COMMISSIONER OF INLAND REVENUE v GREEN SECURITIES LIMITED (IN LIQUIDATION) [2020] NZHC 1371

COMMISSIONER OF INLAND REVENUE v GREEN SECURITIES LIMITED (IN LIQUIDATION) [2020]NZHC 1371 [18 June 2020]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2010-404-170[2020] NZHC 1371UNDER the Companies Act 1993IN THE MATTER OF the liquidation of GREEN SECURITIESLIMITED (IN LIQUIDATION)BETWEEN COMMISSIONER OF INLANDREVENUEPlaintiffAND GREEN SECURITIES LIMITED(IN LIQUIDATION)DefendantOn the papers: 18 June 2020Copy for Henry David Levin, LiquidatorJudgment: 18 June 2020JUDGMENT OF ASSOCIATE JUDGE R M BELLApplication to fix liquidators' remunerationThis judgment was delivered by me on 18 June 2020 at 11:00ampursuant to Rule 11.5 of the High Court Rules.Registrar/Deputy RegistrarCopy for:Henry David Levin, Deloitte, AucklandInland Revenue Department[1] The liquidators seek approval of their remuneration for this liquidation at$159,044 plus GST and expenses. They applied on 8 July 2019. As the amount soughtis large for the liquidation of a small business, I asked for further information, whichthey provided. I have, however, taken longer than I ought to decide their remuneration.Applications to determine remuneration are made towards the end of the liquidation.Delay prevents the final report being sent to the Registrar of Companies and thecompany being removed from the register. Accordingly, the delay must have causedinconvenience. I apologise for that.[2] When the liquidation order was made on 5 May 2010, the Court approved theliquidators' proposed rates of remuneration:Directors/liquidators$395-$475(plus GST) per hourAssociates $325-$395(plus GST) per hourManagers $255-$315(plus GST) per hourSenior analysts $215-$260(plus GST) per hourBusinessanalysts$165-$215(plus GST) per hourAdministrationstaff$95-$125(plus GST) per hourThe liquidators have provided this breakdown of their fees:Particulars ofteamAverage hourlyrate chargedHours claimed Fees claimedLiquidators $461.90 87.5 hrs $40,415.87Associates $355.00 0.2 hr $71.00Managers $305.53 96.2 hrs $29,391.60Senior analyst $235.51 79.60 hrs $18,746.73Business analyst $201.65 330.40 hrs $66,626.62Administrationstaff$101.25 116.30 hrs $11,775.52Total $235.18 710.20 hrs $167,027.34The rates charged are within those approved in the liquidation order. The liquidatorsestimate a further 14 hours' work to complete the liquidation but they hold only$159,044 in hand. If the total time on the liquidation is taken as 724.20 hours and theremuneration is capped at $159,044, the average hourly charge-out rate will be$219.61.[3] Realisations in the liquidation came to $321,135. The main receipts were$260,724 paid by receivers, $95,751 on a distribution from the bankruptcy of thedirector of the company, $10,000 from a pre-liquidation bank account, and interest.The liquidators incurred legal fees of $56,123 (including GST). Other expenses areunremarkable. The Commissioner of Inland Revenue is the major creditor not onlyfor preferential taxes but for other unpaid taxes. Her claim as preferential creditor isfor $114,072. Non-preferential unsecured creditors came to $470,606, giving totalcreditors of $593,678. The Commissioner has been paid her costs on the liquidationapplication in full and has received 81.08 cents in the dollar for her preferential claim.If the liquidators' remuneration claim is upheld in full, there will be no funds forunsecured creditors.[4] In a letter of 19 July 2019, the Inland Revenue advised that the Commissionerhas no objection to the remuneration sought. That is a standard position taken by theCommissioner, when she has sought the appointment of the liquidators on herliquidation applications. If the Commissioner were the only one to benefit from anadjustment to the remuneration, the Commissioner's consent would make itunnecessary to enquire further. In this case, however, it seemed possible that othercreditors might benefit from any adjustment to the remuneration. Further enquiry wasrequired.[5] The liquidators' memorandum outlines the circumstances of the liquidationand the work undertaken. A draft of the liquidators' final report, copies of earlierliquidators' reports and a printout of the liquidators' time records were provided.I have read the decision in a proceeding by the liquidators against the company'sdirector.1 I have not asked the liquidators to provide further information.1 Madsen-Ries v Just [2013] NZHC 2254.[6] The liquidators' expenses and remuneration are payable out of the assets of thecompany.2 As the company was put into liquidation by court order and the liquidatorsclaim at rates higher than those allowed under ss 276 and 277 of the Companies Act,they need a court order approving their remuneration. They are entitled toremuneration but must show that it is reasonable.[7] The leading case, Re Roslea Path Ltd (in liq),3 deals extensively with theprinciples and practice on applications to fix liquidators' remuneration. It is notnecessary to address every point in the decision. The Court held that in fixing aliquidator's remuneration, it is determining the fairness and reasonableness of whathas been charged when measured against the work undertaken and the result achieved.Fair and reasonable remuneration is the value of the services to the creditors andshareholders. Value is an elusive concept which goes beyond mathematicalapplication of hourly rates to hours spent in administrating the company's affairs. Theprinciples applied on reviewing lawyers' costs are analogous.[8] The court referred with approval to an Australian decision, Conlan v Adams4that suggested non-exhaustively categories where time had not been used reasonably:(a) work beyond the power of the liquidator;(b) work done negligently;(c) unnecessary work (covering decisions to carry out the work and over-servicing);(d) work by people with inappropriate seniority; and(e) work at inappropriate rates.[9] The judgment encouraged liquidators to disclose relevant information as toremuneration to creditors during the liquidation. It held that liquidators' costsassociated with applications to fix remuneration are to be treated as costs in theliquidation unless the court orders otherwise. Statements in the judgment as to a2 Companies Act 1993, s 278.3 Re Roslea Path Ltd (in liq) [2013] 1 NZLR 207 (HC).4 Conlan v Adams [2008] WASCA 61, (2008) 65 ACSR 521.proportional approach have statutory support. Section 253 of the Companies Act,which sets out the principal duty of a liquidator, is subject to the requirement to carryout the duties "in a reasonable and efficient manner".[10] The Court quoted a dictum in Re Medforce Healthcare Services Ltd (No.1),that the court reviews only remuneration, not expenses of a liquidator.5 There is,however, a qualification. If liquidators take a course of action which is not requiredin the liquidation, the court may disallow both their expenses and their remunerationfor that course of action. It would be absurd to refuse their remuneration whileallowing their expenses for the same matter. The legal basis is that regardless thecourt's power of review of remuneration under ss 276 and 284, liquidators have noright to claim for expenses not required for a liquidation. Under Schedule 7(1) of theCompanies Act, liquidators may be paid only "the fees and expenses properlyincurred".[11] Green Securities Ltd operated a Rodney Wayne hair salon at Botany TownCentre, Auckland. The company's director, Mr Just, was a director of two othercompanies with Rodney Wayne salons: one at Manukau shopping centre (operated byPresidential Homes New Zealand Ltd) and the other in Nelson. The liquidators saythat the largest contributors to the company's insolvency were a high level of debts,advances to a loss-making associate of $200,650 and advances to the director of$264,296. The company was still trading at the date of liquidation. The liquidatorsdecided to keep the business operating with a view to sale as a going concern. Thatwas overtaken by a secured creditor putting the company into receivership. Thereceivers kept the business operating and sold it for $680,000. That provided a surplusof $206,724 for unsecured creditors. The liquidators say that as well as dealing withthe receivers, they also had to deal with others claiming security over company assets(for example, under retention of title clauses). That required additional work to thatnormally undertaken at the start of the liquidation. Their time records show that duringthis phase they engaged a lawyer for advice on some of the legal issues under thereceivership.5 Re Roslea Path at [45]; Re Medforce Healthcare Services Ltd (No.1) [2001] 3 NZLR 145 (CA) at[18].[12] As well as dealing with the receivership, which resulted in a realisation forunsecured creditors, the liquidators looked at other avenues of recovery. In May 2011they asked Mr Just to repay $264,296 in drawings from the company. Mr Just deniedliability and claimed that the records on which the liquidators relied were inaccurate.They considered that Mr Just was worth pursuing as he controlled an Aucklandresidential property. However, instead of suing for repayment of the funds taken fromthe company, the liquidators sued Mr Just for breaches of director's duties.[13] At the same time, they also sued Mr Just for breaches of director's duties owedto Presidential Homes New Zealand Ltd, also in liquidation. In August 2013 theliquidators recovered judgment against Mr Just for $187,500 for Green Securities Ltdand $164,000 for Presidential Homes New Zealand Ltd.6 Mr Just defended theproceeding in person. The liquidators established without too much difficulty thatMr Just breached these duties under the Companies Act: s 135 (reckless trading), s 136(not to agree to the company incurring obligations without reasonable grounds tobelieve the company can perform) and s 137 (duty of care). Mr Just would not enterinto any settlement arrangements with the liquidators. In response to their bankruptcyproceeding Mr Just made a formal proposal to his creditors. That failed. Theliquidators' vote at the creditors' meeting defeated the proposal. Mr Just wasadjudicated bankrupt in October 2014. As liquidators of Green Securities Ltd, theyclaimed $482,032 in the bankruptcy. That was made up of the judgment plus interestand costs, and $264,295 for advances paid to Mr Just. His Auckland residentialproperty was owned by a company of which he was the shareholder. The OfficialAssignee had the company put into liquidation and appointed himself liquidator inJanuary 2016. The property was fire-damaged. The Official Assignee collected theinsurance and sold the property in its damaged state, realising $286,000. That resultedin a dividend of $95,751.00 to the liquidators as unsecured creditors in Mr Just'sbankruptcy. Although the liquidators do not say so, I assume that there was also adistribution to them as liquidators of Presidential Homes New Zealand Ltd, alsocreditors in Mr Just's bankruptcy.6 Madsen-Ries v Just [2013] NZHC 2254.[14] The liquidators' time sheets show that there was intensive work in 2010-2011at the start of the liquidation and again in 2013-2014 when the proceedings againstMr Just. That can be seen in their charges for each year.2010 $47,146.142011 $16,266.902012 $7,006.502013 $42,018.002014 $23,242.002015 $5,569.402016 $10,351.002017 $9,421.002018 $3,601.002019 $2,251.00[15] The liquidators have categorised tasks in the liquidation. The total amountscharged for each category are:Task ChargeEnforcement $50,556.50Investigation $26,638.00Cash management $26,333.00Statutory obligations $17,480.00Secured creditors $17,088.00Review ofaffairs/records$8,495.00Creditor issues $6,920.50Trading business/ceasing to trade$2,388.50Asset realisation $2,180.50Asset maintenance/protection$1,324.50Creditors meetings/report$299.00Staff $165.00Leases/landlords $117.50These categories are not watertight. For example, some of the work could be equallybe put under enforcement or investigation. Notwithstanding that, the categories givea good idea of the extent of work on different aspects of the liquidation.[16] The liquidators' reports to creditors show these legal fees (excluding GST):(a) From 5 May 2010 to 5 November 2010 $3,113.00(b) From 5 May 2012 to 5 November 2012 $4,406.00(c) From 5 November 2012 to 5 May 2013 $20,089.00(d) From 5 May 2013 to 5 November 2013 $5,801.00(e) From 5 November 2013 to 5 May 2014 $7,274.00(f) From 5 May 2014 to 5 November 2014 $7,189.00_________$47,872.00The fees for the first period relate to work on the receivership. The rest, $44,759.00,went on the proceedings against Mr Just.[17] These matters can be noted:(a) The realisation of assets involved mainly two tasks: obtaining thesurplus following the receivership, and pursuing Mr Just and collectingunder his bankruptcy;(b) Dealing with claims and making distributions do not seem to have ledto more than the usual amounts of work and did not throw up anydifficulties;(c) The liquidation ran for a long time, nine years to practical completion,although it was not large or complicated;(d) The time spent on the liquidation, over 700 hours, is high;(e) The fees are high for such a liquidation; and(f) The average hourly charge-out rate is low in comparison with claimsby other liquidators carrying out similar liquidations with similar feestructures. An average between $250 and $300 per hour is morecommon.[18] At May 2012 the liquidators had been paid by the receivers but had not startedthe proceeding against Mr Just. That provides a convenient point from which to assesstheir conduct of the liquidation. They held $139,302 after paying their fees and allexpenses. If they had completed the liquidation then, they would have paid theCommissioner her preferential claim in full and had a surplus, about $25,000, for non-preferential unsecured creditors. Instead they sued Mr Just but in doing so spent morethan they recovered and had less for creditors than at May 2012.[19] By itself that does not mean that the liquidators should not have sued Mr Just.That would be a hindsight judgment. The liquidators did not know in May 2012 thatthe claim would lose them money. Their decision to sue can be defended. Mr Justwas known to have control of a significant asset, his home. There was good reason tobelieve that the liquidators could obtain judgment against him. In many cases whereliquidators claim against directors for overdrawn accounts or breaches of duty,directors will negotiate a settlement rather than fight to the end. They may not haveappreciated that Mr Just would be less amenable.[20] Even so, aspects of the litigation raise questions. The liquidators combinedtheir claim against Mr Just as director of Presidential Homes Ltd in the GreenSecurities Ltd proceeding. Ordinarily that should be efficient with costs sharedbetween the two claims. That does not appear to be the case here. The costs of suingMr Just are high, even for a claim against him only as director of Green Securities Ltd.[21] The liquidators sued for breaches of director's duties instead of for theoverdrawn funds. Normally it is easier to prove a claim for overdrawn funds.7 Oftensummary judgment may be sought for such a debt claim. It is not clear that there wereany difficulties with such a claim in this case. Moreover, the liquidators made theircase more complex than it needed to be. They sued for breaches of three separateduties under the Companies Act, when they needed to sue for only one. Any of themwould have done. The piling on of causes of action is a heavy-handed, "throw thebook at him" approach. It is also inefficient in increasing work by the liquidators andtheir lawyers, as well as the defence and the court, without any commensurate benefit.Spending time and money on two more causes of action was excessive andunnecessary. The legal fees incurred in obtaining judgment against Mr Just come to$30,296 (plus GST). With a slimmer case, the fees would be less. $5,000 (plus GST)would be saved.[22] The liquidators' enforcement charges included time spent on the claim againstMr Just, including collating and analysing information, instructing lawyers, preparingevidence and attending court. Again their charges would be lower if they had run aleaner claim.[23] But aside from the Just litigation, the liquidators' claim is still very high. Partof the explanation is time. The longer a liquidation takes, the more time is spent onadministrative tasks, such as keeping accounts and reporting to creditors. Althoughthese are required, they are not productive. So, one of the disadvantages of asettlement with a director that requires payments over time is that the liquidationcannot be completed until all payments have been received and costs are run up in themeantime. That can be seen in this case in the time it took to receive the final dividendfrom Mr Just's bankruptcy.[24] While allowing for that time element, the liquidators' claims are still higherthan I see in other cases where a liquidation has not been completed while paymentsare still collected. There is a pointer in the claims for cash management ($26,333) andstatutory obligations ($17,480). These are the third and fourth highest of the7 See for example EBR Holdings Ltd (in liq) v van Duyn [2017] NZHC 1698.liquidators' categories. They should not be. The liquidation did not require extensiveaccounting work. The main statutory obligations are dealing with tax matters,including the GST aspects of the liquidation, the initial report to creditors (there wasno meeting with creditors) and reporting to creditors every six months. The reports tocreditors were routine and followed a standard format, giving an update since the lastreport. In November 2018 preparing the report required 9/10 of an hour. Similar timewas spent on other reports. The work required under these categories cannot justifythe amounts claimed.[25] Under these categories in their time records, many of the liquidators' claimsare for steps such as "open mail", "put file in Lundia", "coding", "clear in-tray anddistribute mail", "PoD" (proof of debt), "file paperwork in codafiles", "return file toLundia", "approve invoice for payment", all in six-minute units. These charges arefor routine clerical work. This explains the many hours claimed but at a low averagehourly rate.[26] I do not accept that it is reasonable for the liquidators to charge separately forthese steps. These matters are generally absorbed as part of the costs of running aninsolvency practice and are covered by the rates approved for liquidators, associates,analysts and the like. Most businesses do not charge out that way. As an example, aconstruction contractor working on a "charge-out" basis will charge for materials andlabour but will typically not charge for clerical work as part of the services providedunder the contract. Instead, they are absorbed within the charge-out costs. Similarlyother insolvency practitioners do not include these matters as separate charges in theirremuneration claims. Such charges do not add value for creditors.[27] A large number worked on the liquidation.8 Some of that is not surprising inview of the time the liquidation took. There will be personnel changes over that time.And tasks were properly delegated. Some of those who started were still involved at8 These names appear on the time records: David Levin, Vivien Madsen-Ries, Jason Weir, GuarevHemani, Amy Sexton, Ryna Ali, Sarah Barnes, Helem Dem Yanenko, Kamma Jagdale, Julie Cook,Katerina Sutherland, Melissa Pritchard, Rachel Betti, Erwin Hessing, Lisa Webb, Annalise Irawan,Robert Campbell, Colin Owens, Rachelle Betti, Marichu Gacuan-Pacquin, Grace Xie, Liz Smith,Rebecca Hildyard, Sagida Mohammed, Sylvia Xu, Aparva Joshi, Olwyn Funnell, Hamish Ellis-Jack, Charlie Graham, Sarah Collins, Eugene Souslov, Sayuree Ram, Mitchell Skienars, LilyChoun and Eileen McLeod.the end. All the same, there were inefficiencies. The liquidators have charged for timespent for one person passing the matter on to another. There was increased reportingwithin the team – one person explaining to another what has happened, seeking adviceand giving instructions. There would be greater efficiencies with a smaller team.A liquidation of this size did not require so many people working on it.[28] That work in the first two years on the initial investigation and dealing with thereceivership can be justified. The liquidators planned to keep trading and to sell thebusiness. That is more challenging and requires more care than dealing with acompany that has stopped trading. The receivership required the liquidators to protectthe interests of unsecured creditors, including scrutinising claims by secured creditors.I am less convinced that work on other matters and work after May 2012 was carriedout as efficiently as was possible. The result was charges that are higher thanreasonable.[29] It is not possible to go through each item in the 63 pages of time records andallow, adjust or reject each to reach a new total. That also would be inefficient. In ReRoslea Path Ltd, the court said:9we consider that the exercise of a judicial discretion to fix an amount on aglobal basis is preferable to the liquidator being required to provide moredetailed information which is likely to increase the cost to creditors and thedelay in distribution of remaining funds.And:10Rather, we consider that Associate Judges should inquire into thereasonableness of fees on the basis of the principles outlined in Medforce 1and other cases, but have the ability to fix a global sum as remuneration (as amatter of judgment), if the liquidator had supplied too little information toenable a clear view to be formed on whether what was claimed was or was not"reasonable".I have to acknowledge that there has been delay anyway.[30] In my judgment the liquidators' reasonable remuneration is $120,000(exclusive of GST and expenses). That sum takes away padding and inefficiencies in9 Re Roslea Path Ltd at [141].10 At [142].their claim but leaves them with an amount that is still relatively high for such aliquidation. It also recognises that fairly intense work was required at the start andthat the claim against Mr Just was more protracted than the liquidators would normallyexpect.[31] In summary, I fix the liquidators' remuneration at $120,000 (exclusive ofGST). That is also to cover all steps to complete the liquidation. The legal expensesclaimed by the liquidators are reduced by $5,000 (plus GST).Associate Judge R M Bell