COMMISSIONER OF INLAND REVENUE v APOLLO BATHROOM AND KITCHEN LIMITED (IN LIQ) [2018] NZHC 18

COMMISSIONER OF INLAND REVENUE v APOLLO BATHROOM AND KITCHEN LIMITED (IN LIQ)[2018] NZHC 18 [26 January 2018]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHERestricted access to certain affidavit evidence – see para [26].CIV-2017-404-1056[2018] NZHC 18UNDER the Companies Act 1993IN THE MATTER OF the liquidation of APOLLO BATHROOMAND KITCHEN LIMITEDBETWEEN COMMISSIONER OF INLANDREVENUEPlaintiffAND APOLLO BATHROOM AND KITCHENLIMITED (IN LIQ)DefendantCIV-2017-404-1057UNDER the Companies Act 1993IN THE MATTER OF the liquidation of AUNZ INVESTMENTGROUP LIMITED (In Liq)BETWEEN COMMISSIONER OF INLANDREVENUEPlaintiffAND AUNZ INVESTMENT GROUP LIMITED(IN LIQ)DefendantHearing: On the papersAppearances: M J Tingey and J E M Lethbridge for the LiquidatorsJudgment: 26 January 2018Reissued: 20 March 2018JUDGMENT OF ASSOCIATE JUDGE R M BELLThis judgment was re-issued by me on 20 March 2018pursuant to Rule 1.9(1) of the High Court Rules.Registrar/Deputy Registrar[1] The liquidators, Messrs Bridgman and Sanson, apply for orders adjusting theirrates of remuneration. When I ordered both companies into liquidation on22 September 2017 and appointed them, I prospectively approved their remunerationat the following hourly rates (exclusive of GST and expenses):Liquidators and directors $375.00-$450.00Associate directors $300.00-$375.00Managers $240.00-$300.00Senior associates $190.00-$240.00Associates $130.00-$190.00Support staff $110.00The approval of those rates was subject to the usual condition that at the end of theliquidation the liquidators are to apply for approval of their overall remuneration. Theliquidators now propose these increased hourly rates:Liquidators and directors $485.00-$550.00Associate directors $395.00-$485.00Managers $315.00-$385.00Senior associates $250.00-$315.00Associates $190.00-$250.00Support staff $140.00[2] The liquidators' rates I approved are the same as those approved in 2004 inCommissioner of Inland Revenue v Summerset Contracting Ltd.1 The liquidators havenot increased them since. Their case is that because of inflation over the last 13 yearsan increase is required to meet rising costs. The liquidators do not say that these twoliquidations have special features that warrant an increase over their standardremuneration. Instead, if the court approves their application, they intend to seekapproval of the new rates in all future liquidations.The companies[3] Both companies were ordered into liquidation because they were unable to paytheir debts. Together, they owe the Commissioner of Inland Revenue approximately$5 million in unpaid taxes. Both companies were associated with Mr York Yu, whowas adjudicated bankrupt on 1 June 2017 on an application by the Commissioner. Theliquidators say that AUNZ Investment Group Ltd operated as a commercialimmigration consultant, in real estate development and funds management, and wasused as a vehicle to attract wealthy Chinese to invest in or migrate to New Zealand. Itwas involved in a number of real estate developments. The Commissioner of InlandRevenue is not the only creditor. Apollo Bathroom and Kitchen Ltd operated as akitchen and bathroom manufacturer and installer. Its business was allegedly soldbefore liquidation. The liquidators say that they have not been able to obtain businessrecords of AUNZ Investment Group Ltd and that Mr Yu has not been helpful. Theyhave limited information to work on. The liquidators say that they will need to spendsignificant time and resources investigating the circumstances relating to the failure ofthe companies and they cannot estimate the time required or the likely recoveries.The law on liquidators' remuneration – statute and case law[4] The Companies Act 1993 has these provisions for remuneration of liquidatorsappointed by the court:1 Commissioner of Inland Revenue v Summerset Contracting Ltd HC Auckland, CIV-2004-404-1618, 29 November 2004.276 Remuneration of liquidators(2) Unless the court otherwise orders, every Official Assignee who isappointed a liquidator under paragraph (a) of subsection (2) of section241 and every liquidator appointed under paragraph (c) of thatsubsection shall charge remuneration either—(a) of an amount equal to the amount fixed under section 277; or(b) at, or in accordance with, such rate or rates as may beprescribed under that section.277 Rates of remuneration(1) The Governor-General may from time to time, by Order in Council,for the purposes of section 276, make regulations fixing an amount orprescribing a rate or rates in respect of the remuneration of liquidatorsto which that section applies.(2) Without limiting subsection (1), such regulations may—(a) prescribe an hourly or other rate or rates of remuneration anddifferent rates may be prescribed in respect of workundertaken in the liquidation by different classes of persons:(b) prescribe a rate or rates by reference to the net value of theassets realised by the liquidator, together with such otheramounts as may be specified:(c) prescribe a rate or rates in respect of the exercise of aparticular function or power:(d) prescribe a rate or rates by reference to such other criteria asmay be specified.278 Expenses and remuneration payable out of assets of companyThe expenses and remuneration of the liquidator are payable out of the assetsof the company.284 Court supervision of liquidation(1) On the application of the liquidator, a liquidation committee, or, withthe leave of the court, a creditor, shareholder, other entitled person, ordirector of a company in liquidation, the court may—(e) in respect of any period, review or fix the remuneration of theliquidator at a level which is reasonable in the circumstances:(f) to the extent that an amount retained by the liquidator asremuneration is found by the court to be unreasonable in thecircumstances, order the liquidator to refund the amount:[5] The Companies Act 1993 Liquidation Regulations 1994, Reg 28 provides:Remuneration of certain liquidators(1) Unless the court otherwise orders under s 276(2) of the Act, theremuneration of every Official Assignee who is appointed a liquidatorunder paragraph (a) of subs (2) of s 241 of the Act and every liquidatorappointed under paragraph (c) of that subsection, is the greater ofeither –(a) an amount of $2,000; or(b) a fee calculated on an hourly rate in accordance with thefollowing:(i) for work undertaken by the liquidator, including anydeputy Official Assignee where the liquidator is theOfficial Assignee, $230.00 per hour or part of anhour:(ii) for work undertaken by an accountant or solicitoremployed by the liquidator, $230.00 per hour or partof an hour:(iii) for work undertaken by any other employee of theliquidator, $160.00 per hour or part of an hour.(2) The amount and hourly rates specified in subclause (1) are exclusiveof goods and services tax under the Goods and Services Tax Act 1985.These rates were set by the Companies Act 1993 Liquidation Amendment Regulations2016 (LI 2016/35) Reg 4(1).[6] In Re Roslea Path Ltd (in liq)2 a Full Court reviewed the court's approach onapplications to approve liquidators' remuneration. It noted that in many cases thenumber and value of individual creditors will not be sufficient to provide an incentivefor any single creditor to apply to the court to review fees charged by the liquidators.This required the court to act in a more protective manner. The court determines thefairness and reasonableness of the charges. That is measured against the workundertaken and the result achieved. Fair and reasonable remuneration is reflected inthe value of services to the creditors in the company liquidation, and possibly toshareholders if there is a surplus. Value goes beyond mathematical calculation ofhourly rates to hours spent by individuals involved in administering the company's2 Re Roslea Path Ltd (in liq) [2013] 1 NZLR 207 (HC).affairs. The remuneration had to be proportionate to the nature, complexity and extentof the work undertaken. It noted the passing of the swings-and-roundabouts approachwhen remuneration was fixed by commission, with the associated cross–subsidisationbetween liquidations.[7] Amongst other things, the court said:[112] Insolvency law requires relevant principles to be applied in apragmatic way. The fact that liquidators administer an insolventcompany dictates the need for efficient and effective procedures to bein place to realise assets and distribute the net proceeds to creditors.A balance must be struck between the need for liquidators to complywith duties imposed (see ss 253-258A of the 1993 Act), while doingso in a cost-efficient manner. That is emphasised by s 253 whichrequires the liquidators' primary duty (realising assets for distributionamong creditors), to be carried out "in a reasonable and efficientmanner".[115] The quest is for a predictable régime in which a proportion of cost isapplied to obtain a judicial order fixing remuneration.[118] The public policy reason for requiring court sanction is to protectcreditors who may not, because of the likely return to them, have asufficient incentive to challenge the legitimacy of the remunerationclaimed.[122] Nobody suggests that prospective applications should bediscontinued. They are beneficial. They provide a certain basis onwhich liquidators can perform tasks at rates in excess of those set bythe 1994 Regulations, as amended. Creditors are not prejudiced bythe process because the court retains the right to fix the finalremuneration at the time the liquidation is finalised. Even if theliquidators have distributed final dividends to creditors, the Courtretains jurisdiction to order that any unreasonable remunerationretained be refunded, in such a manner as the Court thinks fit: see s284(1)(f).[125] We are attracted to the approach taken by Associate Judge Gendall in which remuneration is approved at the time the company is put intoliquidation. That approach can be justified on the application ofprinciples of proportionality and professional integrity. It involves theapproval of remuneration on a prospective basis, subject to s 284 ofthe 1993 Act. We interpret his approach as requiring a liquidator toapply under s 284(1)(e) to "fix the remuneration of the liquidator" atthe time the liquidator finalises the administration. That is the basison which our views have been formed.[126] The critical issue in relation to "proportionality" is to ensure that theassets of the company are not depleted unduly by a requirement toincur costs which is disproportionate to the benefits gained from aprospective order. [127] Application of the principle of "professional integrity" will requiresome changes to court processes. At present, individual creditorsnominate liquidators, many of whom are known to and respected bythe Court. [128] The discretion to appoint a liquidator is unqualified. In our view,confidence, integrity, independence and impartiality are thefundamental pre-requisites for liquidators appointed by the Court.[130] If the person nominated has been frequently appointed by the Court,and the Court has gained knowledge of competence, integrity,independence and impartiality, the requisite trust and confidence islikely to be present. The liquidators[8] The liquidators are members of PwC, which has a substantial insolvencypractice across the country and is currently handling about 500 liquidations. TheAuckland office is presently handling about 240 liquidations. PwC is one of threeinsolvency practices regularly proposed by the Commissioner of Inland Revenue asliquidators to be appointed by the court. The Commissioner of Inland Revenue bringsfar more liquidation applications than anyone else. In my experience, most court-ordered liquidations handled by PwC are for small to medium-sized businesses.[9] I have considered many applications by PwC for approval of overallremuneration at the end of liquidations. I have invariably approved the remunerationsought, being satisfied that the amounts claimed were reasonable in the circumstances.PwC liquidators have a justifiable reputation for competence, integrity, independenceand impartiality. Their reports show that they carry out their work efficiently.The application for increased rates[10] A starting assumption is that the rates approved in 2004 were reasonable then.Associate Judge Faire would not have approved them if they were not. There isnothing to suggest it would not be safe to work on that assumption. That leads to thequestion: what has changed since then which makes those rates unreasonable now?[11] Some matters have not changed. Basic tasks undertaken by a liquidator remainbroadly the same. Mr Sanson explains that the most likely areas of potential recoverytypically involve overdrawn shareholder accounts, voidable transactions, or othersuspect transactions with parties related to the company in liquidation. I note thatfollowing the decision of the Supreme Court in Allied Concrete Ltd v Meltzer,3liquidators' efforts have moved from voidable transactions to pursuing directors foralleged breaches of duty, for example, reckless trading, trading while insolvent andfailing to keep proper books and records. Mr Sanson notes that the prospects ofrecovery need to be assessed on a cost-benefit analysis. There is an inherentuncertainty whether liquidators will be able to recover. He says it is a complex arearequiring detailed understanding of technical rules, strong forensic accounting know-how experience and commercial judgment. The complexity of a liquidation will varyaccording to the availability of books and records, the co-operation of directors, themotivation of defendants to settle recovery action and the obligation to report toregulatory authorities.[12] Mr Sanson also makes the point that in many liquidations there is little or norecovery and they cannot recover remuneration in full at rates approved by the court.On liquidation there may be few assets left in the company and no apparent claimsagainst solvent entities. A substantial amount of work is still required to attend toadministrative matters. But that has always been a feature of insolvency work. It hasnot changed since 2004.[13] The liquidators have also raised certain matters which I do not regard asrelevant to the present application. They refer to higher rates of remuneration (up to$650 per hour) approved for complex liquidations – the Equiticorp group of companies3 Allied Concrete Ltd v Meltzer [2015] NZSC 7, [2016] 1 NZLR 141.and the New Zealand subsidiaries of the Australian HIH Group of insurers. As large-scale liquidations running for many years and involving real complexity they do notprovide benchmarks for the more run-of-the-mill liquidations handled by theseliquidators.[14] They also refer to PwC's work for the government on "All of Governmentrates" charged by PwC for any work for any government department. Those rates donot apply when PwC are appointed liquidators, because the work is charged to thecompany, rather than to the government. I am required to assess reasonableremuneration for an insolvency practitioner on the liquidation of small to medium-sized companies. That is distinct from other work undertaken for the government.Different measures of remuneration apply to different work. The rates paid by thegovernment for other work do not bear on the present case.[15] The liquidators say that there will be increasing regulation of insolvencypractitioners. That may come under the proposed Insolvency Practitioners Bill,4 bythe Restructuring, Insolvency and Turnaround Association of New Zealand or underproposals by the Insolvency Working Group.5 They say that will increase the costsof managing liquidations. I assume that these will be part of the costs of practice tobe recovered from their remuneration generally, rather than specific expenses or tasksthat may be charged directly to a liquidation. They do not say that any such costs haveimpacted on any liquidations yet. It is no more than an anticipated increased cost. Nordo they attempt to quantify the increased costs. This part of their case is premature. Iam required to assess their remuneration on the basis of current costs of practice, notconjectural costs that they may not incur. If complying with increased regulation leadsto significant increased costs that justify a review of rates of remuneration, theliquidators may of course apply for a review of their rates.[16] More relevantly, the liquidators have shown that between the fourth quarter of2004 and the third quarter of 2017 the general consumer price index has increased by4 Insolvency Practitioners Bill 2010 (141-2). There has been no progress on this bill since its secondreading in November 2013.5 See Review of Corporate Insolvency Law, Report No 1 of the Insolvency Working Group, July2016: http://www.mbie.govt.nz/info-services/business/business-law/insolvency-law-working-group/insolvency-practitioner-regulation-and-voluntary-liquidations/report-no-1-insolvency-practitioners-regulation-and-voluntary-liquidations.pdf.30 per cent. The wage consumer price index has increased by around 49 per cent inthe same period. The liquidators say that salaries are their highest costs, and thosehave increased by 45 per cent since 2004 reflecting changes in the market.[17] I accept the liquidators' case that the increased costs in administering aliquidation give support for increasing the rates of remuneration. If insolvencypractitioners are to continue to administer liquidations to the required standards ofcompetence, integrity and efficiency, they need to retain skilled staff and receive areturn adequate to allow them to continue in business. The risk in not adjustingremuneration to take account of increasing costs is that insolvency practitioners,unable to offer competitive salaries, will not attract staff or will lose staff. Theincreased costs therefore justify an increase in the rates of remuneration.[18] That is supported by the Commissioner of Inland Revenue. By a letter of 1December 2017, the principal adviser (collections) of the Inland Revenue Departmenthas consented to the increased rates of remuneration. That consent is significant. TheCommissioner of Inland Revenue brings far more liquidation applications than anyoneelse. She is an informed user of insolvency practitioners. On many applications forapproval of remuneration, I have found that the Commissioner is invariably directlyaffected by any potential adjustment to the remuneration. In many cases the fundsavailable for creditors may not be enough to pay off preferential creditors in full, letalone pay anything towards unsecured creditors. The Commissioner is invariably apreferential creditor in most insolvent liquidations: for PAYE, child supportdeductions, student loan deductions, KiwiSaver and GST. As a matter of practice, Itend to ask liquidators to refer their applications to the Commissioner for comment, asthe creditor who will benefit from any reductions in remuneration claimed. TheCommissioner has never objected to the remuneration sought by PwC liquidators. Asan informed creditor, the Commissioner no doubt appreciates that any increase inremuneration for liquidators will result in less available for creditors, including herselfas a preferential creditor, and she is more likely to receive reduced distributions thanordinary unsecured creditors.[19] The liquidators also refer to rates of remuneration approved for otherinsolvency practices, whom the Inland Revenue regularly propose as liquidators –KPMG and Deloitte. PwC's rates are the lowest of the three. In the past, I have usedthe PwC rates as a benchmark to assess rates claimed by other insolvency practitioners.I have tended not to approve remuneration higher than $500 per hour exclusive ofGST. I accept that if I approve increases to PwC, other insolvency practitioners mayalso request approval for corresponding increases. In short, I accept that this decisionmay apply more widely than to PwC.[20] The liquidators have shown that the proposed increases are reasonable. If the2004 rates were increased by either the general CPI increase or the wage CPI increase,the rates would be higher than those proposed.[21] While the liquidators' application is only for the liquidations of AUNZInvestment Group Ltd and Apollo Bathroom and Kitchen Ltd, there are no unusualfeatures about these liquidations. The prospects of a substantial recovery for creditorsmay not look promising at this stage, but that is not uncommon. The liquidators havenot identified any matters of special complexity. Instead they have made out a casefor increased remuneration generally.Outcome[22] As I am satisfied that the liquidators' application is appropriate, I approve thenew rates as applied for. Those rates will apply for all work undertaken as from thedate of this decision. The rates approved when the liquidation orders were made willapply up until the date of this decision. The liquidators asked for back-dated orders totake effect from the liquidation orders, but that would require a recall of the originalorders. I see no basis for revisiting them.[23] The liquidators will still be required to apply for approval of their overallremuneration at the end of the liquidations. The court's determination of the overallremuneration will be the "order otherwise" under s 276(2) of the Companies Act,without which the liquidators will be held to the rates in that section and in reg 28 ofthe Companies Act 1993 Liquidation Regulations.[24] I reserve leave to the liquidators to apply for review of the rates approved inthis decision, but any such applications should not be made more frequently than everysix months. They should be supported by evidence from another suitably qualifiedand experienced insolvency practitioner.[25] The liquidators applied without notice. While the Commissioner of InlandRevenue, a major creditor in both liquidations, consented to the rates sought, othercreditors do not know about the application or this decision. They should have theopportunity to seek a review of this decision, in addition to any review of the overallremuneration at the end of the liquidation under s 284(1). These applications aresignificant events in the liquidations and should be reported to creditors.6 I direct theliquidators to advise creditors in their next reports under s 255(2)(d) of the CompaniesAct of their applications, this decision and the creditors' ability to seek a review of therates of remuneration under s 284(1)(e). The liquidators are to file in court copies oftheir next reports to show that they have complied with this.Suppression[26] The liquidators also sought orders suppressing some of the information inMr Sanson's affidavit. I accept that the information is confidential to PwC. I have notrelied on it, as it is irrelevant. I find that the following parts of Mr Sanson's affidavitare confidential: paragraphs 24(c), 27-29 and 34. I order that those parts are not to bepublished. For any application for access to the court file, those parts of his affidavitare to be redacted. Access to the court file will be allowed only by order of a Judge.I have considered the matters under r 12 of the Senior Courts (Access to CourtDocuments) Rules 2017. After the substantive decision, under r 13(c) open justicedoes not require access to documents that I have not relied on. The protection ofconfidentiality after the substantive decision has greater weight than while Iconsidered the matter on the papers. The protection of confidentiality in the parts ofMr Sanson's affidavit outweighs the principle of open justice under r 12(e) and thefreedom to seek information under r 12(f). The restrictions on access are the minimumrequired to protect the confidential information.6 Companies Act 1993, s 255(2)(d)(i).[27] On 22 September 2017 I made an order allowing a journalist with the NationalBusiness Review access to these files. That was before the present applications. Theaccess restrictions in this decision apply to the liquidators' applications only, not to theCommissioner's liquidation applications..Associate Judge R M Bell