THE COMMISSIONER OF INLAND REVENUE v HEERA HORTICULTURE LTD (in liq) [2022] NZHC 2055

THE COMMISSIONER OF INLAND REVENUE v HEERA HORTICULTURE LTD (in liq) [2022] NZHC2055 [18 August 2022]IN THE HIGH COURT OF NEW ZEALANDTAURANGA REGISTRYI TE KŌTI MATUA O AOTEAROATAURANGA MOANA ROHECIV-2020-470-42[2022] NZHC 2055UNDER the Companies Act 1993IN THE MATTER of the liquidation of HEERAHORTICULTURE LIMITED (inliquidation)BETWEEN THE COMMISSIONER OF INLANDREVENUEPlaintiffAND HEERA HORTICULTURE LIMITED (inliquidation)DefendantHearing: On the papersCounsel: Memorandum filed by the Liquidators dated 14 July 2022Judgment: 18 August 2022JUDGMENT OF ASSOCIATE JUDGE SUSSOCK[Approval of Liquidators' Remuneration]This judgment was delivered by me on 18 August 2022 at 3.30pmpursuant to r 11.5 of the High Court RulesRegistrar/Deputy RegistrarSolicitors:KPMG, AucklandIntroduction[1] The liquidators of Heera Horticulture Limited (in liquidation), Ms ElizabethHelen Keene and Ms Janet Sprosen of KPMG, have applied for the approval of theiroverall remuneration of $46,478.50.[2] Ms Vivian Judith Fatupaito of KPMG was appointed together with Ms Keeneas liquidator on 8 March 2022. Ms Sprosen was appointed joint and several liquidatorupon the resignation of Ms Fatupaito.[3] The memorandum filed attaches a copy of the draft final report to the Registrarof Companies, prepared on the basis that all distributions have been made and theliquidators' fees approved by the Court. Copies of the four six-monthly reports issuedby the liquidators are also attached.[4] I describe the background and work undertaken below before setting out thelegal principles applying to approval of liquidators' remuneration and applying thoseprinciples to the circumstances of this liquidation.Background and work undertaken[5] Heera Horticulture Limited (in liquidation) was incorporated on 24 June 2011.It supplied horticultural labour-hire services to orchards and farms in the mid NorthIsland region.[6] Following their appointment, the liquidators spoke with the current director,Jobanpreet Singh (Jobanpreet), to gain an understanding of the company's affairs.Jobanpreet advised that he was paid cash for his personal details, which were used toregister him as the company's director on the Companies Register from 9 January2019. Jobanpreet advised that he returned to India the day after he provided his detailsand provided confirmation of this to the liquidators. The liquidators therefore issuedinformation requests to the company's accountant, banks and other third parties.[7] From an initial review of the information provided, it appears the companyceased trading at the end of 2018. The liquidators spent considerable time locating thecontact details for the company's former directors, Gurdeep Singh (Gurdeep) andCharanjit Singh (Charanjit). When the liquidators eventually made contact, Charanjitadvised that the company was operated by his brother, Gurdeep. He advised he wouldprovide his brother's contact details but did not. Gurdeep then advised the liquidatorsthat the company had been sold to Jobanpreet at the end of 2018 or the beginning of2019 for the amount of its debts and that all records of the company had been given toJobanpreet. No responses to written requests for information were received and norwas a copy of the sale and purchase agreement referred to by Gurdeep.[8] The company's signed financial statements for the year ending 31 March 2018recorded an overdrawn shareholders' account in the amount of $123,195. Theliquidators pursued all four shareholders previous to Jobanpreet as the financialstatements did not attribute portions of the current account to specific shareholders.[9] Due to the absence of financial statements the liquidators reconstructed theshareholders' current accounts for the period 1 April 2018 to the date of resignation ofdirectors or liquidation, then identified additional drawings and deposits. Theliquidators spent considerable time obtaining information from the company'saccountant and conducting traces on payments from the bank accounts to identifywhich the shareholder payments related to, as no company records were provided.[10] The liquidators issued demands on two of the former shareholders forrepayment of the amounts attributed to them but no response was received. Theliquidators therefore instructed counsel to initiate legal proceedings. These weresettled a week prior to the defended hearing date but only after the liquidators hadincurred significant costs in preparation for the defended hearing. The settlementamount was paid at the end of January 2022.[11] In addition, the company's 2020 income tax return was amended afteridentifying a liability that appeared to have been incurred after the company ceasedtrading. The liquidators identified vehicles registered under the company's name butwere informed most of the vehicles had been sold and the funds received prior to thecompany's liquidation, with the two remaining vehicles deregistered without sale.Due to the age and value of these vehicles, the liquidators deemed them uneconomicalto pursue further.[12] The liquidators identified a related party payment but there was no response tothe letter of demand and, due to the size of the amount, the liquidators did not pursuethe claim.Creditors and distributions[13] The liquidators anticipate a first and final distribution of $2,363.36 to InlandRevenue representing 100 per cent of their petitioning creditor costs. In addition, theliquidators anticipate a first and final distribution of $131,097.69 to Inland Revenuerepresenting 89 per cent of their preferential creditor claim.[14] There were $297,079.20 in claims by non-preferential unsecured creditors.The liquidators advise that there are insufficient recoveries to make any distributionsto these creditors.Legal principles[15] 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[16] 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 terms1 Re Roslea Path Ltd (in liq) [2013] 1 NZLR 207 (HC) at [102].2 At [102].of 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[17] 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.(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.3 At [108].4 At [151].5 Madsen-Ries v Salus Safety Equipment Ltd (in liq) [2022] NZCA 101.6 At [15].[18] 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.[19] I am, therefore, required to be satisfied that the remuneration reflects the valueof the services rendered to the creditors of the company.Discussion[20] The memorandum filed by the liquidators sets out a summary of the feesincurred ($46,478.50) and the hours worked (133.55). This calculates to an averagehourly recovery rate of $348.02. The memorandum further provides a breakdown ofthe fees incurred by staffing level and the average rates applied. This shows thatapproximately 33 per cent of the hours worked were at partner level at an hourly rateof $550, with approximately 60 per cent undertaken at analyst level at $170 to $330per hour. The liquidators confirm that they consider the most suitable level of staffingwas employed according to the work required. The time incurred by the liquidatorsand their staff is further broken down as follows:(a) 35 per cent was spent on general enquiries, statutory reporting, initialdiscussions with the director and creditors, and administration of theliquidation; and(b) 59 per cent was spent on investigating, issuing claims, negotiating,litigation and attending on settlement of claims in the liquidation.[21] The six-monthly reports attached to the memorandum set out the hourly ratesfor the liquidators and their team members, the fees incurred up to the date of the reportand the average hourly rate. The reports further record that the liquidators welcomecreditor feedback in respect of the fees charged at any time during the liquidation.7 At [54].[22] The memorandum also includes a schedule of disbursements incurred in theliquidation including advertising, administration charges and other expenses for a totalof $3,468. There is no further information provided in relation to the administrationcharge but it appears to be five per cent of the liquidators' fees incurred. It would beuseful in future for further explanation to be provided as to what this charge covers.Some liquidators charge an administration fee rather than separately charging fordisbursements. If that is the case, this needs to be specified in the reports so that theaverage hourly rate calculated can take that into consideration (if it covers the samecosts as other liquidators absorb in their hourly rate).[23] If the administration charges are added to the fees incurred before calculatingthe hourly rate, the average hourly rate rises to $365.42 which is relatively high. Asset out in the background above, however, this does not appear to have been astraightforward liquidation. It was completed relatively quickly and creditors had fulldisclosure of fees through the six-monthly reports as the liquidation progressed, withthe opportunity to raise issues if they wished to do so. The liquidators do not refer toany issues being raised in their memorandum.Approval by Commissioner of Inland Revenue[24] The liquidators sought confirmation from the petitioning creditor, theCommissioner of Inland Revenue, that the Commissioner was satisfied the level offees and expenses set out in the memorandum was appropriate. A letter on behalf ofthe Commissioner is attached to the memorandum recording that the Commissioner issatisfied with the outcome of the liquidation and the level of fees claimed. TheCommissioner accepts that the fees reflect the large amount of work that wasundertaken to locate the details of the former directors, reconstruct the shareholders'current accounts and manage the protracted legal process during the defendedproceedings against the shareholders.Result[25] 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 liquidators' application forapproval of their fees totalling $46,478.50 excluding GST plus disbursements of$3,468.__________________________Associate Judge Sussock