INSOLVENCY
The quest for predictability
Matt Kersey and Dale Smith discuss liquidator’s remuneration

In the recent case of Re Roslea Path Ltd (in liq); Flynn & Anor v McCallum & Anor (High Court, Tauranga CIV-2005-470-611, 17 December 2009, Justices Heath and Venning), a Full Court of the High Court took the opportunity to review and clarify the law concerning the remuneration of liquidators. In particular, the Court considered the leading cases on liquidators’ remuneration, Re Medforce Healthcare Services Limited (in liquidation) [2001] 3 NZLR 145 (Medforce 1), and Re Medforce Healthcare Services Limited (in liquidation) (No 2) [2001] 3 NZLR 158 (Medforce 2), in light of perceived difficulties in the application of the Medforce 1 principles.

The resulting judgment broadly confirms the principles laid down in Medforce 1, and clarifies the procedure, evidence, and considerations for the Courts and liquidators when approaching liquidators’ remuneration, emphasising the concepts of value and proportionality. The decision also gives practical guidance to liquidators, and is accordingly of real practical value to insolvency practitioners, who frequently seek Court sanction of their fees without the assistance of counsel. In particular, the Court outlined the information required to support an application to fix remuneration, with a view to increasing the efficiency and predictability of such applications.

Approaches to remuneration under the Companies Act
Under the Companies Act 1993 (Act) there are two approaches to liquidators’ remuneration, depending on whether the liquidator is appointed by the shareholders or directors (private liquidators), or by the Court. All liquidators are entitled to charge “reasonable remuneration” for carrying out their duties and exercising their powers as liquidator (section 276(1)). However, Court-appointed liquidators may only charge the default rates under the Companies Act 1993 Liquidation Regulations 1994 (currently a maximum fee of $2000 or a top rate of $200 per hour). Unless the Court otherwise orders, private liquidators are not restricted in this way.

Nonetheless, the Court has jurisdiction under section 284 of the Act to review or to fix the remuneration of all liquidators (private and court-appointed) at a level which is “reasonable in the circumstances” and, as an adjunct of this power, to order the liquidator to refund a retained amount. A liquidator or liquidation committee has standing to apply to the Court under section 284. A creditor, shareholder, or director may do so with the leave of the Court. 

There are three circumstances in which the Court may be involved in fixing remuneration:

• A Court-appointed liquidator may seek prospective approval to charge rates higher than the default rates under the Regulations.
• A Court-appointed liquidator may seek retrospective approval under section 284(1)(e) to fix their actual remuneration on a basis other than application of the default rates under the Regulations.
• A qualifying person may seek to review or fix reasonable remuneration for a liquidator (private or Court appointed) under section 284(1)(e), or for the liquidator to disgorge funds retained as remuneration (section 284(1)(f)).

The Medforce judgments
In Medforce 1, a Full Court of the High Court characterised the test on a retrospective application to fix remuneration as being to determine whether a reasonably prudent person would have undertaken the time spent if faced with the same situation. Although the time spent was a relevant factor, the value of the services rendered was more important than the cost of rendering them.

The Court laid down guidelines that have subsequently been applied by judges in fixing liquidators’ remuneration. In summary:

• A prospective application to approve rates should be supported by an affidavit from an experienced insolvency practitioner as to the appropriateness of those rates.
• In a retrospective application, the liquidator should, at a minimum, provide a summary of the work undertaken during the liquidation and attach sufficiently detailed expenditure accounts to enable the judge to determine whether the personnel involved, and their charge-out rates, were appropriate to the nature of work to be undertaken. The liquidator should also attach any statutory reports that he or she was required to issue under the Act. Such information could be conveyed to the Court by memorandum, certified as correct by the liquidator. If prospective approval has not been given, the liquidator would need to supply a supporting affidavit and evidence as described above in relation to a prospective application. 

In Medforce 2, Master Gambrill endeavoured to give greater clarity to how the Medforce 1 principles would be applied by the Court. Importantly, she identified three tiers of remuneration:

• fees not exceeding $6,000, which would generally be approved without further inquiry;
• fees between $6,000 and $15,000, for which the Court would make no further inquiry provided they were satisfied that the information gave an adequate overall picture; and
• fees in excess of $15,000, for which the liquidator would have a greater burden in terms of the information to be provided to the Court (particularly if there was minimal recovery).

The Master also set down guidelines for the form of the application to approve fees in cases where it was made personally by the liquidator (as an officer of the Court). 

Perceived concerns with the Medforce judgments
In Roslea Path, the Court identified certain judicial concerns arising out of the application of the Medforce judgments (as summarised by Associate Judge Doogue in his extrajudicial paper, presented at the Corporate Insolvency Conference in March 2009, entitled, “A Judicial Perspective on Insolvency Law and Practice”), as follows:

• Difficulty in determining the reasonableness of the charges on the basis of the information required to be put before the Court.
• Difficulty in testing the evidence of senior insolvency practitioners who corroborate evidence of the reasonableness of the quantum of fees sought.
• In retrospective applications, the affidavits rarely, if ever, address the ‘value of work’, partly due to reliance on time-based charging as the basis for fixing the remuneration without having regard to other factors such as quality, efficiency, complexity, outcomes achieved, and proportionality.
• Doubts as to whether ‘market forces’ have resulted in competition for appointment of liquidators, and as to the extent that petitioning creditors are motivated to make a full enquiry as to the fees of a potential liquidator.

Added to this were concerns raised by two senior insolvency practitioners who gave expert evidence, such as:

• a desire to eliminate unnecessary administrative costs and inefficiencies in the process for approval of fees; and
• a concern that procedures for approval of fees were not implemented uniformly across New Zealand. For example, there was a suggestion that where prospective approval was granted, only the High Court at Auckland made this subject to approval of the overall remuneration at the close of the liquidation.

As the Court noted at [115], the concerns were not directed at the principles or guidelines described in the Medforce judgments, but instead identified a need for greater efficiency and predictability: “The quest is for a predictable regime in which a proportionate cost is applied to obtain a judicial order fixing remuneration”.

Discussion
The Court described its role in fixing a liquidator’s remuneration as “making a determination of fairness and reasonableness of what has been charged when measured against the work undertaken and a result achieved”. The underlying principle meant that, simply put, the remuneration should reflect the ‘value’ of the services provided – something which could not necessarily be determined simply by applying hourly rates to the time spent administering the company’s affairs. 

In considering how ‘value’ should be assessed, the Court drew an analogy with costs revision of solicitor’s fees, and in particular factors referred to by Acting Chief Justice Barker in Gallagher v Dobson [1993] 3 NZLR 611 at 615. These factors included the skill, specialised knowledge, and responsibility required, the amount of property or money involved, the complexity of the matter, and the urgency. The Court concluded that those principles applied equally to remuneration for liquidators’ services. 

The Court also emphasised the importance of a ‘proportionate’ approach in determining liquidators’ fees. Proportionality has two facets: first, the remuneration must be proportionate to the nature and complexity of the work undertaken; and second, the amount of information provided to the Court to justify a fee must be proportionate to the fee claimed. 

Following a comprehensive review of the case law, and consideration of the evidence of insolvency practitioners and the nature of the Court’s function, the Court generally accepted the principles laid down in the Medforce judgments. However, it set out certain refinements to the processes, with a view to achieving greater efficiencies, and a more proportionate approach.

Prospective applications
In terms of prospective applications, the Court encouraged the emerging practice of prospectively approving liquidators’ remuneration at the time of a liquidation order. The Court noted that this practice is currently applied in the Wellington and Christchurch High Courts (see, for example, CIR v Junction Ski Shop (1992) Ltd (High Court, Wanganui CIV-2008-484-93, 30 July 2008, Associate Judge Gendall); and Sweeney v Caprice Acquisitions Ltd (High Court, Wellington CIV-2007-485-1903, 29 April 2009, Associate Judge Gendall)). That involved proposed fee rates being included in the required ‘consent to act’, for approval by the Court on appointment. Their Honours considered this approach to be justified by the principles of proportionality and professional integrity. Such approval would be subject to final approval of the overall remuneration under section 284(1)(e), at the time the liquidator finalises the administration. In a prospective application, the principle of proportionality is aimed at ensuring that the benefits of an increase in remuneration are not disproportionate to the depletion in assets of the company.

The Court would apply the principle of professional integrity to ensure that it had sufficient trust and confidence in the liquidator (who, after all, is an officer of the Court). The Court observed that such trust and confidence would be likely to be present where a liquidator had been frequently appointed and was known to the Court. In other cases, the proposed liquidators would need to provide some evidence of their experience and competence (eg, a resume), in support of the hourly rates proposed to be charged. The Court at that point would have the option of making a prospective order (subject to a requirement that the overall remuneration be fixed under section 284 at the close of the liquidation), or, alternatively, it could restrict the liquidator to the rates in the regulations, pending a retrospective application as described in Medforce 1.

In a more complex liquidation, the Court considered that procedures could be put in place at the time of the liquidation order to review remuneration on a continuing basis, with the aim of preventing a major dispute at the end of the liquidation. In such a case, the Court envisaged that counsel, at the time of applying to liquidate the company, would prepare a memorandum identifying proposed processes that would be incorporated into the order, which would enable regular disclosure of fees charged to all creditors, and informing interested parties of the right to seek review of the remuneration charged. Such processes might, in a very complex case, incorporate regular and independent review of the remuneration. 

Retrospective applications
In retrospective applications, the Court emphasised the need for a flexible approach to the assessment of ‘value’, to contain the cost of such applications. For example, if the liquidator placed inadequate information before the Court, the Judge should be able to exercise his or her judicial judgment to fix a “global sum”. Their Honours considered this to be preferable to always requiring a liquidator to provide further and more detailed information which would in turn result in more cost, and delay distribution of funds to creditors. (Of course, the Court would maintain a discretion to require more information.) This approach underlines the fact that liquidators carry the onus to justify their remuneration.

Liquidators would need to bear in mind the ‘proportionality principles’ when submitting information to the Court in support of approval under section 284(1)(e). In Medforce 1, the Court considered that in most cases this would be achieved by attaching the relevant statutory report under section 255 of the Act, together with a brief overview of the liquidation process, and sufficiently itemised accounts. Their Honours approved of these requirements, and further pointed out that if liquidators voluntarily disclosed in their second and subsequent reports the amount of fees charged and the components of those fees, and explained the right of creditors or shareholders to dispute that remuneration, then, in cases where no objection was made, the Court would be less inclined to rigorously examine the fees charged. 

The Court also noted and approved the ‘tiered’ approach in Medforce 2, in which the quantum of fees sought could influence the degree of proof of the reasonableness of the remuneration charged. To reflect current commercial realities, the Court adjusted the quantum of each of the tiers, so that fees of up to $7,500 would generally be approved with little further inquiry; fees between $7,500 and $25,000 would not be subject to further inquiry provided the Court was satisfied as to the extent and nature of the work carried out and the reports filed gave an adequate overall picture; and fees in excess of $25,000 would impose a heavier burden on the liquidator to justify the remuneration. The Court added that these figures would be subject to regular adjustments.

Third party applications
Save for the requirement that the liquidator respond to concerns of an objector, the Court considered that applications by third parties for review of remuneration would proceed on the same basis as retrospective applications.

Other matters
Finally, the Court noted that it considered that the principles it had discussed applied equally to a review of remuneration of voluntary administrators or receivers (subject to aspects of the particular insolvency regime at issue). 

The Court also clarified that liquidators could sign an ex parte application without certification from counsel, relying upon the Court’s discretion to dispense with the certificate under rule 7.23(5) of the High Court Rules. 

Conclusion
It is in the interests of creditors, the liquidator, and the company that liquidators are fairly remunerated, and that the Court’s involvement in remuneration issues is kept to the absolute minimum. The Roslea Path decision adds clarity to procedural requirements, offers a process that streamlines the overall approval of the remuneration, and may help with avoiding disputes. The effectiveness of the suggested processes will depend on the willingness of liquidators to provide regular and sufficiently detailed reports to creditors throughout the liquidation process, and to address remuneration properly at the commencement of the liquidation, if rates in excess of the default rates are sought.

A new negative licensing system for insolvency practitioners, approved in principle in August 2008, includes more stringent requirements for remuneration. A Bill on the new proposals is expected to be introduced to Parliament this year. Although the Attorney-General chose not to intervene in the Roslea Path hearing on behalf of the Crown or public interests, he indicated that the Ministry of Economic Development would review the decision and any policy concerns. It remains to be seen if the decision will have an impact on the scheme when it is introduced to Parliament.

NZLawyer, Issue 133, 1 April 2010