Commissioner of Inland Revenue v S K Hospitality NZ Limited (in liquidation)

[2023] NZHC 1307

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2019-404-2570

[2023] NZHC 1307

IN THE MATTER

of the Companies Act 1993

BETWEEN

THE COMMISSIONER OF INLAND REVENUE

Plaintiff

AND

S.K. HOSPITALITY NZ LIMITED (in liquidation)

Defendant

Hearing:	On the papers
Appearances:	Memorandum filed by liquidators dated 9 Febrary 2023
Judgment:	29 May 2023

JUDGMENT OF ASSOCIATE JUDGE SUSSOCK

This judgment was delivered by me on 29 May 2023 at 4.00 pm pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

THE COMMISSIONER OF INLAND REVENUE v S.K. HOSPITALITY NZ LIMITED (in liquidation) [2023] NZHC 1307 [29 May 2023]

Introduction

[1]        The liquidators of S.K. Hospitality NZ Limited (in liquidation) (Company), Luke Norman and Janet Sprosen of KPMG, have applied for approval of their fees in this liquidation totalling $22,379.26.

[2]        The liquidators have filed a memorandum attaching a copy of their draft final report to the Registrar of Companies prepared on the basis that the liquidators’ fees have been approved. The liquidators have also attached copies of their five reports issued during the liquidation. Due to staff shortages in the Registry, the memorandum was only referred to me recently. I apologise on behalf of the Court for the delay.

[3]        The background and work undertaken are set out below. I then outline the legal principles applying to approval of liquidators’ remuneration and apply those principles to the circumstances of this liquidation.

Background and work undertaken

[4]        The Company was incorporated on 3 February 2016 and operated a restaurant and events catering business in Manukau, Auckland.

[5]        Following application by the Commissioner of Inland Revenue, Vivian Judith Fatupaito and Luke  Norman  were  appointed  as  liquidators  of  the  Company  on 7 August 2020.

[6]        On 8 March 2022, Janet Sprosen replaced Vivian Judith Fatupaito as liquidator upon her resignation.

[7]        The  liquidators’  memorandum  records   that   following   appointment   on 7 August 2020 the liquidators made multiple attempts to contact the director of the Company but were unsuccessful.

[8]        The liquidators issued a formal notice to attend an examination on oath but were advised the director was unable to attend due to health issues. Enforcement of

attendance at an examination was complicated by the COVID-19 restrictions applying during the relevant period.

[9]        The liquidators report that the Company’s business had been sold prior to liquidation. Pursuant to the terms of the sale and purchase agreement, part of the purchase price was held in trust until both parties confirmed satisfaction of undertakings regarding chattels. The purchaser maintained the retained funds were payable to the purchaser as the undertakings were not satisfied. The director’s position was the retained funds should be released to the Company.

[10]      The liquidators corresponded with the purchaser and the director’s solicitor regarding the retained funds. The purchaser provided information to the liquidators in support of their position, but the director provided no information despite repeated requests. In the end, after obtaining legal advice, the liquidators consented to the release of the retained funds to the purchaser.

[11]      Following review of the documents regarding the sale of the business, the liquidators identified that proceeds from the sale were paid to a related party pursuant to a purported security. After attempting to resolve validity issues with the security through correspondence, the liquidators filed and served notices to set aside the voidable charge and voidable transaction on the related party.

[12]      The related party filed a notice of opposition, and the matter was set down for a hearing on 24 May 2021. A few days prior to the hearing the related party made a settlement offer. Settlement was ultimately agreed and paid and the liquidators’ application was discontinued. Due to the lateness of the settlement offer, however, the liquidators had already incurred significant costs.

[13]      In addition, the liquidators requested that the director return a company vehicle in her possession. The director’s solicitor advised that the vehicle was purchased by the director prior to liquidation and that the director had been required to remedy mechanical issues. The liquidators determined that it was uneconomic to pursue the director for the vehicle given the value.

[14]      During the liquidation, the liquidators also complied with a request from the Ministry of Business, Innovation and Employment (MBIE) for information regarding the director, Reet Maan (formally known as Sonia Singh). On 20 December 2021, Reet Maan was prohibited from managing a company for seven years by the Registrar of Companies.

[15]      The draft final report records that there were insufficient asset realisations to enable a distribution to be made to any class of creditors.

Legal principles

[16]      The Court’s power to approve liquidators’ remuneration is provided for 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

[17]      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 the company’s affairs.2 The Court emphasised the need for a proportionate approach, both in terms 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 is 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

1      Re Roslea Path Ltd (in liq) [2013] 1 NZLR 207 (HC) at [102].

2 At [102].

3 At [108].

4 At [151].

[18]      The Court of Appeal in Madsen-Ries v Salus Safety Equipment Ltd (in liq) recently confirmed the approach set out in Re Roslea Path Ltd.5 The Court approved counsel assisting’s summary of the principles that apply to the determination of retrospective applications (for approval of liquidators’ remuneration) as follows:6

(a)Liquidators are fiduciaries and their fundamental obligation is a duty to account. There is a conflict between the interests 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 creditors.

[19]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.

5      Madsen-Ries v Salus Safety Equipment Ltd (in liq) [2022] NZCA 101.

6 At [15].

7 At [54].

Discussion

[20]      The liquidators’ memorandum records that the time spent by the liquidators and their staff can be broken down by task as follows:

(a)two per cent on general enquiries and discussions with creditors in the liquidation;

(b)24 per cent on administration, statutory reporting and case closure; and

(c)74 per cent on investigating, issuing claims, litigation, negotiating and attending on settlement of claims in the liquidation.

[21]  The memorandum further sets out a summary of the liquidators’ fees incurred by        hours       worked,              staff   level    and   the   average    rates    applied   as    follows:

Summary of Liquidation Fees
(All figures exclude GST)	Court Approved Hourly Rates ($)	Average Hourly Rate Charged ($)	Hours Worked	Fees Incurred ($)	Percentage of Hours Worked (%)
Liquidator/Director	550	526.39	50.25	26,450.00	24 15 59 2
Manager/Senior Manager/Associate Director	400-500	438.39	31.45	13,787.50
Graduate Analyst/Analyst/Senior Analyst	170-330	240.53	121.50	29,225.00
Support Staff	100-170	170	4	680.00
Total	207.20	70,142.50	100
Total Fees Actually Paid from Liquidation
22,379.26

[22]      As the summary above shows, a significant proportion of the work undertaken in the liquidation was completed at the graduate analyst/analyst/senior analyst level.

[23]      In addition, the summary shows that the fees incurred were $70,142.50 whereas the fees for which approval is sought are only $22,379.26. The memorandum refers to $48,142.50 being written off by the liquidators as insufficient recoveries were made. This figure does not match the amounts in the table exactly, with the difference between the fees incurred in the table and the total fees paid from the liquidation being

$47,763.24. Whichever is the correct figure however, a very substantial sum has been written off with the result that the average hourly rate for the liquidation was only

$108 (excluding GST), significantly below the usual rate.

Commissioner of Inland Revenue

[24]      The Commissioner of Inland Revenue was the petitioning creditor. The liquidators’ memorandum attaches a letter from the liquidators to the Commissioner dated 27 January 2023 which attached a copy of the liquidators’ draft final report and invited any queries or objections to be raised with the liquidators. The liquidators’ memorandum records that no objections were received.

Result

[25]       Considering the steps taken as discussed in the background above and the hours spent, the staff involved and the amount of time written off, I am satisfied that the liquidators’ proposed remuneration sufficiently reflects the value of services rendered to the creditors of the company in liquidation. As a result, I grant the application for approval of the liquidators’ fees totalling $22,379.26 (excluding GST and disbursements).

Associate Judge Sussock