Liquidators’ remuneration – Court of Appeal puts ad valorem in its place

Key takeaways

A spate of recent decisions approving liquidators’ remuneration on an ad valorem basis had caused some trepidation amongst insolvency practitioners facing the prospect of court fee approval. The Court of Appeal of the Supreme Court of NSW has now eased some of that uncertainty, delivering its judgment in Sanderson as Liquidator of Sakr Nominees Pty Ltd (in liquidation) v Sakr [2017] NSWCA 38 on 9 March 2017, in which it reaffirms the importance of reasonableness and proportionality in fee approval applications, and rejects the notion that, even in small liquidations, ad valorem can be applied without regard to the actual work performed. 

The original decision

In February 2016 Justice Brereton determined a remuneration application by the liquidator of Sakr Nominees Pty Ltd (In Liq) (the Company), a company with realised assets of $3.72 million.The liquidator had already obtained creditor approval for the majority of his fees, and was seeking court approval for a further $63,577.80, calculated on a time costing basis.Brereton J approved remuneration in the sum of only $20,000, commenting that in smaller liquidations where questions of proportionality, value and risk loom large, liquidators could not expect to be rewarded for their time at the same hourly rate as would be justifiable if more property was available. 

This decision followed Brereton J’s earlier judgments in In the matter of Independent Contractor Services (Aust) Pty Ltd (in liquidation) (No 2) [2016] NSWSC 106 (where his Honour allowed remuneration on an ad valorem basis amounting to some 14% of gross recoveries), and Re AAA Financial Intelligence Ltd (in liquidation)(No 2) [2014] NSWSC 1270 (where remuneration amounted to 20% of assets realised). 

Brereton J’s approach was at odds with the approach taken by other judges to the assessment of remuneration. For example, in Idylic Solutions Pty Ltd [2016] NSWSC 1292, Black J took a more holistic approach, using the percentage of realisations as a test of whether remuneration calculated on a time costing basis was reasonable. A similar approach was taken in Re PrimeSpace Property Investment Ltd (In liq) [2016] NSWSC 1821, in which JWS acted for the liquidators of a trustee company in a complex liquidation, who successfully sought approval of administrators’/liquidators’ remuneration calculated on a time costing basis.

The appeal

The liquidator of the Company appealed from Brereton J’s decision. Both ASIC and ARITA intervened, and in those circumstances, a bench of five judges heard the appeal. 

The Court delivered its decision on 9 March 2017, allowing the appeal. The Court confirmed that the critical question in fixing remuneration is whether the claim is reasonable. Whilst no particular method must be used in order to determine that question, the matters specified in s 473(10) of the Corporations Act 2001(Cth) should be taken into account. Those factors include the extent to which the work was reasonably necessary, the period of the work, the quality of the work, the complexity of the work, and the value and nature of the property dealt with.

Having regard to those factors, remuneration calculated on either a time costing or an ad valorem basis may be considered reasonable but, importantly, the Court found that it would not be appropriate to fix remuneration on an ad valorem basis by simply applying a percentage considered appropriate to all liquidations or to a particular class of liquidations, without regard to the particular work done or required to be done.¹

Proportionality will still be an important consideration, in that the work performed must be proportionate to the difficulty and importance of the task, in the context in which it is performed. Examining remuneration as a percentage of asset realisations may therefore be a relevant exercise, in that it is a way of objectively testing whether the amount of remuneration claimed should be of concern.²  

Significantly, the Court found that the mere fact that work performed by a liquidator does not lead to a change in the funds available for distribution (for example work mandated by statute) does not mean that the liquidator is not entitled to be remunerated for it.³ Similarly, remuneration for work undertaken in an unsuccessful attempt to recover assets may also be paid, provided it was reasonable to carry out the work and the amount charged was reasonable.⁴

The Court clarified that this did not mean that time costing would always be appropriate, but rather that an overall assessment of reasonableness needs to be undertaken, taking into account the work actually performed, rather than being driven by the value of the assets under the liquidator’s control.⁵

Finally, it was held that the Act does not mandate a separate approach for smaller liquidations, although the value and nature of the property being dealt with will be a relevant factor under s 473(10).

The Court found that Brereton J had erred in failing to take into account the evidence that had been presented by the liquidator of the factors in s 473(10) of the Act. It was also found that in assessing proportionality his Honour did not give sufficient consideration to the work actually done by the liquidator and whether the amount charged for it was reasonable, instead focussing on the size of the property under the liquidator’s control.⁶

The practical impact

In making an application for fee approval, insolvency practitioners will still have to supply the Court with sufficient material to enable the Court to assess whether the remuneration claimed is reasonable, by reference to the factors in s 473(10).

However, practitioners can now take some comfort in the fact that the work actually performed, and the context in which it was performed, will be taken into account in determining whether the remuneration is reasonable. Whilst proportionality of fees will still be a relevant factor, a decision about remuneration should not be made on the basis of the size of the liquidation or recoveries alone, without careful consideration of the work itself and the reasons for doing that work. 

¹Sanderson as Liquidator of Sakr Nominees Pty Ltd (in liquidation) v Sakr[2017] NSWCA 38 at [52].
²Ibid at [56].
³Ibid at [57].
⁴Ibid at [58].
⁵Ibid at [60].
⁶Ibid at [64].