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Liquidator leaps the proportionality hurdle

On 22 December 2015 the Supreme Court of South Australia handed down its reasons in Macks v Maka [2015] SASC 200 (“Macks”).

The decision of Judge Bochner, a Master of the Supreme Court of South Australia, involved the application and development of the concept of proportionality in applications for the fixing of remuneration, as had been approved by the Full Court of the Federal Court of Australia in Templeton v Australian Securities and Investments Commission [2015] FCAFC 137.[1]

The decision is an example of an insolvency practitioner successfully proving that his or her remuneration for which approval was sought was proportional to the returns realised and reasonable in the circumstances of the administration.

Background

On 4 July 2013, Eastwood Insulation Pty Ltd (“the Company”), East Insulation Pty Ltd (“East”) and Portisle Pty Ltd (“Portisle”) were all placed into voluntary administration. Mr Maka, one of the defendants, was the sole director and shareholder of the Company and Portisle, and a director and shareholder of East. A Deed of Company Arrangement (“DOCA”) was entered into by the Company, East and Portisle. The Company was later placed into liquidation by resolution of its creditors.

The plaintiffs were at the time of their application deed administrators of East and Portisle and liquidators of the Company.

In January 2015 the Portisle DOCA was fully effectuated with all unsecured creditors receiving 100 cents in the dollar. The East DOCA was also in the process of finalisation, with all unsecured creditors expecting to receive 100 cents in the dollar.

The plaintiffs sought determination of the quantum of their remuneration for the period they acted as deed administrators of the Company from 20 August 2013 to 6 March 2014 and as liquidators from 6 March 2014 to January 2015, in the amounts of $137,000.00 and $311,000.00 respectively.

The defendants raised a number of objections to the sum of remuneration sought being approved, their main objection being that the amounts for which approval was sought were not proportional to the total amount recovered by the unsecured creditors during the appointments.

The defendants asserted that the plaintiffs would receive remuneration close to $1 million for the total engagement with the return to creditors being estimated between 41 – 61 cents in the dollar (or a total return of $1.7 million). The defendants argued that this return would only be available to the creditors in the event the insolvent trading and preference claims pending were successful, and that there would be a worse outcome if the claims were unsuccessful. In light of this contention, the defendants submitted that even if the work carried out and the hours spent were reasonable, the amount claimed would be excessive based on the final return to creditors.

Decision of the Supreme Court

Judge Bochner held that the defendants had failed to make out their objection on the basis of lack of proportionality by incorrectly applying the “like with like” principle to determine the correct remuneration for which approval was sought in proportion to the realisations made. The plaintiffs therefore had the total sum of remuneration they were seeking approved.

Discussion

Her Honour referred to a number of decisions of the Federal Court of Australia, the Supreme Court of New South Wales and the Supreme Court of Victoria in support of her findings.

The following should be noted:

  1. The decision illustrates a clear and helpful application of the comparator or “like for like” principle articulated by the Full Court of the Federal Court in In her own words, her Honour stated at [63] that to determine the correct comparator the Court must:
    • consider the overall return, or anticipated return to creditors, but not to the exclusion of other factors; and
    • make an assessment of remuneration in light of the value of work in each category, as against remuneration claimed for that category.

    Here, the defendants in making their objections had compared the total amount of remuneration claimed (being $986,436.00) as against a return to creditors of 34 – 66 cents in the dollar. Her Honour found that this was the incorrect comparator (it did not compare “like for like”) as the defendants had taken the total amount of remuneration and had only compared it to the potential return to unsecured creditors. This comparison did not take into account the distributions to secured and priority creditors of 100 cents in the dollar which had already been paid.

    Her Honour held at [65] that the appropriate considerations were either:

    • the total amount paid/sought over the entire period of the administration as against a reasonable, pragmatic estimate of all returns to all creditors over the entire period of the administration; or
    • the total amount paid/sought in relation to particular category or time period (or both, i.e. a category of tasks for a particular period, for example, the DOCA period) as against the value of that task category over the period in question.

    On proper comparison, her Honour held that when considering returns to all classes of creditors the overall return would be greater than the 34 – 66 cents in the dollar asserted by the defendants, as the secured and priority creditors had already been paid in full. In such circumstances the amount for which approval was sought was found not to be disproportionate to the realisations and dividends paid even if there was only a return of between 34 – 66% to unsecured creditors.

  2. Her Honour then addressed the second element of the analysis by determining whether the remuneration claimed is proportional by considering the “value for money” principle, which was first discussed in In the matter of GTL Tradeup Pty Ltd (in liq) [2015] FCA 323 per Farrell J, and later developed in Templeton.

    Her Honour identified that the proper approach is to first look to whether the work undertaken was reasonably embarked on, and secondly, to look at the circumstances at hand (for example, the complexity and importance of the work and the seniority of person carrying out the work).

    Her Honour emphasised the importance of characterising and considering the circumstances of the administration, and this is ultimately the issue upon which the defendants’ objections failed. The defendants’ objections were found to be too focused on the overall outcome for creditors. Her Honour stated [61]:

    while the overall outcome to creditors is one factor to be taken into account, it is not the only, or indeed the overriding factor to be considered.

    In reaching a conclusion, her Honour found that the plaintiffs’ conduct of the administration did provide value for money in the circumstances. Her Honour was persuaded by the fact that no other creditors sought to be heard in the application, other than Mr Maka, and that the sometimes repetitious and excessive work carried out by the plaintiffs, and the resultant costs, were due to the actions of Mr Maka.

    Her Honour at [71] considered the conduct of an objector/defendant as a “relevant consideration in determining what work is reasonable in the circumstances”.

    Her Honour stated at [70]:

    in my view, a director of a company should not be in a position to behave in such a way as to increase the costs of an administration, but then object to payments of those costs on the basis of proportionality.

Conclusion

The Macks case confirms that the Full Court’s decision of Templeton (handed down in October 2015) has provided guidance for clear and practical applications of the proportionality approach in the determination of applications to fix remuneration. The decision highlights the importance in considering the circumstances in which the practitioner carried out the administration, and the need to properly (and accurately) articulate the “like for like” principle, in particular by reference to returns to all classes of creditors.

Further, insolvency practitioners should be reassured that the Court is willing to consider all aspects of the conduct of administration (including the conduct of objectors / directors), even in circumstances where a substantial amount (or all) of the company’s assets are exhausted in the payment of the practitioners’ remuneration.

Cowell Clarke has significant expertise and experience in all aspects of corporate insolvency law. If you need any assistance concerning any insolvency related queries, do not hesitate to contact us.

[1] We refer you to our previous client alert “The Full Court confirms application of proportionality’ dated October 2015 which discussed the decision of Templeton and the concept of proportionality.

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