THE COMMISSIONER OF INLAND REVENUE v ENTRA SCAFFOLDING LTD (in liq) [2022] NZHC 2056

THE COMMISSIONER OF INLAND REVENUE v ENTRA SCAFFOLDING LTD (in liq) [2022] NZHC 2056[18 August 2022]IN THE HIGH COURT OF NEW ZEALANDTAURANGA REGISTRYI TE KŌTI MATUA O AOTEAROATAURANGA MOANA ROHECIV-2020-470-122[2022] NZHC 2056UNDER the Companies Act 1993IN THE MATTER of the liquidation of ENTRASCAFFOLDING LIMITED (in liquidation)BETWEEN THE COMMISSIONER OF INLANDREVENUEPlaintiffAND ENTRA SCAFFOLDING LIMITED (inliquidation)DefendantHearing: On the papersCounsel: Memorandum filed by the Liquidator dated 23 June 2022Judgment: 18 August 2022JUDGMENT OF ASSOCIATE JUDGE SUSSOCK[Approval of Liquidators' Remuneration]This judgment was delivered by me on 18 August 2022 at 4pmpursuant to r 11.5 of the High Court RulesRegistrar/Deputy RegistrarSolicitors:KPMG, AucklandIntroduction[1] The liquidators of Entra Scaffolding Limited (in liquidation), Ms ElizabethHelen Keene and Ms Janet Sprosen, both of KPMG, apply for approval of their overallremuneration of $18,675 in this liquidation.[2] Ms Vivian Judith Fatupaito of KPMG was originally appointed together withMs Keene on 15 February 2021. Ms Fatupaito resigned on 8 March 2022 and wasreplaced by Ms Sprosen.[3] The liquidators have attached to their memorandum their draft final report tothe Registrar of Companies, prepared on the basis that their fees have been approved.They have also provided copies of their first, second and third six-monthly liquidators'reports.[4] I set out the background and work undertaken in the liquidation below, beforesetting out the applicable legal principles and applying those to the circumstances ofthis liquidation.Background and work undertaken[5] The company was incorporated on 29 March 2018. It operated as a scaffoldingcompany. Following appointment on 15 February 2021, the liquidators spoke with theregistered director, Mr Bradley van der Heyden. Mr van der Heyden advised thatalthough he was recorded as the director of the company, he had not been involvedsince 2019 and the former director, Mr Rewi Hamilton, was in control of the business.Mr van der Heyden advised that he was unable to resign as he was the sole directorrecorded on the Companies Register.[6] Communications with third parties confirmed that Mr Hamilton was in controlof the business. Despite multiple attempts to contact Mr Hamilton, the liquidatorswere unsuccessful.[7] An employee of the company advised the liquidators that it was still trading atthe date of liquidation and that it had active scaffolding sites across Tauranga arisingout of a contract with Golden Homes Limited.[8] The liquidators therefore contacted Golden Homes to obtain informationbefore attending the company's premises in Papamoa where the liquidators:(a) met the landlord of the company at the premises;(b) met the employees and terminated their employment;(c) received a company vehicle returned by one of the employees;(d) recorded the assets of the premises;(e) reviewed and collected relevant company records from the office;(f) met the auctioneer to view assets and discuss sale options; and(g) secured the site.[9] The liquidators then considered whether they could complete the company'swork in progress but determined there would be no benefit to the creditors to do so.This decision was based on the company's financial position and the requirementsunder the relevant health and safety legislation. The liquidators therefore ceasedtrading the company's business on 19 February 2021 and terminated all employmentcontracts.[10] Information requests were made to third parties to identify any assets,recoveries or potential claims in the liquidation. This identified that Heartland Bankheld a security over the company's Holden Colorado and that the Bank of NewZealand held a specific security over a vehicle and a General Security Agreement overthe company's assets.[11] The liquidators arranged for the sale of the Holden Colorado, with Heartlandreceiving a full distribution in respect of their secured creditors' claim (releasing theirsecurity over the vehicle). The liquidators also identified and located a Toyota Hiluxwhich was sold on an "as is, where is" basis at auction. The liquidators then identifiedother assets including scaffolding leased from Entra Solutions Limited. BNZ'sconsent was obtained to deal with all assets under their security, including the scaffold.The assets were valued and sold by auction, including several vehicles which hadsignificant outstanding road user charges that needed to be brought up to date for sale.The liquidators then made a distribution to the BNZ in the amount of $105,081.26 inpartial settlement of the loan secured by the General Security Agreement.[12] While the company had scaffolding at various sites under the Golden Homescontract, the liquidators determined it was not cost effective to disassemble andremove it for sale due to the relatively minimal volume at each site and the health andsafety requirements involved in removal. The company's onsite scaffolding wastherefore disclaimed by the liquidators pursuant to s 269 of the Companies Act 1993and not dealt with pursuant to the BNZ's security.[13] The liquidators received a payment of $20,869.50 from Golden Homes forwork completed. The liquidators investigated possible claims against the director(s)and shareholders but this did not reveal any claims that warranted recovery action.[14] As a result, the liquidators have determined there are no further avenues forrecovery and have finalised the liquidation.Creditors and distributions[15] As referred to above, there were two secured creditors, BNZ ($145,912.30) andHeartland Bank ($14,531.88). BNZ received a distribution of $105,081.26, whichamounted to 72 per cent of its claim, while Heartland received a full recovery.[16] There were three preferential unsecured creditors, the petitioning creditor($1,758.10), employees ($2,520) and Inland Revenue ($205,001.56) plus non-preferential unsecured creditors with claims of $280,450.96.[17] There will be no funds available to make a distribution to the preferentialunsecured creditors or to the non-preferential unsecured creditors.Legal principles[18] The Court's power to approve liquidators' remuneration is provided in s 284of the Companies Act 1993. The principles that apply in considering applications forapproval are set out in the full High Court decision, Re Roslea Path Ltd (in liq).1[19] Heath and Venning JJ held that in fixing a liquidator's remuneration, the Courtis determining the fairness and reasonableness of what is being charged whenmeasured against the work undertaken and the result achieved. The Court held thatfair and reasonable remuneration reflects the value of the services rendered to thecreditors of the company and, if a surplus is achieved, its shareholders. The decisiondescribes "value" as an elusive concept which goes beyond mathematical applicationof hourly rates to hours spent by individuals involved in administering a company'saffairs.2 The Court emphasised the need for a proportionate approach, both in termsof the remuneration paid but also the information required by the Court to justify theremuneration paid.3 One of the suggested ways of ensuring that a reasonable andproportionate approach has been taken, is for the liquidators to voluntarily disclose intheir six-monthly reports the amount of fees charged, such that creditors have anopportunity to ask questions as the liquidation progresses.4[20] The Court of Appeal in Madsen-Ries v Salus Safety Equipment Ltd (in liqrecently confirmed the approach adopted in Re Roslea Path Ltd.5 The Court approvedcounsel assisting's summary of the principles that apply to the determination ofretrospective applications as follows:6(a) Liquidators are fiduciaries and their fundamental obligation is a dutyto account. There is a conflict between the interest of the liquidator(fiduciary) in receiving remuneration and the interest of the creditors(those to whom the fiduciary duties are owed) who bear the cost ofthat remuneration.(b) Liquidators are officers of the Court and are subject to its generalsupervisory function. They must attend diligently to their tasks andmake all proper reports and inquiries. They have the sameresponsibilities as barristers and solicitors.1 Re Roslea Path Ltd (in liq) [2013] 1 NZLR 207 (HC) at [102].2 At [102].3 At [108].4 At [151].5 Madsen-Ries v Salus Safety Equipment Ltd (in liq) [2022] NZCA 101.6 At [15].(c) Liquidators must justify their claims for remuneration. They bear theonus in this regard and the benefit of any doubt due to inadequateinformation must be resolved in favour of the creditors.(d) Fixing liquidators' remuneration requires judicial judgment. It ismore akin to an administrative task. It is implicit that the judicialofficer can draw on his/her own experience in performing this role.(e) In fixing liquidators' remuneration the Court is making adetermination of the fairness and reasonableness of the proposed feescompared to the work undertaken and results achieved. The focus ison the value of services rendered to the creditors of the company.(f) The Court will consider whether there has been unnecessary work orover servicing as this would not represent time reasonably expendedat a reasonable rate.(g) A broad brush approach is acceptable provided that there is anexercise of judicial judgment as opposed to an arbitrary choice ofamount.(h) The process of fixing remuneration needs to be proportionate. Itshould not be unduly prescriptive; nor should it unnecessarily addcosts to the creditors.[21] The Court of Appeal held: 7 even where there is no challenge to the liquidator's remuneration this doesnot absolve the Court from the obligation to be satisfied that the remunerationapproved reflects the value of the services rendered to the creditors of thecompany.[22] I am therefore required to be satisfied that the remuneration reflects the valueof the services rendered to the creditors of the company.Discussion[23] The memorandum and draft final report attached set out the background to theappointment of the liquidator, the steps taken during the liquidation, and a schedule ofliquidators' receipts and payments for the period from 15 February 2021 to 9 May2022 (attached at Appendix A). In addition, the liquidators have provided copies oftheir three six-monthly reports to the company's creditors and shareholders. Each ofthese reports sets out the fees incurred up to the date of the report and invites creditors'feedback in respect of fees charges at any time during the liquidation.7 At [54].[24] The liquidators have included in their memorandum a breakdown of the timerecords and remuneration and confirmed the applicable hourly rates applying werethose approved by the Court when the liquidators were first appointed. The liquidatorsincurred fees of $18,494 plus disbursements of $1,310 in dealing with the securedcreditor's assets. Those fees have been deducted from the sale of the secured assetsand are not included as a cost of the liquidation. The liquidators' application is forapproval of remuneration of $18,675. An amount of $1,329.50 has been written off asthe liquidators have made insufficient recoveries.[25] The report records that 58.5 hours were worked, meaning that the averagehourly recovery rate is $313.93 (excluding GST). The breakdown of hours worked bystaffing level shows that 30 per cent of the hours worked were at partner or liquidatorlevel at an hourly rate of $550 per hour, while 62 per cent was at analyst or senioranalyst level ($172 to $330 per hour). The remaining six per cent was at manager orsenior management level ($400 to $500 per hour) and two per cent at support stafflevel ($100 to $170 per hour).[26] The memorandum records that the time incurred by the liquidators and theirstaff can be further broken down as follows:(a) 49.91 per cent was spent on secured assets and creditors during theliquidation.(b) 28.87 per cent was spent on statutory reporting and administering theliquidation.(c) 20.04 per cent was spent on ceasing the company's operations,investigating, realising other assets and communicating with creditors.[27] The disbursements charged include expenses relating to advertising and todealing with the secured assets. An administration charge has also been incurred offive per cent of the overall remuneration.Commissioner of Inland Revenue letter[28] The liquidators sought approval from the petitioning creditor, theCommissioner of Inland Revenue, for the level of fees and expenses for whichapproval is sought from the Court. A letter is attached to the memorandum confirmingthe Commissioner is satisfied with the outcome of the liquidation and the fees claimedof $18,675 plus GST and disbursements. The Commissioner appreciates that theliquidators determined quickly that there was no benefit to creditors to continuingtrading and that the best solution was to sell the available assets.Result[29] I am satisfied having regard to the memorandum filed and its attachments,including the letter on behalf of the Commissioner of Inland Revenue, that theliquidators' remuneration appropriately reflects the value of the services rendered tothe creditors of this company. As a result, I grant the application for approval ofliquidators' fees totalling $18,675 excluding GST plus disbursements of $2,842.90.__________________________Associate Judge Sussock