McAulay v Hawkes Bay Wind Machines Limited (in liq) HC Napier Civ-2007-441-916
[2011] NZHC 201
•11 March 2011
IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY
CIV-2007-441-916
UNDER The Companies Act 1993
IN THE MATTER OF an application under s 284(1)(e) of the Companies Act 1993 to fix remuneration of the Liquidator
BETWEEN DORI ANN MCAULAY Plaintiff
ANDHAWKES BAY WIND MACHINES LIMITED (IN LIQUIDATION) Defendant
Hearing: 2 July 2010 and 10 February 2011 (Heard at Napier and Auckland)
Appearances: Mr R J Gordon for the Liquidator
Mr Palairet (liquidator)
Ms Dori Seabourn (formerly McAulay) Mrs Janice Atkinson
Mr Kim McAulay
Judgment: 11 March 2011 10:00:00
JUDGMENT OF ASSOCIATE JUDGE DOOGUE
This judgment was delivered by me on
11.03.11 at 10 a.m., pursuant to
Rule 11.5 of the High Court Rules. Registrar/Deputy Registrar
Date……………
Counsel:
Ms Janice Atkinson, Hastings
Mr Kim McAulay, Hastings
Ms Dori Seabourn, HastingsJohn Palairet, BDO Spicers, Station Street, Napier
Richard Gordon, Buddle Findlay, Wellington, P O Box 2694, Wellington
MCAULAY V HAWKES BAY WIND MACHINES LIMITED (IN LIQUIDATION) HC NAP CIV-2007-441-
916 11 March 2011
Introduction
[1] The liquidator in this proceeding, Mr Palairet, has made applications dated 8
September 2008 and 24 July 2009 for orders fixing his remuneration. The first
application sought the Court’s approval for remuneration actually charged up to 31
August 2008 totalling $53,795.86 (excluding GST). In the same application, the liquidator sought approval to charge work to be done from that point forward at rates which were specified in the application. That application was expressed to be made in reliance on, inter alia, the decision of the High Court in Re Medforce Healthcare Services Ltd (in liq) [Medforce].[1] In the second application, the liquidator sought approval for remuneration which had actually been charged during the period 1
September 2008 until 31 July 2009, a total of $48,874.26 (excluding GST). The liquidator deposes and I accept that when the amount of the current claims is added to the amount approved to 31 August 2008, the total fees charged exclusive of GST is $102,670.12.
[1] Re Medforce Healthcare Services Ltd (in liq) [2001] 3 NZLR 145 (HC).
[2] Two directors of the company, Mr Kim D McAulay and Ms Janice Atkinson (whom I shall describe as ―the directors‖) seek to have the Court review the earlier decision dated 8 September 2008. Both directors filed an application dated 25
February 2010 in which they sought orders as follows:
a) Reviewing the ―remuneration that the liquidator has already been paid and is now claiming approval for and to the extent that the remuneration is found by the court to be unreasonable; order the liquidator to refund the amount‖.
b)Seeking leave to apply to the Court for an order reversing a decision of the liquidator to pay a warranty claim that was invalid;
c) An order reversing the decision of the liquidator to pay what is described as an excessive amount to settle a warranty claim with the
excessive margin being some $50,000. The directors seek an order
that the liquidator pay a sum of $50,000 to the company as compensation.
d)An order declining to approve any part of the remuneration claimed by the liquidator in his application of 29 July 2009 and any further claims by the liquidator;
[3] In their application, the directors have intertwined the actual orders sought with the grounds for them. It would appear that the grounds relied upon in regard to the application for leave for review of the remuneration are the following:
a) The liquidator did not make voluntary disclosure of his fees to the shareholders during the course of the liquidation;
b)The liquidator failed to provide shareholders with regular reports on the affairs of the company;
c) The liquidator has not responded to the directors’ written requests that he review his remuneration and the decisions that they wanted to have overturned;
d)At the time the liquidator was appointed, the assets of the company consisted mainly of cash with a few debtors to collect, and very few creditors to pay. Given that background, the total costs of $149,540 which the liquidator has invoiced were excessive;
e) The liquidator spent time on issues that were outside the scope of the liquidation. This related principally to distribution of the surplus of funds remaining in the company to the shareholders and that the liquidator unnecessarily responded to representations from Mrs McAulay that the shareholding in proportion to which the surplus should be distributed was not accurately recorded in the company’s accounts. The directors submit that considerable unnecessary costs were incurred in this type of activity;
f) That the liquidator mismanaged a warranty claim and paid out
$50,000 more than he ought to have. This resulted from the fact that he did not consult the directors who had the technical and background knowledge which would have helped him to accomplish a proper outcome, and did not attempt to obtain substantiation from the claimant about the cost of their claim before paying it out;
g) The liquidator made unauthorised loans to Mrs McAulay, the third director, during the course of the liquidation without consulting the other directors. The dealings that he had with her over that matter involved expense to the company which was not justified;
h)The directors have had to expend time and have incurred expenses in legal fees in dealing with mistakes that the liquidator made with respect to preparation of financial statements for the company.
[4] In addition to bringing their own application, the directors have filed notices of opposition to the liquidator’s application for approval of remuneration. The grounds set out in the notices of opposition are these:
1.The liquidator has expended considerable time and cost on activities that should have not been conducted as a matter of this liquidation assignment.
2.This liquidation was of a solvent company with substantial cash reserves; no assets to realise; little in the way of creditors and other claims, and little need for accounting, financial reporting and taxation matters.
3.The nature, complexity and extent of the work required in this particular liquidation were minimal.
4.The costs incurred or claimed for to date on liquidation costs including liquidator’s remuneration amount to $150,000 which far outweigh what should be necessary for a solvent liquidation of this nature where there were no assets to realise.
5.The liquidator paid out warranty claims from the company’s cash reserves when the claim was invalid and when he had been advised by company directors that it was invalid before making the payment.
The application for the Court to review the liquidator’s remuneration
Approval of the remuneration
[5] Section 276 of the Companies Act 1993 makes provision for a liquidator to be paid for the work he or she does:
276 Remuneration of liquidators
(1) Subject to section 284(1)(e), every liquidator, not being an Official Assignee, appointed under paragraph (a) or paragraph (b) of subsection (2) of section 241 is entitled to charge reasonable remuneration for carrying out his or her duties and exercising his or her powers as liquidator.
[6] The proviso in s 284(1)(e) is that the level of remuneration charged by the liquidator is reviewable by the Court. But it is only the remuneration that may be reviewed, not his or her expenses.
[7] The provisions of s 284 are relevant to both aspects of the matter that I have to determine.
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:
Approach
[8] The principles governing leave to bring a challenge to the decisions of liquidators were summarised by counsel, Mr Gordon, as follows:
1.In the Trinity Foundation case,[2] Associate Judge Lang (as he then was) held that a person (in that case a creditor) seeking leave under s 284(1) must do more than merely demonstrate that his claim to intervene is sustainable. They must show that they have an arguable case to do so. And in this context, an arguable case meant it must have two particular characteristics:
[2] Trinity Foundation (Services No 1) Ltd v Downey (2005) 9 NZCLC 263,917 (HC).
(a) First, it must have a credible factual basis; and
(b) Second, there must be a reasonable likelihood that, if the claim were established, the Court would then actually disturb the liquidator’s act or decision in question.
As his Honour put it then: ―I take the view that s 284(1) provides a filtering mechanism, and is designed to ensure that leave to challenge the acts and decisions of a liquidator is only given in appropriate cases.‖
2.Even if leave is obtained, the authorities make it plain that the Court will only intervene to reverse or modify an act or decision of a liquidator in special cases. The Court will not (in the absence of fraud) interfere in the day-to-day administration of a liquidation; nor will it usually seek to reverse a decision that has been made within the discretion of the liquidator and in good faith.
3.In Commissioner of Inland Revenue v Hulst,[3] Morris J discussed at some length the Court's powers under the Act to supervise the actions of a liquidator (who in that case was a person ―of considerable commercial acumen and experience‖). The Court readily held that the liquidator had not acted unreasonably, when the decision in question was ―a commercial one to avoid the potential costs of advice and litigation, deal quickly with the litigation, and was not inconsistent with the information he had‖.
[3] Commissioner of Inland Revenue v Hulst (2000) 8 NZCLC 262,266 (HC).
[9] I consider the foregoing is an accurate summary of the authorities.
[10] The only further reference to authorities that is necessary to note, and which Morris J also referred to in the Hulst decision, is that the onus of proof where the liquidator’s decision is challenged as being unreasonable lies upon the challenger.
Can the original order be reviewed?
[11] I understand that the primary position that the liquidator takes is that the quantum of the remuneration which he has charged in the liquidation from September 2008 forward cannot be reviewed. That is said to be because in November 2008, I approved the charge-out rates on which the remuneration was calculated and that the amount of remuneration has been ―peer-reviewed‖.
[12] The Court has power in appropriate cases to review without notice applications, to hear argument and evidence on notice and, if satisfied that it is
appropriate to do so, rescind the earlier order: DB Baverstock Ltd v Haycock.[4] In
[4] DB Baverstock Ltd v Haycock [1986] 1 NZLR 342 (HC).
Baverstock, Henry J said:[5]
[5] Ibid, at 344.
It is common ground that the purpose of an application under R.264 to rescind an ex parte order is to establish a hearing de novo in the presence of the defendant (Carter Holt Ltd v Fletcher Holdings Ltd [1980] 2 NZLR 80, 84; WEA Records Ltd v Visions Channel
4 Ltd [1983] 2 All ER 589, 593). The purpose of that is to enable a Judge to consider whether, on the basis of all the evidence and
the arguments advanced, the interlocutory orders should stand. Ex parte orders are provisional by nature, being made on the basis
of evidence and submissions from only one side, and for that reason are subject to review without inhibition.
[13] The reason why the Court will approve remuneration on an interim basis is obvious. There will be liquidations which are protracted and it is just and reasonable that a liquidator should receive recompense in the form of a progress payment and not have to wait until the end of the liquidation before he receives any payment at all.
[14] The second point is that it has now become usual for judges to make interim orders approving remuneration subject to a final order approving the overall remuneration directed in a particular liquidation. That approach has been adopted because the Court’s task is to ensure that the liquidator’s charges for the overall project represent proper value. There are dangers inherent in charging on the basis of time recording that the costs charged exceed the amount that the services provided are directly worth. The Court at the end of the liquidation can, by taking into account the overall costs charged, assess with the advantage of perspective whether the costs are reasonable.
[15] It was not stated explicitly in the first order that if it transpired at the conclusion of the liquidation that the overall remuneration claimed was excessive, then the Court could make an adjustment by reducing the final payment even though such adjustment might be based on a perceived need to scale back the remuneration granted under the first order. In my opinion, the order ought to have contained such a provision. However, as I have noted above, the application was expressly based on
Medforce. In that case, the basis on which interim charges were to be permitted was
explained. That is, notwithstanding the making of interim orders for payment of remuneration, the overall remuneration payable to the liquidator was to be reviewed at the conclusion of the liquidation.
[16] I do not consider that it is now too late to vary the original order in the way I have just discussed, given that the order was made on a without notice basis and that the application expressly referred to the principles in Medforce — and which were implicitly applied in the determination. Further, there can be no relevant prejudice to the liquidator by adopting such a course. If he has been overpaid under the terms of the first order, there is no reason why an adjustment should not be made to the required extent when finalising the remuneration he receives for the liquidation overall. Finally, I would be a little concerned if the substance of the liquidator’s submission is that even though he is an officer of the Court, he is able to outflank the Court’s supervision of his overall remuneration by claiming that one or more increments making up his claim to remuneration were, for technical reasons, now beyond the reach of the Court to review.
[17] I have no doubt that the overall remuneration of the liquidator remains subject to review by the Court.
Should leave be granted to the directors to be heard on the issue of remuneration?
[18] In reaching its decision about granting leave, the Court needs to be satisfied that there are reasons why it should depart from its usual practice of dealing with remuneration without hearing from the parties mentioned in s 284(1).
[19] I am satisfied that there are factors present in this case which mean that leave should be granted to the directors to be heard on the review of remuneration. Those reasons are these. First, the affidavits and other material presented by the directors contained some material which is relevant and useful when considering the issue of the liquidator’s remuneration. That is particularly so because one of the directors, Ms Atkinson, is not only a director of the company, but also a chartered accountant. I shall make further reference to her evidence subsequently. While it is true that some of the evidence in the directors’ affidavits is not particularly helpful or
relevant, my view overall is that they contain material which is relevant to the question of the liquidator’s overall remuneration.
The alleged breaches of duty
[20] Mr McAulay and Ms Atkinson are of the view that not only are the liquidator’s costs excessive, but also that there has been disentitling conduct on his part which justifies a substantial reduction in the fees which he has charged. In fact, their position is that Mr Palairet’s defaults have been such that he should actually pay money back to the company.
[21] It is necessary to consider on what basis the Court will conclude that there has been default on the part of a liquidator. I intend to be guided by the judgment of Morris J in Hulst.[6]
[6] Hulst, above n 3.
[22] In that case, it was held that the Court will not interfere with a liquidator’s decision unless it can be demonstrated that there has been fraud; the liquidator’s discretion has not been exercised in good faith; or the liquidator has acted in a way that no reasonable liquidator would have acted.
The directors’ submissions and evidence
[23] Having decided to admit the evidence of the directors and hear submissions from them, it necessary for me to carry out an assessment of the material that they had submitted.
Mr McAulay’s evidence
[24] I regret to say that Mr McAulay’s evidence is not of great assistance. What emerges clearly from it is that he has little regard for accountants and lawyers. His view appears to be that every lawyer and accountant who has become involved in his matrimonial disputes and the liquidation have acted in their own self-interest with a view only to maximising the fees that they can charge. He has also attacked the
honesty of the liquidator without proper grounds for doing so. The picture that
emerges is that of a witness who has an exaggeratedly cynical view of practitioners belonging to the two professions whom he has encountered in recent years.
[25] Having said that, I note that Mr McAulay makes the points that the liquidator’s charges total $150,000 approximately, which he believes is self- evidently excessive. Apart from that, he asserts that the liquidator mishandled warranty claims and made enquiries into areas which were not in dispute. I accept that, assuming there was a sound evidential foundation for those assertions, those would be issues relevant to fixing remuneration.
Ms Atkinson’s evidence
[26] Ms Atkinson set out the background as to why the company had to be liquidated, which essentially came about because of the breakdown of the marriage of Mr and Mrs McAulay and the commencement of her relationship with Mr McAulay. Ms Atkinson said that Mrs McAulay’s conduct made it difficult for Mr McAulay and herself as directors to run the company against a background where Mrs McAulay was making allegations of fraud. Ms Atkinson, too, expressed criticism of professional advisers that Mrs McAulay had retained. It is her allegation that the complaints which Mrs McAulay’s lawyer made of misappropriation of company funds led the liquidator to carry out unnecessary checks on the state of affairs of the company’s accounts and that the liquidator therefore wasted time and money on futile and unnecessary enquiries.
[27] Ms Atkinson asserts that there were mistakes in the financial statements that the liquidator produced. She says for example that an advance to Mr McAulay in the sum of $153,841 was incorrectly shown as being in the sum of $280,070. Furthermore, Ms Atkinson says that in the accounts which he prepared, the liquidator incorrectly classified a warranty reserve by showing it as a liability. There are other criticisms made of the financial statements which are not necessary to set out in detail.
[28] Ms Atkinson expressed scepticism about the value of the efforts that the liquidator made to recover debts for the company, saying that while money was
indeed recovered, it was not really due to his efforts. The company had liquidated its assets, apart from some unpaid debts, before the liquidator even came onto the scene.
[29] Ms Atkinson also criticises him for advancing the sum of $27,000 to Mrs McAulay without any authority for so doing and without the agreement of herself and Mr McAulay.
[30] Ms Atkinson gave a brief history of the liquidation proceedings. She referred to the fact that the company had sold its business several months prior to being placed into liquidation by the High Court. She had overseen payment of creditors and tax and other payments. She referred to the allegations and complaints by Mrs McAulay that there had been fraudulent and improper conduct on the part of herself (Ms Atkinson) in managing the financial affairs of the company. She recounted that she met with the liquidator for an appointment to discuss the liquidation and to supply him with accounting, taxation and administrative records. She also discussed with him various issues that Mrs McAulay had alleged.
[31] Ms Atkinson said that the liquidator had not made proper disclosure of what he was spending his time on, and how much cost he was incurring as his own fees and the fees of his legal counsel. She disputes that there was any need for the liquidator to investigate complaints made by Mrs McAulay. Ms Atkinson said that the company’s records, accounts and financial statements which she provided to the liquidator were self-explanatory and that there was no need for him to enquire further. Ms Atkinson claims to be vindicated in this because the liquidator did not make any changes to the financial accounts which she had prepared.
[32] In addition, Ms Atkinson complained that there was little communication between her and the liquidator about financial matters and about ―how he was conducting the liquidation‖. She said that the enquiries the liquidator made into the substance of the complaints that Mrs McAulay had brought to his attention were inconsistent with the fact that the liquidator, at the outset of the liquidation, said he did not intend to become involved in the dispute between the two factions. Ms Atkinson says that if Mrs McAulay was determined to have all the accounts
investigated she should have done it at her own expense and not by using the vehicle of the liquidator’s time to achieve that purpose.
[33] Ms Atkinson makes some criticisms of the technical accuracy of some of the accounts prepared by the liquidator, claiming that some of them did not reconcile. Further criticisms of the liquidator include failure to pay taxes on time which allegedly resulted in penalties being charged. She complains that the liquidator provided information to Mrs McAulay which she did not give to Ms Atkinson and this was at the company’s expense.
[34] She makes various criticisms of the evidence of the expert accountant who has provided an affidavit for the liquidator, Mr Vance. She points out the disclaimers in Mr Vance’s affidavit which include that he has not perused any accounts or other documentation generated in the liquidation assignment. He is further criticised for describing as ―realisations‖ what, in effect, were the proceeds of sale of the company’s business which were placed to the credit of the company’s bank account without the liquidator being at all instrumental in that process.
The complaints in summary
[35] In summary, then, the following issues are raised by the directors in their evidence and submissions:
a) the liquidator mishandled warranty claims brought against the company. The directors assert that the decision that he made to reach a settlement on a warranty-related matter and to pay a sum to the claimant was wrong and unjustified and that he should accordingly compensate the company. The directors need to obtain leave to apply to the Court for the orders that they seek;
b) the quantum of the liquidator’s charges which was in excess of
$150,000 is self-evidently excessive;
c) the liquidator unnecessarily involved himself in examining whether the accounts that had been prepared prior to liquidation gave a true and correct account of the company's position;
d)the liquidator unnecessarily involved himself in allegations made by Mrs McAulay and in the disputes between the shareholders, and that Mrs McAulay ought to pay the cost of any such investigation;
e) mistakes were made in preparing the accounts;
f) there was little debt collecting that genuinely needed to be done because the assets of the company had been realised prior to liquidation and the liquidator has overcharged having regard to that feature of the case;
g) the liquidator wrongly advanced $27,000 to Mrs McAulay; and
h) the liquidator had not properly explained what his time was spent on.
[36] Following the first day’s hearing in this matter, I raised some additional matters of my own motion which I asked the liquidator to respond on with responses to be copied to the directors and to Mrs McAulay. The matters in question were set out in a minute which I issued on 26 July 2010.
Expert evidence
[37] Before I examine the evidence and arguments further, it is necessary to make some mention of the three affidavits made by an expert liquidator which the liquidator filed in this case.
[38] The scope of the expert evidence filed by a witness for the liquidator was of limited value in this case and really did not go beyond commenting on the charge- out rates. Nor was it balanced by expert evidence called by the opposing parties. I appreciate that for reasons of cost it may not have been feasible to produce comprehensive expert evidence that would assist the Court.
[39] I also note that the Code of Conduct for expert witnesses was not complied with by the expert who gave evidence for the liquidator by, inter alia, not including in the evidence an acknowledgement that the expert witness had read the Code of Conduct and agreed to comply with it.
[40] That said, the witness, Mr Vance, is known to the Court as a reputable chartered accountant and liquidator, whose experience in the field would enable him to properly give the opinions that he has stated in his evidence. As well, the remuneration rates that he referred to seem to be within the range of charges that are commonly approved by the Court. Notwithstanding the failure to comply with the Code of Conduct, in the absence of cogent and reliable material pointing to a different conclusion, I believe it is safe to accept Mr Vance’s evidence on this point.
[41] The liquidator’s general response to the claims about the remuneration will now be set out.
The charges, quite simply, reflect the time in attendance by BDO Spicers staff doing necessary work on the liquidation. And even when one steps back and views the entire liquidation in the round, the total remuneration charged is entirely proportional — $102,670 in fees by comparison to distributions to shareholders totalling $1,140,732 (around
9%). I refer also the schedules attached to this synopsis.
[42] Subject to the qualifications that I have mentioned, Mr Vance’s evidence does provide some support for the propriety of the overall level of charges made by the liquidator.
Complaint that directors not consulted about the fixing of remuneration
[43] The complaints by the directors that the remuneration was fixed without reference to them is not a matter which would justify the Court re-opening the issue of remuneration and fixing a different level of remuneration. The arrangement by which liquidators’ remuneration is fixed on a ―without notice‖ basis has been generally adopted as confirmed by the discussion of the Court in Re Roslea Path Ltd
(in liq).[7] That outcome essentially follows from the fact that the liquidator and a
liquidation committee are the only parties to have standing to apply to the Court directly without leave first being granted. The broad policy justification for such an approach is that the Court generally finds that it can rely upon liquidators as officers of the Court to discharge their obligations conscientiously and to put before the
Court the necessary material it needs to carry out the assessment of remuneration.
[7] Re Roslea Path Ltd (in liq); Flynn v McCallum HC Tauranga CIV-2005-470-611, 17 December
2009 [Roslea].
[44] In Roslea, the Court explained the justification for the Court’s trust in liquidators in the following terms. First, liquidators are appointed by the Court. Before appointing a liquidator, the Court needs to be satisfied in the competence, integrity, independence and impartiality of the nominee, and can require the nominee to provide a resume confirming his or her independence and relevant experience (unless that person has been regularly appointed by the Court and is known by the
Court).[8] Secondly, liquidators appointed by the Court are under its direct control:[9]
see Re Byers ex parte Davies,[10] where the Court had jurisdiction to direct the Court- appointed Assignee not to take advantage of a mistake, even though it would not prevent an ordinary party from doing so. The principle was held to extend to any officer of the Court.
The adversarial atmosphere in which the liquidator had to function
[8] Ibid, at [128]–[130].
[9] Ibid, at [131].
[10] Re Byers ex parte Davies [1965] NZLR 774 (SC).
[45] A central feature of the background to the litigation was that the liquidation of this company coincided with, or indeed seems to have been brought about by, the breakup of the marriage of two of the shareholders and directors of the company and the establishment by Mr McAulay of a relationship with the third shareholder and director, Ms Atkinson.
[46] Regrettably, but perhaps understandably, animosity from that source has carried over to the dealings between the parties over the company and its business. The liquidator asserts on oath that this additional element has increased the time involved on the part of himself and his staff in dealing with the liquidation. He says that the liquidation was carried out in a climate of hostility and that there was suspicion between the two opposing shareholders factions; that decisions were contested and that one side or the other would be displeased with any decision that he took. The liquidator’s assertions are plausible.
[47] Each of the three parties with a stake in the company, Mr McAulay, Mrs
McAulay and Ms Atkinson retained legal advisors who made representations concerning the way that the liquidation was to be carried out. Mrs McAulay was
also a trustee of the McAulay Family Trust. At some point it was proposed that a new and sole trustee be appointed for the McAulay Family Trust, namely New Zealand Guardian Trust.
[48] The liquidator himself instructed solicitors to advise him on the method of distribution of the assets after the necessary payment of liabilities. Criticism has been made of some of the details of how this was carried out by the liquidator but in my view that is beside the point as he was acting under what appears to be competent legal advice. A further issue which seems to have engaged the liquidator’s attention arose out of the dispute between Mrs McAulay and the other directors and shareholders about Ms Atkinson’s shareholding in the company and whether steps should be taken to challenge the allocation of shares.
[49] It would be surprising, in my view, if the antagonistic climate in which the liquidator had to perform his tasks did not lead him to carry out checks into matters that bear on an ordinary liquidation and would need to be the subject of a review by the liquidator. Mrs Dori McAulay made serious assertions of misconduct against those who had control of the company’s business (Mr McAulay and Ms Atkinson). This would have had two results. First, whatever the liquidator decided would be the subject of close scrutiny if not challenge. Secondly, unless he could be confident that the assertions that Mrs McAulay made were baseless, he had to maintain a neutral but watchful stance when considering actions that had been taken by the directors and the way in which the company accounts had been prepared. I will make further reference to how this circumstance impacted upon the individual phases of the liquidation which are under scrutiny in this hearing at the appropriate point in the judgment.
The warranty claims
[50] The brief facts related to the warranty claim are these. The company manufactured machines which would generate air currents over orchards as a protection against frost settling on plants. It exported machines to Australia. It actually exported as far afield as Canada, but the issue over the warranty arose in relation to the Australian market.
[51] The company had an agent in Australia which dealt with warranty claims where repairs needed to be undertaken. The company had supplied the agent with a supply of spare parts to use when a machine had to be repaired under warranty in Australia. The agent claimed from the company certain sums under its contract with the company including the cost to it of spare parts which it supplied in the course of repairing a customer’s machine. The agent was an Australian company called Aussie Frost Fan Pty Ltd (―AFF‖), which was claiming for the amount of AU$88,144.84 (including GST). The liquidator eventually settled the claim for AU$32,675.42, and after a GST refund was recovered, the actual cost to the company was AU$28,295.07. The directors say that the liquidator mismanaged this claim and that he should not have paid anything to AFF. The directors allege that AFF actually used parts which had been supplied to it by the company without cost, as part of making good the warranty claim, and that therefore AFF had no justification for claiming back the cost of the parts used from the company.
[52] The liquidator says, though, that when he investigated the claims the directors made, he found that the parts that Mr McAulay claimed had been the subject of
―double dipping‖ had in fact been utilised by AFF on other warranty work done for
the company in Australia.
[53] Essentially the challenge that is made in this case is on the basis that the liquidator did not require, as he ought to have, proper proof that the AFF warranty claim was a valid one. The directors assert that the liquidator did not follow the procedures which the company, while under the control of the directors, would have. Serial numbers were not sought in order to compare them with company export records, nor did the liquidator ask to see the broken parts or get confirmation that the machine had been properly operated and serviced, for example.
[54] The directors assert that there was no need for the liquidator to pay anything to AFF under the warranty claims. In addition to the other points that I have already noted, it was submitted that the warranty claims were out of time. That is, the directors’ submission was that the company warranty was for a period of two years only. Ms Atkinson pointed out that the warranty repairs for which AFF sought reimbursement were outside that two year period. Therefore the agent in Australia,
AFF, who would have known of and been bound by the warranty period, ought not to have carried out the work and therefore was not entitled to reimbursement. However, as the liquidator has said in his affidavit in reply, he took legal advice on these matters and the advice was that notwithstanding the limitation contained in the contractual warranty, there was still a potential exposure for the company under the fitness for purpose revisions of the Sales of Goods Act 1908.
[55] The next point made was that Mr Palairet did not, as he could have, request the directors’ travel to Australia to investigate the claims. Had he done so, it was said that it might have been discovered that the damage to the machines was not due to problems of manufacture or design but through operation. I have no doubt that Mr McAulay is very experienced and knowledgeable in the field of wind machines. But it does not follow that the liquidator ought to have retained his services. The liquidator may not have known Mr McAulay well enough to have confidence that he would manage the dispute in a sensible and cost-effective way. That is, there is no reason to assume that the liquidator ought to have had sufficient faith in Mr McAulay to entrust to him the dealings of the warranty claim. The liquidator would no doubt have wished, if at all possible, to avoid inflaming the dispute with the agent. Given the very real difficulties that had developed between the liquidator and Mr McAulay, the liquidator may not have felt that it would be wise to put forward Mr McAulay as his representative.
[56] A review of the liquidator’s actions in the factual setting of the liquidation leads me to the view that it would not be fair and reasonable to reduce the liquidator’s remuneration because of aspects of the way that he managed a warranty claim brought against the company.
[57] I agree that in the face of legal advice that there was a potential claim available under the warranties, it was reasonable for the liquidator to take the view that a sensible way to manage the risk was by attempting to reach a compromise with the Australian agent.
[58] I make the further concluding comment that it may well be the case that the directors might have done a better job of managing the warranty claims. But the fact
was that the liquidator had supplanted the existing management as a result of the company going into liquidation. A significant contributing reason that the company went into liquidation in the first place was that the owners (to which category the management belonged) did not trust each other. Therefore, for the liquidator to involve one faction of the owners in further activity on the part of the company would probably have caused further disputes and suspicion.
[59] I am not satisfied that the directors have a credible factual basis for advancing their claim that the liquidator made an error which caused loss to the company when he compromised the AFF warranty claim.
[60] My concluding comment is that it would be a mistake to assume that a liquidator’s role in terminating the business activities of the company requires him to carry out all his functions in the same way that the company’s officers would have done had the company been continuing in existence. When it comes to matters of trade, it is obvious that in many instances a liquidator will not have the same grasp of the company’s business and the same experience of the trade in which the company is involved to get the same results as the proprietors would if they were still in control of the company. Further, the liquidators, when dealing with the wide array of companies that they become involved in, could not possibly be experts in all the businesses carried on by those companies. The liquidator’s mandate is different from that of the proprietors of an operational company. The liquidator’s imperative is to conclude the liquidation with all proper speed, efficiency and economy. He or she is required to bring to the liquidation broad commercial good sense and judgement. There has to be an appreciation that often the alternative to quickly and sensibly compromising on a claim which appears to have merit will involve the liquidator accumulating chargeable hours which are out of proportion to what is at stake and, if it comes to that, incurring the expense and running the risks inherent in litigation if no sensible compromise can be reached. While it might be cost-effective for the proprietor of a business to pursue a dispute, a liquidator may have to take a different approach — one that recognises, inter alia, that the creditors will have to bear the substantial hourly cost of the liquidator carrying on the dispute. The position of the business proprietor is likely to be different, with the cost of resolving disputes being part of the company’s overhead costs.
[61] For the reasons I have given, therefore, I do not consider that the liquidator’s conduct in this case comes within one of the categories where in terms of Hulst the Court would be justified in interfering. Mr Palairet has given a rational account of why he made the decisions that he did. Where appropriate (both in the area of guarantees and others) and where it was advisable for him to do so, he obtained legal advice. The case advanced by the directors does not persuade me that the Court would have approached the matter of the guarantees differently from the way in which Mr Palairet did.
Allegation that the liquidator involved himself in disputes between shareholders
[62] As I have already noted, the position that the directors took was that the liquidator did not need to embark upon any enquiry as to what entitlement each of the shareholders had to the surplus funds left over after payment of creditors and settlement of warranty claims and other matters. It is said that all that the liquidator needed to do was to consult the company records which would provide the relevant information as to respective shareholdings.
[63] The elements of the liquidator’s fees which are brought into question by the directors’ assertions are summarised in the ―by task‖ schedule contained in the liquidator’s affidavit of 3 June, 2010. The relevant portion of that schedule gives the flavour of the investigations that were carried out. It reads:
Investigation: investigation of the Company' s transactions, pre- liquidation, consideration of management fee, review of affidavits, consideration of shareholder issues including dividends and loan accounts; correspondence and emails around dividends, loan accounts and payments to related parties, determining contingent liabilities on warranties, determining contingent liabilities under the lease obligations to third-party $11,512
[64] The complaint which the directors make is that the liquidator had no entitlement to become involved in the dispute between them and the other shareholder, Mrs McAulay. In this area, as all others, the conduct of the liquidator must be judged by the standard of reasonableness. Whether he liked it or not, the liquidator found himself caught between two hostile factions. Mrs McAulay had retained counsel to act for her and had a trust associated with her. Counsel had threatened the liquidator with proceedings if he distributed on the basis of the
shareholdings shown in the company records. I understand that the contentions that were made for Mrs McAulay included that transactions from which Ms Atkinson or entities associated with her had benefited ought to be set aside, and that the transfer of shares to Ms Atkinson’s trust ought to be struck down. As a result, it was alleged that the legal ownership of shares disclosed by the company share register was not the proper basis upon which distributions to the shareholders ought to be made. The grounds upon which the transactions involving Ms Atkinson were allegedly open to attack were that she had misused her role as a person owing fiduciary obligations to Mrs McAulay and the McAulay trust.
[65] It was not unreasonable in my judgement that the liquidator should consider these allegations and investigate them to a sufficient extent where he could be satisfied that he should distribute in accordance with the company record of the shareholdings, rather than on some other basis. More specifically, in order to carry out a distribution of the surplus assets of the company, the liquidator had to know who had a justified claim on them. That involved resolving the net state of the accounts of each party vis-á-vis the company. A party who had previously received in excess of his or her entitlement would have to give credit to that extent on the distribution of the surplus assets.
[66] There were allegations that some of the directors had received more than they were entitled to. This required that the liquidator investigate the position. He has deposed that he found that loans had been made to the Aspley Family Trust (Ms Atkinson’s family trust) in the sum of $127,523. Mr McAulay had received advances of $131,063 and $149,007. Mrs McAulay had received advances of
$36,527. It had been asserted that the loans to the Aspley Family Trust and Mr McAulay had not been properly authorised. As well, the liquidator had to enquire into what drawings had been taken, dividends received and any management fees paid. In relation to the last item, Ms Atkinson’s family trust had received payment for management fees claimed on the basis that she had done contract work for the company.
[67] Whether a shareholder could claim and the extent of his or her entitlement depended upon the proportion of shares held in the company. It was true that
records were kept which purported to show what the various shareholdings were, but this information was contested. The main focus of this dispute was on the shareholding of the Aspley Family Trust. It was shown as owning 26 per cent of the shares of the company. It was not claimed that the trust had purchased the shares for cash. Ms Atkinson and Mr McAulay contended instead that the shares had been transferred by way of recognition of ―sweat equity‖. These were issues of substance and not a patently unfounded complaint arising out of the acrimonious circumstances of the parting of Mr and Mrs McAulay. That is evidenced by the fact that the issue concerning the shareholdings was seen as a live issue by New Zealand Guardian Trust when it was appointed as a replacement neutral trustee in the McAulay Family Trust. In fact, New Zealand Guardian Trust had at one point threatened in May 2008 to seek an injunction against the liquidator to restrain distributions pending a further application that was to be made to challenge the asserted allocation of 26 per cent of the shares in the company to Ms Atkinson.
[68] I am not satisfied that the liquidator was in error in dealing as he did with the disputes over the company shareholding.
Allegedly unnecessary review of company’s accounts
[69] The next point concerns the assertion that the liquidator needlessly reviewed the company accounts. He is criticised because, it is said, the accounts had already been prepared to a proper standard and this was evidenced by the fact that the liquidator did not make any changes to them.
[70] For his part, the liquidator has explained that four distributions to shareholders occurred during the course of the liquidation. On each occasion, the liquidator says that he was required to analyse the cash position of the company and related questions in order to determine how much, if any, cash was to be distributed to the individual shareholders.
[71] The relevant part of the ―by task‖ schedule which relates to this part of the assertions made by the directors reads as follows:
Financial statements: Preparation of financial statements of the
Company for the year ended 31 October 2007, 2008 and 2009, monthly
updating financial records to enable distribution statements to be prepared and periodically provision of information to shareholders on request, research into deductibility of:
Excess remuneration for shareholders; Legal fees 2006–2008;
Patent application and copyright;
Foreign exchange losses from financial arrangements; Provision for warranty; and
Liquidation costs.
[72] I consider that the background of acrimony between the shareholders is a relevant aspect of the context in which the liquidator was required to carry out this part of the work. That is no doubt why the subject of excessive distributions for shareholders was a topic of sensitivity.
[73] I mentioned in the previous section of this judgment that the liquidator takes the position that the true state of the shareholders’ current accounts with the company had to be determined as a preliminary to distribution of the surplus remaining after payment of debts. I have expressed my agreement that this was a necessary step.
Preparation of accounts by liquidator
[74] One of the more significant payments of the liquidator’s charges was the
amount claimed for preparation of financial statements for years ended 31 October
2007, 2008 and 2009. The sum of $15,734 was claimed for this item. In a minute which I issued 26 July 2010, I asked the liquidator to consider this issue in an additional affidavit which I suggested should be filed. I invited him to explain the source of the obligation that he apparently understood he was under to prepare financial statements for the 2007, 2008 and 2009 years.
[75] Mr Gordon, in response to that minute, in submissions which he prepared for the liquidator for the resumed hearing, noted that the position where a liquidator carries on the business of the company is governed by reg 39 of the Companies Act
1993 Liquidation Regulations 1994. The regulations provide:
39. Liquidator carrying on business
Where a liquidator carries on the business of the company, he or she must keep accounting records for the carrying on of the business of the company that comply with section 194 of the Act to the extent that that section is applicable.
[76] Section 194 of the Act imposes the requirement for the board of a company
to keep ―accounting records‖.
[77] Mr Gordon submitted that this regulation applied in the circumstances of this case and I agree.
[78] Having reviewed the evidence and additional submissions, I am satisfied that there was such an obligation. The fees charged for this work are part of a sum of
$15,734 billed for the additional work as well as the accounts. The relevant invoicing included consideration of issues such as deductibility of excess remuneration for shareholders and patent and copyright matters. It is not possible to break out from the evidence how much of this sum was billed for preparation of the accounts.
[79] The real issue is not the scale of the charges for the work done. The point raised is whether this part of the work ought to have been undertaken at all. I consider that the liquidator was justified in undertaking the work.
Alleged mistakes made in the accounts
[80] Ms Atkinson criticised the liquidator for what she said were mistakes in the accounts which had to be corrected. It was her assertion that those affected by the mistake that was made ought not to have to pay for it to be rectified.
[81] The process of approving liquidators’ remuneration involves the Court making a decision in the round about the reasonableness of the remuneration. The Courts have warned against the potential for the process of examination of the liquidators’ remuneration to become oppressive. The enquiry needs to be proportionate to what is at stake. It does not involve the Court supervising the detail of the liquidator’s work. It is not a quality control process. The Court will examine
material placed before it and ask itself whether in general terms, there are grounds for concern that the liquidator has made an excessive claim for remuneration. It will be a matter of degree how far the Court will descend into matters of detail. The Court must bear in mind that if it puts in train enquiries to which the liquidator must respond, that will cause the liquidator to incur costs. The Court will not be deterred from enquiring, where grounds exist to suppose that there may have been impropriety or misconduct, or where there are grounds to suppose that the costs are out of kilter with what was required to reasonably conduct the liquidation in the particular circumstances of the company concerned. If there are no good grounds to suppose that the work which is being invoiced at professional rates charged by accountants has been carried out in a way that obviously falls below the required professional standard, then the Court will intervene. Otherwise the creditors will be required to pay the liquidator at a rate at which he is not entitled to claim.
[82] Except in the case of obvious or flagrant negligence it may be difficult in a given case to determine whether the point has been reached where the Court ought to intervene. Although the issue does not arise in this case, the Court would act more readily where there was reliable independent expert evidence which suggests that the work has little value or that substantial sums will need to be expended to remedy the work that has been done.
[83] That is not the case here. Arguments about whether a maintenance warranty reserve ought to be treated as a liability in the books of account, to take an example that Ms Atkinson raised, are not appropriate subjects for enquiry. Nor are the disputes about whether the correct figures have been adopted for particular items in the accounts something the Court should enquire into.
[84] Questions of whether or not an apparently experienced and well-qualified liquidator has made a mistake in dealing with an item in the accounts and had to remedy the situation and the further issue of whether the liquidator should compensate the company for the correcting the position are questions that are not outside the Court’s jurisdiction.
The amounts charged for pursuing “Realisations”
[85] In the analysis of liquidator’s total remuneration on a ―by task‖ basis, the following summary is provided:
Realisation of assets and creditor payments: Realisation of Company assets, collection of debtors, including instructing an Australian debt collector, monitoring the sale of the Canadian machines to enable collection of debtors, payments of creditors $5,160
[86] I accept that the directors made a fair point when they assert that such realisations as the liquidator was responsible for must have been relatively minor and that it was erroneous to assume that the liquidator had been responsible for
―realisations‖ of $993,015 to 13 June 2008, when in fact these are the proceeds of sale of the business which were lodged in a solicitor’s trust account pending distribution. In his second affidavit sworn 8 October 2008 when commenting upon the reasonableness of the charges, Mr Vance again expressed the view that the remuneration that he was commenting on, which had been charged in the interim period since his first affidavit — a sum of approximately $21,000 — was reasonable having regard to ―… the tasks undertaken and completed and looking at the level of realisations involved in this liquidation‖. I note, incidentally, that the statement which I have just quoted was repeated verbatim in his next affidavit dated 24 July
2009 when he expressed his approval of additional liquidator’s charges of
$48,397.81.
[87] The liquidator in his last affidavit dated 28 October 2010 accepted that:
The extent of the work done by me in this area was not that extensive. The total costs incurred on the work accounted for $5,160 out of the total remuneration charged of $102,670 — so about 5% of the total cost of my appointment.
[88] Given the extent of the efforts that the liquidator actually made to recover debts, the figure of $5,160 just mentioned would have to be seen as at the upper end of what amounted to a justifiable charge. However, in the overall context of the case I do not believe that would justify the Court in reviewing downward the overall remuneration claimed by the liquidator.
Other miscellaneous points
[89] I have noted the criticism made of the liquidator for making an advance to Mrs McAulay without proper authority. I am not persuaded that this issue has any bearing on the remuneration of the liquidator. I do not consider that the Court should, even if it sustained the complaint, impose a penalty on the liquidator by way of reducing the remuneration payable. If the correct approach was to enquire into what financial loss the parties affected have suffered, there is inadequate evidence available on which I can determine the issue. I do not therefore intend to take the issue of the unauthorised advance into account.
Assessment of overall reasonableness
[90] That brings me to the ultimate matter placed in issue by these proceedings, namely the overall reasonableness of the liquidator’s costs. In the particular circumstances of this case, the Court is required to carry out its usual task of evaluating and assessing the extent of the obligations of the liquidator. That is, it looks at what the liquidator actually had to do. In this case, there were the usual obligations to ensure that legislation had been complied with, to generally acquaint himself with the business that the company carried on, when necessary to investigate transactions involving the company, to familiarise himself with the company’s constitution and the other various functions that the liquidator must attend to. In this case, the liquidator says that he was also required to prepare financial statements and I have concluded that, on balance, there was a need for him to do so.
[91] The liquidator’s tasks, then, were a mixture of usual or generic ones which have to be undertaken by liquidators generally. Those tasks and the commitment of effort required vary depending upon the individual circumstances of each company. In the latter regard, a level of detail has been provided by the liquidator which enables the Court to form an impression of the particular circumstances of the company in liquidation — that is, the liquidation in which the liquidator was actually involved. Schedule B contains a summary of the liquidator’s attendances on a ―by task‖ basis. This provides valuable information as to the extent of the work which
the liquidator undertook. As I have noted above, the liquidator undertook the preparation of accounts for the years ended 2007, 2008 and 2009. I have concluded that this last work was probably necessary. Counterpart tax returns for the same years were required as well as dealing with GST issues. There was also present an additional feature not generally found in liquidations, which was the necessity to deal with subsidiary and associated companies.
[92] Apart from the actual tasks undertaken, due consideration must be given to the overall environment that the liquidator and his staff were working in. As noted above, the environment in this particular liquidation was an adversarial one, which would require the liquidator to conduct more checks than it would otherwise be necessary.
[93] Whether a particular category of tasks is or is not one that the liquidator should undertake may, to some extent, be influenced by the resources that are available. By that, I mean that in some liquidations there will be so little money available for the liquidator that it will be impossible for him or her to do anything more than perform the bare statutory obligations. Further, in a case where the size of the fund that is to be distributed is very substantial, or where the number of parties affected is greater and there are a number of competing claims, more extensive effort may be called for on the liquidator’s part to provide assurance that the company has complied with the relevant constitutional requirements and statute law. That is, to provide a degree of assurance which is appropriate to the circumstances may involve more work on the part of the liquidator and greater resulting cost. Obviously, where the business is still active in whole or in part and the liquidator has to take steps to close it down, that may be a factor which increases costs. Against that, in the case of a solvent company, as here, there is not the same imperative to investigate matters such as whether preferential dealings had occurred between the company and its shareholders at the cost of external creditors.
[94] That said, the Court will be watchful to ensure that where the company has ample funds the liquidator is not tempted to ―over service‖ a liquidation;[11] and that the costs charged matches the value of the benefits provided by the liquidator.[12]
[11] Roslea, above n 7, at [215].
[12] Ibid.
[95] Mr Gordon drew to my attention that dividends of some $1.1 million had been paid out by the liquidator and that his fees as a percentage of those distributions were in the area of 9 per cent, which he submitted was a factor which supported the liquidator’s application for approval. My assessment of this submission is as follows.
[96] The Court may conclude that the liquidator’s charges are too high even where amounts charged are low in proportion to the amounts realised for creditors. If, for example, a liquidator is able to recover what is owed by doing no more than making a demand which produces a large amount of money, it can hardly be said that the proportion of the amount recovered in relation to the amount charged by way of fees throws much light on the reasonableness of his charges. Compared with that, in another case where a liquidator has to pursue claims in the face of intransigent opposition and the realisations are the aggregate of many small claims brought by the liquidator, then even remuneration amounting to 20 per cent of the realisations might be seen as being fair. This demonstrates, in my belief, that while the degree of success enjoyed by the liquidator — measured in amount of money recovered for the creditors — can be a useful check on the reasonableness of the charges, it is very much a context-sensitive issue. There would be little point in extrapolating from one case to another the ratio of fees to recoveries, where the fact situations are entirely different.
[97] The next issue concerns the calculation of the liquidator’s fees. This has been arrived at, as is normally the case, by time costing. It can be difficult for the Court to assess whether a reasonable amount of time had been claimed to carry out the overall tasks of the liquidator or any particular part of them. Concentration on the detail of individual parts of the claim is of less importance than making a
judgement about propriety of the overall charges. However, if any part of the
charges gives the appearance of having been based upon a manifest over- commitment of time to a task, then the time allowance must be reviewed downward.
[98] I accept that in some cases it will be possible for an aggrieved party to succeed on a submission that on any possible view, the liquidator has charged so much that it must be viewed by the Court as being outside the parameters of what is fair and reasonable. To take a perhaps extreme example, if in the present case the liquidator had charged $750,000 to carry out the liquidation, the sum would be seen as so inherently excessive that the Court would not countenance it. In this case, that feature is not present.
[99] The evidence on this issue is first, that of the liquidator, and second, that of Mr Vance. As to the former, the Court reposes trust in liquidators as officers of the Court to ensure that their charges are based upon rates that are not out of line with those of other practitioners with whose charges their own can be reasonably compared. In effect, Mr Palairet’s evidence provides the necessary assurance that that is so. Further, he is supported by the evidence of Mr Vance about the overall reasonableness of the charges made by the liquidator. The evidence broadly speaking, makes the following points:
a) that the range of tasks undertaken by the liquidator was acceptable and necessary;
b) that the hourly rates charged were within an acceptable range;
c) that the overall remuneration charged was reasonable.
[100] In this case, there are practical limitations to the rigour of the enquiry which the Court can carry out. The Court did not have the undoubted assistance it would have had from expert evidence balancing that called in support of the liquidator’s application. Nor was there cross-examination.
[101] In the end, though, the Court has to judge the matter on the evidence that has actually been placed before it. It is my judgment that the liquidator has satisfied me that the remuneration claimed is reasonable and justifiable.
Result
[102] The application which the liquidator filed dated 24 July 2009 for an order fixing remuneration for his acting as liquidator after 31 August 2008 is granted. The application of the directors for orders fixing remuneration at the sum of $20,000 and consequential orders for repayment of money taken by the liquidator for fees is dismissed. The application for an order reversing the decision of the liquidator to settle the AFF warranty claim is dismissed. If the parties are unable to agree on costs, they should let me have brief memoranda within 21 days of the date of this
judgment and I will deal with that issue.
J.P. Doogue
Associate Judge
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