Following their appointment, the liquidators spoke with the current director, Jobanpreet Singh (Jobanpreet), to gain an understanding of the company’s affairs. Jobanpreet advised that he was paid cash for his personal details, which were used to register him as the company’s director on the Companies Register from 9 January 2019. Jobanpreet advised that he returned to India the day after he provided his details and provided confirmation of this to the liquidators. The liquidators therefore issued information requests to the company’s accountant, banks and other third parties.
[7] From an initial review of the information provided, it appears the company ceased trading at the end of 2018. The liquidators spent considerable time locating the contact details for the company’s former directors, Gurdeep Singh (Gurdeep) and Charanjit Singh (Charanjit). When the liquidators eventually made contact, Charanjit advised that the company was operated by his brother, Gurdeep. He advised he would provide his brother’s contact details but did not. Gurdeep then advised the liquidators that the company had been sold to Jobanpreet at the end of 2018 or the beginning of 2019 for the amount of its debts and that all records of the company had been given to Jobanpreet. No responses to written requests for information were received and nor was a copy of the sale and purchase agreement referred to by Gurdeep.
[8] The company’s signed financial statements for the year ending 31 March 2018 recorded an overdrawn shareholders’ account in the amount of $123,195. The liquidators pursued all four shareholders previous to Jobanpreet as the financial statements did not attribute portions of the current account to specific shareholders.
[9] Due to the absence of financial statements the liquidators reconstructed the shareholders’ current accounts for the period 1 April 2018 to the date of resignation of directors or liquidation, then identified additional drawings and deposits. The liquidators spent considerable time obtaining information from the company’s accountant and conducting traces on payments from the bank accounts to identify which the shareholder payments related to, as no company records were provided.
[10] The liquidators issued demands on two of the former shareholders for repayment of the amounts attributed to them but no response was received. The liquidators therefore instructed counsel to initiate legal proceedings. These were settled a week prior to the defended hearing date but only after the liquidators had incurred significant costs in preparation for the defended hearing. The settlement amount was paid at the end of January 2022.
[11] In addition, the company’s 2020 income tax return was amended after identifying a liability that appeared to have been incurred after the company ceased trading. The liquidators identified vehicles registered under the company’s name but were informed most of the vehicles had been sold and the funds received prior to the
company’s liquidation, with the two remaining vehicles deregistered without sale. Due to the age and value of these vehicles, the liquidators deemed them uneconomical to pursue further.
[12] The liquidators identified a related party payment but there was no response to the letter of demand and, due to the size of the amount, the liquidators did not pursue the claim.
Creditors and distributions
[13] The liquidators anticipate a first and final distribution of $2,363.36 to Inland Revenue representing 100 per cent of their petitioning creditor costs. In addition, the liquidators anticipate a first and final distribution of $131,097.69 to Inland Revenue representing 89 per cent of their preferential creditor claim.
[14] There were $297,079.20 in claims by non-preferential unsecured creditors. The liquidators advise that there are insufficient recoveries to make any distributions to these creditors.
Legal principles
[15] The Court’s power to approve liquidators’ remuneration is provided in s 284 of the Companies Act 1993. The principles that apply in considering applications for approval are set out in the full High Court decision, Re Roslea Path Ltd (in liq).1
[16] Heath and Venning JJ held that in fixing a liquidator’s remuneration, the Court is determining the fairness and reasonableness of what is being charged when measured against the work undertaken and the result achieved. The Court held that fair and reasonable remuneration reflects the value of the services rendered to the creditors of the company and, if a surplus is achieved, its shareholders. The decision describes “value” as an elusive concept which goes beyond mathematical application of hourly rates to hours spent by individuals involved in administering a company’s affairs.2 The Court emphasised the need for a proportionate approach, both in terms
1 Re Roslea Path Ltd (in liq) [2013] 1 NZLR 207 (HC) at [102].
2 At [102].
of the remuneration paid but also the information required by the Court to justify the remuneration paid.3 One of the suggested ways of ensuring that a reasonable and proportionate approach has been taken, is for the liquidators to voluntarily disclose in their six-monthly reports the amount of fees charged such that creditors have an opportunity to ask questions as the liquidation progresses.4
[17] The Court of Appeal in Madsen-Ries v Salus Safety Equipment Ltd (in liq recently confirmed the approach adopted in Re Roslea Path Ltd.5 The Court approved counsel assisting’s summary of the principles that apply to the determination of retrospective applications as follows:6
(a)Liquidators are fiduciaries and their fundamental obligation is a duty to account. There is a conflict between the interest of the liquidator (fiduciary) in receiving remuneration and the interest of the creditors (those to whom the fiduciary duties are owed) who bear the cost of that remuneration.
(b)Liquidators are officers of the Court and are subject to its general supervisory function. They must attend diligently to their tasks and make all proper reports and inquiries. They have the same responsibilities as barristers and solicitors.
(c)Liquidators must justify their claims for remuneration. They bear the onus in this regard and the benefit of any doubt due to inadequate information must be resolved in favour of the creditors.
(d)Fixing liquidators’ remuneration requires judicial judgment. It is more akin to an administrative task. It is implicit that the judicial officer can draw on his/her own experience in performing this role.
(e)In fixing liquidators’ remuneration the Court is making a determination of the fairness and reasonableness of the proposed fees compared to the work undertaken and results achieved. The focus is on the value of services rendered to the creditors of the company.
(f)The Court will consider whether there has been unnecessary work or over servicing as this would not represent time reasonably expended at a reasonable rate.
(g)A broad brush approach is acceptable provided that there is an exercise of judicial judgment as opposed to an arbitrary choice of amount.
(h)The process of fixing remuneration needs to be proportionate. It should not be unduly prescriptive; nor should it unnecessarily add costs to the creditors.
3 At [108].
4 At [151].
5 Madsen-Ries v Salus Safety Equipment Ltd (in liq) [2022] NZCA 101.
6 At [15].
[18]The Court of Appeal held: 7
… even where there is no challenge to the liquidator’s remuneration this does not absolve the Court from the obligation to be satisfied that the remuneration approved reflects the value of the services rendered to the creditors of the company.
[19] I am, therefore, required to be satisfied that the remuneration reflects the value of the services rendered to the creditors of the company.
Discussion
[20] The memorandum filed by the liquidators sets out a summary of the fees incurred ($46,478.50) and the hours worked (133.55). This calculates to an average hourly recovery rate of $348.02. The memorandum further provides a breakdown of the fees incurred by staffing level and the average rates applied. This shows that approximately 33 per cent of the hours worked were at partner level at an hourly rate of $550, with approximately 60 per cent undertaken at analyst level at $170 to $330 per hour. The liquidators confirm that they consider the most suitable level of staffing was employed according to the work required. The time incurred by the liquidators and their staff is further broken down as follows:
(a)35 per cent was spent on general enquiries, statutory reporting, initial discussions with the director and creditors, and administration of the liquidation; and
(b)59 per cent was spent on investigating, issuing claims, negotiating, litigation and attending on settlement of claims in the liquidation.
[21] The six-monthly reports attached to the memorandum set out the hourly rates for the liquidators and their team members, the fees incurred up to the date of the report and the average hourly rate. The reports further record that the liquidators welcome creditor feedback in respect of the fees charged at any time during the liquidation.
7 At [54].
[22] The memorandum also includes a schedule of disbursements incurred in the liquidation including advertising, administration charges and other expenses for a total of $3,468. There is no further information provided in relation to the administration charge but it appears to be five per cent of the liquidators’ fees incurred. It would be useful in future for further explanation to be provided as to what this charge covers. Some liquidators charge an administration fee rather than separately charging for disbursements. If that is the case, this needs to be specified in the reports so that the average hourly rate calculated can take that into consideration (if it covers the same costs as other liquidators absorb in their hourly rate).
[23] If the administration charges are added to the fees incurred before calculating the hourly rate, the average hourly rate rises to $365.42 which is relatively high. As set out in the background above, however, this does not appear to have been a straightforward liquidation. It was completed relatively quickly and creditors had full disclosure of fees through the six-monthly reports as the liquidation progressed, with the opportunity to raise issues if they wished to do so. The liquidators do not refer to any issues being raised in their memorandum.
Approval by Commissioner of Inland Revenue
[24] The liquidators sought confirmation from the petitioning creditor, the Commissioner of Inland Revenue, that the Commissioner was satisfied the level of fees and expenses set out in the memorandum was appropriate. A letter on behalf of the Commissioner is attached to the memorandum recording that the Commissioner is satisfied with the outcome of the liquidation and the level of fees claimed. The Commissioner accepts that the fees reflect the large amount of work that was undertaken to locate the details of the former directors, reconstruct the shareholders’ current accounts and manage the protracted legal process during the defended proceedings against the shareholders.
Result
[25] I am satisfied having regard to the memorandum filed and its attachments, including the letter on behalf of the Commissioner of Inland Revenue, that the liquidators’ remuneration appropriately reflects the value of the services rendered to
the creditors of this company. As a result, I grant the liquidators’ application for approval of their fees totalling $46,478.50 excluding GST plus disbursements of
$3,468.
Associate Judge Sussock
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