Commissioner of Inland Revenue v Tuupari Farms Limited (in liquidation)

[2022] NZHC 2059

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2014-488-0136

[2022] NZHC 2059

UNDER

the Companies Act 1993

BETWEEN

THE COMMISSIONER OF INLAND REVENUE

Plaintiff

AND

TUUPARI FARMS LIMITED (in

liquidation) Defendant

Hearing:	On the papers
Counsel:	Memoranda filed by liquidators dated 8 April 2022 and 11 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 4pm pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Solicitors:

PriceWaterhouseCoopers, Auckland

THE COMMISSIONER OF INLAND REVENUE v TUUPARI FARMS LTD (in liq) [2022] NZHC 2059 [18

August 2022]

Introduction

[1]    The liquidators of Tuupari Farms Limited (in liquidation), Mr Craig Sanson and Mr Malcolm Hollis, have applied for approval of the liquidators’ fees in this liquidation totalling $140,674.87 excluding GST plus disbursements.

[2]    Mr Sanson and Mr Colin McCloy were first appointed on 29 September 2014. Mr McCloy vacated the position on 18 December 2015 and was replaced by Mr David Bridgman. Mr Bridgman was then replaced on 9 December 2020 by Mr Hollis.

[3]    The liquidators have attached their draft final report to the Registrar of Companies to their memorandum, prepared on the basis that their fees have been approved. In addition, they have attached copies of their 14 six-monthly reports issued since the company was put into liquidation.

[4]    The liquidators filed a second memorandum dated 11 July 2022 attaching a letter on behalf of the Commissioner of Inland Revenue. This confirms that the Commissioner is satisfied with the outcome of the liquidation and the proposed remuneration.

[5]    I describe the background and work undertaken below, followed by the legal principles applying to approval of liquidators’ remuneration. I then apply those principles to the circumstances of this liquidation.

Background and work undertaken

[6]    The company was incorporated in November 1999 and owned and operated two dairy farms in Northland. It ceased trading on 3 June 2014.

[7]    Following appointment on 29 September 2014, the liquidators were advised that in 2008, two of the company’s shareholders asked to be bought out, which resulted in the company being burdened with significant additional debt. As a result of this increase in debt, there was considerable pressure on the company’s cashflow.

[8]    The company was also affected by the economic downturn of 2008 and a series of droughts in subsequent seasons which led to a decrease in production. As a result, the company began a farm sales process in 2013. The farms were sold in June 2014, prior to the liquidation.

[9]    As at the date of liquidation, the company’s assets consisted of a number of items of plant and equipment, miscellaneous livestock, shares held in various entities, and some outstanding accounts receivable. The liquidators undertook a significant amount of work investigating and identifying claims, including identifying fixed assets that were located at the director’s residence, the company’s previously owned farms or that were held by third parties.

[10]   In addition, the company held shares in two companies and had a third allotment of shares that had been transferred in error for nil consideration to the purchaser of the company’s farms.

[11]   Prior to liquidation, the company sold approximately 122 cows to a third party with a further 32 cows to be leased for a year and purchased upon expiry of the lease in May 2015.

[12]   The company also had accounts receivable relating to final milk cheques for the 2014 season, and money owing on a sharemilking agreement on a third farm.

[13]   The liquidators identified and realised these assets, and settled a number of voidable transaction claims leading to total realisations of $688,157.22.

Creditors and distributions

[14]   The company had three secured creditors with one discharging their security shortly after liquidation. A distribution of $110,830 was made to the ANZ bank from the sale of fixed assets pursuant to a General Security Agreement.

[15]   The petitioning creditor received a distribution of 100 cents in the dollar for its petitioning creditor’s costs of $3,776.36 and its preferential claim of $332,713.77 relating to unpaid GST and PAYE.

[16]   Seven non-preferential unsecured claims totalling $1,063,169.28 were received. A small distribution of $11,999.99 was made to the non-preferential unsecured creditors.

Legal principles

[17]   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

[18]   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 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

[19]   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

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

2 At [102].

3 At [108].

4 At [151].

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

6 At [15].

(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.

[20]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.

[21]   Although the Commissioner of Inland Revenue is satisfied the fees charged are reasonable, I am therefore still required to be satisfied that the remuneration reflects the value of the services rendered to the creditors of the company.

Discussion

[22]   The liquidator’s first memorandum records that the fees have been charged in accordance with the rates fixed by the Court on the date of liquidation, 29 September 2014. The draft final report attached to the memorandum sets out the background to the appointment of the liquidator, the steps taken during the liquidation in significant

7 At [54].

detail and, at Appendix B, a statement of realisation and distribution for the period of the liquidation together with a summary of fees charged and a breakdown of tasks undertaken.

[23]   The liquidators confirm their conclusion that all areas of recovery have been explored and dealt with, thus enabling the completion of this liquidation.

[24]   The liquidators have provided copies of their 14 six-monthly reports to the company’s creditors and shareholders. Each of these sets out the fees incurred to the date of the report and provides an estimated breakdown of these fees across five categories of work with the relevant percentages set out. The reports each record that s 284 of the Companies Act allows creditors, shareholders, other entitled persons or directors of a company in liquidation to apply for a review of the liquidators’ remuneration. The memorandum filed by the liquidators records that no objections have been received in respect of their remuneration.

[25]   Appendix B includes a breakdown of the total hours charged by the rates at which those hours were charged. The breakdown indicates that 26 per cent of the hours worked were at partner or director level, at a rate of $375 to $450 per hour, with almost 50 per cent of the hours worked at senior associate level or below, at an hourly rate of between $110 to $240 per hour. Annexure B to the draft final report provides a narrative of the work performed at each of the staffing levels in significant detail.

[26]The total hours worked were 463.9 for an average hourly recovery rate of

$303.24 (excluding GST). The second memorandum filed by the liquidators records that the amount of fees paid was less than actually incurred by approximately $1,000. Appendix B includes in the statement of realisation and distribution for the period of the liquidation, an amount for “liquidators’ disbursements” of $7,486.67. This number is not broken down. It represents slightly more than five per cent of the liquidators’ remuneration for which approval is sought. It would be useful in future for this number to be broken down or for further explanation to be provided as to what this charge covers. Some liquidators charge an administration fee equal to five per cent of the liquidators’ remuneration rather than separately charging for disbursements. If that is the case, this needs to be specified in the report so that the average hourly rate

calculated takes that into consideration as some liquidators absorb these costs in their hourly rate.8 If these disbursements are added to the fees for which approval is sought, the average hourly rate increases to $319.88 (excluding GST).

[27]   The liquidation has taken a considerable period of time and there have been a number of changes in liquidators (although Mr Sanson has remained throughout). During this time there has been a significant realisation of assets with distributions of

$459,320.12 paid to creditors. Confirmation that fees have been disclosed in each of the six-monthly reports and no objections received provides some comfort that the fees appropriately reflect the value of services to the creditors.

Commissioner of Inland Revenue’s position

[28]   The liquidators sought confirmation from the petitioning creditor, the Commissioner of Inland Revenue, that the Commissioner was satisfied with the level of fees and expenses for which approval is sought. The Commissioner has confirmed that they have reviewed the memorandum and the draft final report. They acknowledge the amount of work that has been undertaken to investigate and identify claims in the liquidation, realise fixed assets for distribution and to address voidable transactions.

[29]   The Commissioner confirms that they received 100 per cent of their creditor’s costs and 100 per cent of the preferential claim. The Commissioner is satisfied with the outcome of the liquidation and the fees charged of $141,628 plus GST and disbursements. I note that this is the amount of fees incurred rather than the amount of fees charged, which is a slightly lower figure of $140,674.87 excluding GST plus disbursements.

Result

[30]   I am satisfied having regard to the memoranda filed and their 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

8      See the discussion in my earlier decision Ng v M & C Malaysia Restaurant Ltd [2022] NZHC 882 at [22].

the creditors of the company. As a result, I grant the application for approval of liquidators’ fees totalling $140,674.87 excluding GST plus disbursements.

Associate Judge Sussock