Elders Merchandise Limited v Quantum Grow Limited (in liq)
[2021] NZHC 2396
•8 October 2021
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE
CIV-2012-409-144
[2021] NZHC 2396
UNDER Section 266 of the Companies Act 1993 IN THE MATTER
of the liquidation of Quantum Grow Limited (in liquidation)
BETWEEN
ELDERS MERCHANDISE LIMITED
Plaintiff
AND
QUANTUM GROW LIMITED (IN LIQ)
Defendant
Hearing: (On the papers) Appearances:
A S Botterill for the liquidator
Judgment:
8 October 2021
JUDGMENT OF ASSOCIATE JUDGE LESTER
(Liquidators fees)
[1] On 20 March 2012 Quantum Grow Limited (Quantum) was placed in liquidation by this Court and Damien Grant and Steven Khov appointed liquidators. While joint liquidators were appointed, the last liquidation report signed by both liquidators was dated 6 October 2017. When Mr Khov resigned is not stated.
[2] On 20 July 2020 the liquidator applied for approval of their fees. The application came before Associate Judge Paulsen who issued a Minute on 23 July 2020. The Judge said: “Given the large sum claimed, the extensive litigation
ELDERS MERCHANDISE LIMITED v QUANTUM GROW LIMITED (IN LIQ) [2021] NZHC 2396
[8 October 2021]
undertaken and the lack of recovery for the creditors this is not a straightforward application.”1 With respect, I agree with that observation.
[3] In Associate Judge Paulsen’s Minute, he sought further information in respect of 10 issues. On 9 June 2021 a memorandum was filed by Mr Botterill, counsel acting for the liquidator, to address those questions. Part of the delay in dealing with the application due to a schedule attached to the 3 June memorandum that was printed on A4 when it needed to be printed on A3 to be deciphered. On 10 June 2021 the Court requested that schedule be provided in A3 form and it was provided accordingly at the start of August 2021.
[4] As I will outline below, many of the questions raised by Associate Judge Paulsen last year were not answered in any real sense.
Legal principles
[5] The leading case regarding approval of a liquidator’s fee is Re Roslea Path Ltd (in liq).2
[6] The liquidator bears the onus of establishing that the claimed remuneration is reasonable. The benefit of any doubt based on the inadequacy of information provided by a liquidator should be resolved in favour of the creditors.3
[7]In Re Roslea the Court said:
[46] Liquidators are paid out of assets of the company that have realised for distribution to creditors. This creates a “common fund” in which all participants have an interest. The participants include all creditors and (to the extent a surplus may result) shareholders of the company. An analogy is a trust fund out of which a trustee is entitled to remuneration. In “common fund” cases, involving legal practitioners who set remuneration, an inquiry is undertaken both into work carried out and whether it was reasonably necessary, having regard to the nature and value of the issues at stake ...
1 Elders Merchandise Ltd v Quantum Grow Ltd HC Christchurch CIV-2012-409-144, 23 July 2020 at [1].
2 Re Roslea Path Ltd (in liq) [2013] 1 NZLR 207 (HC).
3 Re Roslea, above n 2 at [141].
[8]The Court then approved the following statements of principle:4
(a)Court appointed liquidators are fiduciaries. As with any fiduciary it is necessary for their remuneration to be justified.
(b)The appropriate test is to determine whether a particular cost would have been incurred; would the time spent have been undertaken by a reasonably prudent person faced with the same situation?
(c)While time is a relevant factor in fixing remuneration, the value of the services rendered is more important than the cost of rendering them.
[9] In my opinion, there is some parallel with the factors to be taken into account in determining whether to grant leave for a shareholder to bring a derivative action.5 In that context, the appropriate test is that which would be exercised by a prudent businessperson in the conduct of his or her own affairs when deciding to bring a claim. Such a decision requires consideration of the amount at stake, the apparent strength of the claim, likely costs and the prospects of executing any judgment.6
[10]The authors of Morison’s Company Law note:7
The “reasonable businessman” test may be modified in cases involving a breach of fiduciary duty. A derivative action may be justified where there is only a suspicion that the defendant has breached his fiduciary obligations as director. Rather than focusing on a prudent business person determining whether to use his or her money to bring the claim, it is preferable to focus on whether a person acting as a fiduciary in respect of funds of others ought to consider whether a prudent trustee would use other people’s funds for that purpose.
[11] Liquidators seeking to discharge their duties should do so with costs and benefits clearly in mind; the benefits ordinarily being those to the creditors. The costs of litigation have to be reasonably incurred and proportionate.8
Recoveries made but no distribution to creditors
[12] Here, the claims of unsecured creditors totalled just over $111,000 and preferential creditors of $74,998.42. It seems that a preferential creditor’s claim,
4 At [47], citing Re Medforce Healthcare Services Ltd (in liq) [2001] 3 NZLR 145 (HC) at [32].
5 See Companies Act 1993, s 165.
6 Morisons Company Law (NZ) (online ed, LexisNexis) at [36.10], citing Vrij v Boyle [1995] 3 NZLR 763 (HC) at 765.
7 Morison’s Company Law, above n 6, at [36.10].
8 Grant v Lotus Gardens Ltd (in liq) [2015] NZHC 2345 at [33].
being the costs awarded to the petitioning creditor, was paid. There was a further preferential distribution which may have been to individuals listed as having preferential claims who may have been employees but it is not possible to tell.
[13] Total cash received was $201,126.83. Of that $154,140.28 is claimed as fees and $35,065.32 as disbursements. Expenses such as wages, asset storage costs, a miscellaneous item of expenses and a small staff wages account appear unremarkable. What warrants remark are the disbursements and fees which meant that, despite there being enough money recovered to make a distribution to unsecured creditors, nothing was paid to them.
Associate Judge Paulsen’s questions
[14] Associate Judge Paulsen asked for a breakdown of the charges in respect of each litigation matter undertaken by the liquidators. The Judge also asked whether the liquidators used in-house counsel in conducting the litigation. It has been confirmed in-house counsel were used.
[15] The Judge also asked: “What enquiries were made and/or advice received as to the likelihood of recovery on behalf of the creditors through the litigation undertaken against Flexigrow Limited, Lotus Gardens Limited and Mr Canavan?”9 The Judge also asked for details of the disbursements.
[16]The response to those questions was as follows:
A breakdown of the charges in respect to each litigation matter is not readily available. At the time, the steps taken were not distinctly delineated within the recording/billing system. Unlike many law firms, insolvency practices (including Waterstone) do not create separate client matters for distinct areas of work within the insolvency. Time is recorded under categories (as has been provided) for the file.
[17]As to the question concerning the prospects of recovery, the response was:
The liquidator cannot recall what enquiries were made and/or advice was received in terms of the litigation against Flexigrow Limited, Lotus Gardens and Mr Canavan. It is important to highlight that a large majority of the recoveries made were for legal settlements (including the proceedings) that
9 Elders Merchandise, above n 1, at [1(h)].
the liquidator(s) pursued at their own risk for some time. The actions were necessary to facilitate any recovery which would otherwise have been minimal.
[18] As far as I can tell, the litigation subject to Associate Judge Paulsen’s questions in [15] produced no return. All recoveries came from voidable transactions, settlements or GST refunds.
[19] Details of the disbursements of $35,065.32 was provided as per the table below:
Liquidator’s Disbursements NZ$ 1. 1 November 2012 Liquidators Disbursement 4,500.00 Staff Expense Claim 2. 5 November 2012 Liquidators Disbursement 3,500.00 Acronym IT Support 3. 12 November 2012 Liquidators Disbursement
Inv 1514
446.20 Staff Expense Claim 4. 12 November 2012 Liquidators Disbursement
Inv 1503
3,524.28 5. 23 November 2012 Hilton Haulage Inv 156392 622.66 6. 9 January 2013 Hilton Haulage Inv 159860 777.69 7. 10 January 2013 JDP Investigations
135012006
103.50 8. 5 February 2013 Liquidator Disbursement
Inv 1784
3,822.80 9. 8 February 2013 Hilton Haulage Inv 164094 777.69 10. 5 March 2013 WSI Inv 1898 1,785.23 Air New Zealand 11. No Breakdown 7,537.00 Staff Expense Claim 12. 7 March 2014 Liquidators Disbursement
WSI Inv 3450
1,150.00 13. 4 August 2014 Liquidators Disbursement
Inv 004209
2,453.80 14. 25 September 2014 Liquidators Disbursement
Inv 004502
711.02 15. 19 November 2014 Liquidators Disbursement
Inv 004649
1,241.40 16. 15 July 2015 Liquidators Disbursement
Inv 005482
232.25 Scope investigation
17. 17 November 2015 Liquidators Disbursement
Inv 005917
689.80 MWIS Legal 18. 16 December 2015 Liquidators Disbursement
Inv 006012
1,190.00 Scope Investigation Total $35,065.32
[20] The above table does not explain what the expenses claimed relate to. Narrations such as “Staff Expense claim” and “Acronym IT Support” disclose nothing about what the expense relates to. Items narrated only as “Liquidators disbursement” are equally unhelpful. One can make assumptions about what “Hilton Haulage” invoices relate to and assumptions about what is covered by the investigation costs and the MWIS legal claim is likely to be an agent’s fee or the like. Similarly, I expect the Air New Zealand expenses will be airfares, but what they relate to is not explained.
[21] I find items 1 to 4, 8 and 11 to 15 have not been adequately explained these payments represent funds taken by the liquidators from the common fund. Liquidators have a fiduciary obligation to be able to explain the disbursements – and Associate Judge Paulsen directed an explanation be provided. As noted above, the benefit of the doubt goes against the liquidator.
[22] I do not approve the items identified in the preceding paragraph which comes to a total sum of $28,886.50. Given these sums have been taken already, they will need to be refunded for the benefit of the creditors.
[23] In declining to approve these claims I have not overlooked that: “There is no jurisdiction to review disbursements incurred”.10 I accept it is not for the Court to second-guess the reasonableness of out-of-pocket costs such as freight, airfares, legal agency fees or service costs. However, the liquidator must demonstrate the disbursements claimed are in fact out-of-pocket expenses incurred in the liquidation. If the costs are not external third party costs then they are remuneration or payments to meet costs that should be covered by the rates charged by the liquidator. The liquidator’s charges should be sufficient to cover internal liquidator’s expenses. The explanation provided by the liquidator in relation to disbursements (the full extent
10 Re Roslea, above n 2, at [157], referring to Re Medforce Healthcare Services Ltd (in liq), above n 4, at [19].
of which is the table set out above) does not establish that the disallowed sums were disbursements.
Liquidator’s fees
[24] This is a retrospective application for approval, the liquidation having been concluded and the fees taken during the course of the liquidation. The approach to such applications was discussed in Re Roslea.11 What is envisaged is a “broad brush” approach. The Court said:12
In some cases, liquidators will put inadequate information before the Court. While there are risks that a judgment based on such information might be unfair to the liquidator, we consider that the exercise of a judicial discretion to fix an amount on a global basis is preferable to the liquidator being required to provide more detailed information which is likely to increase the cost to creditors and the delay in distribution of remaining funds. An approach of that type can be justified on the basis that the liquidator bears the onus of establishing that the claimed remuneration is “reasonable” and that the benefit of any doubt, based on the inadequacy of information provided by a liquidator, should be resolved in favour of the creditors.
[25] Again, and at the risk of labouring the point, here the liquidator was asked for detailed information about the costs incurred and the benefits received in respect of the proceedings subject of Associate Judge Paulsen’s question referred to at [15]. The liquidator is unable to provide that information.
[26] I am obliged to enquire into the reasonableness of the fees on the basis of the principles outlined in Re Medforce Healthcare Services Ltd (in liq) . Having done so I have the ability to fix a global sum as remuneration if a liquidator has supplied too little information to enable a clear view to be formed on whether the amount claimed was reasonable.13
[27] In this case, the liquidator relies on the contents of his liquidation reports. In Roslea the Court noted it was open to a liquidator to disclose voluntarily in the second and subsequent reports the amount of fees charged and the largest components of those
11 Re Roslea, above n 2, at [138]-[169].
12 At [141].
13 Re Roslea, above n 2, at [142].
fees.14 The Court noted that a liquidator could also disclose voluntarily the ability of any creditor or shareholder to challenge that remuneration.15 The Court then said:16
[152] If disclosure of that type were made and no steps had been taken by a creditor or shareholder to challenge remuneration by the time the retrospective application were made, we consider that the Court could properly approve the remuneration charged, without the need for detailed information.
[28] The Court noted the other side of the coin is that, if disclosure of that type had not been made on a regular basis, it is more likely the Court would require the liquidators to provide information of the type contemplated by Medforce to justify the claim to remuneration.17
[29] While the liquidator’s reports do contain advice to creditors that they can challenge the liquidator’s fees, the actual recording of their fees does not disclose “the largest components” of those fees. All that is listed in each report is a figure for disbursements and a figure for fees.
[30]In total 2,162 hours of work were recorded with a total time cost recorded of
$493,599.25. The liquidator addresses the issue by saying that he seeks approval of only $153,140.28 in fees, which equates to an average hourly rate of $71.36 per hour and which is well below the rates normally charged.
[31] What this submission highlights is that nearly half a million dollars in time was recorded in a liquidation with unsecured creditors of $111,000 and preferential creditors of $75,000.00.
[32] As noted, the Court in Roslea referred to the approach in Re Medforce. The Court in Medforce found there must be enough information to enable an assessment of whether the total costs charged are reasonable and said:18
[34] As a minimum it seems to us that what is required is a statement of the work undertaken during the course of the liquidation, together with an
14 At [151].
15 At [151].
16 At [152].
17 At [152].
18 Re Medforce, above n 4.
expenditure account sufficiently itemised to enable the charges made to be related to the work done. The detail would have to be sufficient to enable the judicial officer to determine whether the personnel involved in the liquidation and their respective charge-out rates were appropriate to the nature of the work undertaken. This information may in some cases raise concerns as to whether there has been overservicing and overcharging. If there are suggestions of this in the information provided, the Court can request further information.
(emphasis added)
[33] It is evident from what I have already discussed that it is not possible to assess the charges made in relation to the work done. That is because the Court has been presented with totals in respect of each category of work and total recoveries.
[34] Basic narratives on time records have been provided describing the work undertaken but, as Associate Judge Paulsen identified, it is not possible to link the charges in relation to the work done other than by reference to the spreadsheet showing total legal costs of $277,862 were charged against recoveries from legal work of
$90,785.09 (together with a costs award of $8,436.37).19
[35] A total of $66,511 is recorded for administration and a further $11,464.75 of time recorded narrated “Other/internal”. 150 hours is recorded as “on-site” for a total of $32,435 of time recorded. It is not clear to me what this relates to other than speculating that it was time spent by the liquidators at the company’s premises.
[36] As Associate Judge Bell in Commissioner of Inland Revenue v Salus Safety Equipment Ltd (in liq) said the cost of routine clerical work is “generally absorbed as part of the costs of running an insolvency practice and are covered by the rates approved for liquidators, associates and analysis”.20
[37] On this basis the costs recorded for administration and “other/internal” should be excluded. Given most of the activity in the liquidation was during the first few years, it is reasonable to assume most of the administration costs arose in the period the liquidators were most active. This is also when most of the recoveries were made which were wholly applied to costs. At least some of the costs taken will have been
19 I do not include the refund of security for costs as this would have come from the liquidation in the first place.
20 Commissioner of Inland Revenue v Salus Safety Equipment Ltd (in liq) [2020] NZHC 1368.
for administration and the “other/internal” time. Again, the material provided does not specify what the fees taken were applied to and so I have assumed that the fees taken were simply applied pro-rata to the time recorded under the various categories.
The liquidator’s submissions
[38] The liquidator provided a summary of the work undertaken. The liquidated company operated as a hydroponics company. The liquidator says the directors and promoters of the business went to some lengths to obstruct the liquidation, resulting in considerable litigation. The liquidators discovered that the trading business had been shifted to a new enterprise without any consideration being paid by the transferee. The liquidators had to undertake considerable work to obtain accounting records and locate stock.
[39] The liquidators went so far as to obtain search warrants on three separate sites (one in Auckland and two in Christchurch), which were executed under the supervision of the Police. These searches provided considerable information as to the company’s accounting records and enable them to recover a considerable amount of stock, although only a fraction of what they believed had been transferred. With the benefit of the accounting records, the liquidators undertook eight interviews pursuant to s 261 of the Companies Act 1993.
[40] There is also on the file an interlocutory application requiring the director, Mr Canavan, to attend an interview under oath.
[41] On my count some 17 notices to set aside voidable transactions were issued – 12 of which were for sums less than $10,000 – the largest being $30,450 and the smallest being $3,706.67. These were issued between 2 July 2012 and 15 August 2013. The application records that $90,785.09 was recovered as a result of settled voidable transaction claims.
[42]All of this is in the context of a liquidation with unsecured creditors of
$111,000 and preferential creditors of $75,000. An added difficulty in assessing the reasonableness of the liquidators’ actions is knowing the timeframe of recoveries versus the timeframe of the expenditure incurred. For example, if a significant
proportion of the voidable transactions were recovered before the liquidators embarked on what proved to be further unproductive litigation, then alongside the disallowed disbursements and a recognition that routine clerical work cannot be charged for, a distribution to creditors may have been possible. A liquidator who has a fund that might allow a dividend to creditors of say 20 cents in the dollar would need to soberly assess the prospects of further litigation that, if unsuccessful, would entirely exhaust that fund and, if successful, see the recovery absorbed in further liquidators fees and legal fees. It is clear, however, that liquidators are permitted to undertake preliminary investigative work and to realise assets, or bring claims to cover their costs in doing so.21
[43] The application for approval of fees refers to proceedings issued against a company called Lotus Gardens Ltd seeking to recover $25,576.88. The proceeding ultimately went to the Court of Appeal – the liquidators being unsuccessful in the High Court22 but succeeding in the Court of Appeal.23 The Court of Appeal referred to the liquidation matter back to the High Court which liquidated Lotus Gardens Ltd and appointed the Official Assignee as liquidator.24 The present liquidator of Quantum Grow Ltd then successfully applied to be appointed liquidator of Lotus Gardens.25 The current application for approval of fees says: “Despite the considerable efforts to obtain this insolvency appointment, it proved barren. No recovery was made.”
[44] All this was over a debt of $25,000. The liquidators say they believed significant assets had been transferred to Lotus Gardens but, given the difficulties they had faced in obtaining accurate information before embarking on the recovery action, it is telling that they were unable to explain whether a cost-benefit analysis in respect of this litigation was undertaken.
[45] Mr Canavan was bankrupted as a result of a costs judgment obtained against him and another company called Profuzion - another entity said to have been used by
21 Robt Jones Holdings Ltd v McCullagh) [2018] NZCA 358, [2002] NZCCLR 6 at [148].
22 Grant v Lotus Gardens Ltd [2013] NZHC 1135, [2013] NZCCLR 16.
23 Grant v Lotus Gardens Ltd [2014] NZCA 127, [2014] 2 NZLR 726.
24 Grant v Lotus Gardens Ltd [2014] NZHC 829.
25 Grant v Lotus Gardens Ltd (in liq), above n 8.
the office holders of Quantum Grow to hide assets, which was liquidated on 17 February 2014 with no recovery made.
Conclusion
[46] I am satisfied the original liquidators were faced with a difficult initial period in the liquidation insofar as he had to obtain search warrants and undertake a significant number of interviews to obtain the company records, locate company assets and gain an understanding of the company’s affairs. Funding of that work through voidable transactions recoveries is understandable subject to what I have said earlier as to when such recoveries were obtained as compared with how long the investigation process continued.
[47] I accept that initial investigations would have been required to generate the information necessary to achieve the voidable transaction recoveries.
[48] However, the further litigation work is harder to justify. The ill-fated proceedings against Lotus Gardens Ltd were commenced in early 2013 with the judgment in the unsuccessful application to liquidate the company released 17 May 2013. Eight of the voidable transaction notices were issued after the release of that judgment. It is inevitable that a significant amount of time was recorded in relation to the unsuccessful liquidation proceeding, the successful appeal, the subsequent liquidation and the application to replace the Official Assignee as liquidator. While all that time has not been recovered, it is part of the total time recorded of which a proportion has been recovered.
[49] Because the time recorded against each recovery action is not separately recorded, an exact breakdown of the costs thrown away on the Lotus Gardens litigation is not possible. This is not to criticise the liquidators with the benefit of hindsight. Extensive litigation over $25,000 was never going to be economic.
[50] Given the absence of justification for the litigation through the senior courts over $25,000, I do consider the liquidator has not demonstrated that the fees incurred on the Lotus Garden Ltd proceedings were reasonably incurred. It follows I cannot approve all of the $153,140.28 taken in fees as some of that amount will relate to time
spent on that litigation. Calculating exactly how much of the fees taken related to the Lotus Garden claim is not possible.
[51] Focusing on the appeal only and the application to be appointed replacement liquidators, I assess (in the round) that $20,000 of fees were not reasonably incurred and I decline to approve that part of the liquidator’s fees. I do not overlook that not all time spent on Lotus Gardens was recovered but this sum is to reflect the totality of proceedings it appears were not subject to a cost-benefit analysis or at least not to one that can now be produced or explained.
[52] In respect of the fees taken to cover routine clerical work and the unexplained category for “other/internal”, I disallow a further $7,500.
[53] It follows that the liquidators will need to pay to creditors the disallowed disbursements of $28,886.50, the $7,500 from para [52] above, the preceding paragraph, and the disallowed fees of $20,000 – a total of $56,386.50. For the avoidance of doubt, the liquidator’s time in making this distribution is not claimable from this sum. The liquidator is to file a further report within 20 working days confirming the distribution to creditors has been made at that time an order approving the balance of the fees and disbursements will be made.
Associate Judge Lester
Solicitors:
Jeff Ussher, Auckland
Waterstone Insolvency, North Shore
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