COMMISSIONER OF INLAND REVENUE v SALUS SAFETY EQUIPMENT LIMITED (IN LIQUIDATION) [2020] NZHC 1368

COMMISSIONER OF INLAND REVENUE v SALUS SAFETY EQUIPMENT LIMITED (IN LIQUIDATION)[2020] NZHC 1368 [17 June 2020]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2012-404-7253[2020] NZHC 1368UNDER the Companies Act 1993IN THE MATTER OF the liquidation of SALUS SAFETYEQUIPMENT LIMITED (in liq)BETWEEN COMMISSIONER OF INLANDREVENUEPlaintiffAND SALUS SAFETY EQUIPMENT LIMITED(IN LIQUIDATION)DefendantOn the papers: 17 June 2020Copy for: H D Levin, DeloitteJudgment: 17 June 2020JUDGMENT OF ASSOCIATE JUDGE R M BELLApproval of liquidators' remunerationThis judgment was delivered by me on 17 June 2020 at 3:30pmpursuant to Rule 11.5 of the High Court Rules.Registrar/Deputy RegistrarCopy for:H D Levin, Deloitte, AucklandInland Revenue Department[1] The liquidators seek approval of their remuneration for this liquidation at$91,600 plus GST and expenses. They applied in July 2018. As the amount sought islarge for the liquidation of a small business with few assets, I asked for furtherinformation which the liquidators provided. I have, however, taken far too long todecide their remuneration. Liquidators' applications to approve their remuneration aremade before liquidators send out their final report and ask to have the companyremoved from the register. My delay in giving this decision has held that up. Iapologise for the inconvenience that must have caused.[2] When the court ordered the company into liquidation on 13 February 2013, ithad proved these hourly rates of remuneration for the liquidators:Directors/liquidators $395-$475 (plus GST)Associates $325-$395 (plus GST)Managers $255-$315 (plus GST)Senior Analysts $215-$260 (plus GST)Business Analysts $165-$215 (plus GST)Administration staff $95-$125 (plus GST)[3] The liquidators provided this breakdown of their fees:PersonnelAverage hourly ratecharged(Exclusive of GST)Hours claimed Fees claimedLiquidators $475.00 33.9 hrs $16,102.50Associates $395.00 .6 hrs $237.00Managers $315.00 73.3 hrs $23,089.50Senior analyst $218.20 2.5 hrs $545.50Business analyst $191.91 248.0 hrs $47,593.04Administration staff $100.23 64.1 hrs $6,431.02Total $222.53 422.40 hrs $93,998.56 (ex GST)[4] Twenty-four people in the liquidators' practice worked on the liquidation. Therates charged are within those approved in the liquidation order. The liquidators'estimate a further 14 hours to complete the liquidation but they hold only $91,148.00in hand. If the total time on the liquidation is taken as 436.40 hours and theremuneration is capped at $91,148, the average hourly charge-out rate will be $208.86(excluding GST).[5] Realisations in the liquidation came to $232,911. The main receipts were$215,007 paid by the directors of the company, $8,945 for receivables and $6,484 forsale of assets. The expenses incurred by the liquidators are unremarkable. TheCommissioner of Inland Revenue is by far the major creditor. She is a preferentialcreditor for the costs of the liquidation application ($3,834) and for preferential taxes($93,376). She is also owed over $93,951 for non-preferential taxes. There were onlyfour other unsecured creditors, of which the highest was $8,300. The Commissionerhas been paid her preferential claims in full. Unsecured creditors have been paid 38.6cents in the dollar.[6] In a letter of 30 July 2018, 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 liquidators' appointment in her liquidationapplications. If the Commissioner were the only one to benefit from any adjustmentto the remuneration, the Commissioner's consent would not make it necessary toenquire further. In this case, however, other creditors would benefit from anyadjustment to the remuneration. Further enquiry was required.[7] The liquidators' memorandum outlines the circumstances of the liquidationand the work undertaken. At my request, the liquidators answered my queries, andprovided information and the liquidation files.[8] The liquidators' expenses and remuneration are payable out of the assets of thecompany.1 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.[9] The leading case, Re Roslea Path Ltd (in liq),2 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 administering the company's affairs. Theprinciples applied on reviewing lawyers' costs are analogous.[10] The court referred with approval to an Australian decision, Conlan v Adams3that 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.[11] The judgment in Roslea Path Ltd (in liq) encouraged liquidators to discloserelevant information as to remuneration to creditors during the liquidation. It held that1 Companies Act 1993, s 278.2 Re Roslea Path Ltd (in liq) [2013] 1 NZLR 207 (HC).3 Conlan v Adams [2008] WASCA 61, (2008) 65 ACSR 521.liquidators' costs associated with applications to fix remuneration are to be treated ascosts in the liquidation unless the court orders otherwise. Statements in the judgmentas to a proportional approach have statutory support. Section 253 of the CompaniesAct, which sets out the principal duty of a liquidator, is subject to the requirement tocarry out the duties "in a reasonable and efficient manner".[12] The liquidators' time records show that the total time spent on the liquidationfor the following years was as follows:2013 170.7 hours2014 29.9 hours2015 60.4 hours2016 52.7 hours2017 66.7 hours2018 42.0 hoursTotal: 422.4 hoursThe liquidators' time records show that while there was some activity in January andFebruary 2014, relatively little was done the rest of that year: only 7.9 hours werebilled. The liquidators accept that the file was overlooked.[13] The liquidators' time records categorise tasks. The times taken for the maincategories are:Task HoursCash management 103.4 hoursStatutory obligations 77.5 hoursReview of affairs/records 61.2 hoursInvestigations 51.1 hoursCreditor issues 42.2 hoursDebtors 22.9 hoursEnforcement 21.6 hoursAsset realisation 17.2 hoursInitial investigations/first 7 days 12.5 hoursSecured creditors 3.7 hoursLeases/landlords 1.9 hoursThese categories are not watertight, but they give a good general idea of the extent ofwork on different aspects of the liquidation.[14] Salus Safety Equipment Ltd carried on business as a contractor providingheight safety protection services. The company had stopped trading in December2012. The last financial statements appear to have been in the year ending 31 March2010. On liquidation, it had a vehicle, plant and equipment, leased premises and somedebtors. Some creditors claimed security over some items of plant and equipment.The company's directors complied with the liquidators' request for information anddocuments.[15] The liquidators' steps at the start of the liquidation in taking charge of thecompany's assets and records, identifying securities registered under the PersonalProperties Securities Act, freezing bank accounts, identifying the landlord,disclaiming the lease and other onerous contracts, are all routine and unremarkable.[16] In March 2015, the liquidators wrote to the directors, holding them liable forbreaches of duty under the Companies Act 1993. The claim was for $215,007, thesum of the creditors' claims in the liquidation. The directors responded promptly,accepting liability and offering to pay $50,000 immediately and the balance byinstalments at $1,000 per week. The liquidators accepted the offer and prepared anacknowledgment of debt, which the directors signed. The directors paid according tothe terms of the deed of acknowledgment of debt. I could see no documents on theliquidators' files recording any defaults by the directors or any follow-up action by theliquidators on non-payment. The liquidators made interim distributions to creditors asthe directors paid. The claim against the directors was accordingly successful. Thedirectors were entirely co-operative. They did not contest liability but made a sensiblesettlement proposal. The liquidators made a major recovery without the costs of legalproceedings and without incurring any legal expenses.[17] Before the liquidators made demand on the directors, they established theamounts of the claims in the liquidation. The Commissioner made an amended claimafter the liquidators had settled with the directors. Some extra work was required todeal with that. The other claims did not present any difficulties.[18] These matters can be noted:(a) much of the work was routine for the liquidation of a small contractingcompany;(b) apart from resolving the Commissioner's claim, dealing with creditorsand their claims did not throw up any significant issues and should nothave led to unusual amounts of work;(c) the liquidators did not incur any unusual expenses;(d) the major recovery in the liquidation, the successful collection from thedirectors under the settlement, went much more smoothly than is oftenseen in such cases;(e) the liquidation ran for five years, although it was not large orcomplicated;(f) the time recorded, over 400 hours, is high for such a liquidation;(g) the fees are high for such a liquidation;(h) The average hourly charge-out rate is low in comparison with claimsby other liquidators carrying out similar liquidations with similar feestructures. An average between $200 and $300 per hour (exclusive ofGST) is more common;(i) the affairs of Salus Safety Equipment Ltd were not complicated; and(j) the liquidation ran smoothly, especially given the co-operation of thedirectors.In these circumstances, the liquidators' remuneration claim is out of kilter with what Isee in comparable cases.[19] The liquidators rely on their itemised attendances in their time records to justifytheir proposed fees of $91,148. I do not, however, accept that that provided fair valueto the creditors. The liquidators have recorded large amounts of time on routine tasks.That can be seen in the claim for 103.4 hours on cash management and 77.5 hours onstatutory obligations. Under those categories, the liquidators have charged in 6 minuteunits for routine clerical work. These matters are generally absorbed as part of thecosts of running an insolvency practice and are covered by the rates approved forliquidators, associates and analysts. These charges appear to be padding. Theliquidators say that it was necessary to monitor payments by the directors. But thatexplanation does not account for the many hours allocated to "cash management".Similarly, it is hard to see the justification for the 77 hours claimed for statutoryobligations. By and large liquidators' statutory obligations involve advertising theliquidation, dealing with tax aspects of the liquidation such as GST, the initial reportto creditors (there was no meeting of creditors), and reporting to creditors every sixmonths. The reports to creditors are routine and follow a standard format, givingupdates since the last report.[20] If this liquidation had been given to a smaller insolvency practice, I amsatisfied that the liquidation could have been completed in shorter time. Time wouldnot have been lost during 2014. The same results would be achieved with less timeon the job. The average hourly rate would be higher but the overall fees would belower. That would give more value to creditors. I assess that a more efficientinsolvency practice would have completed this liquidation with the same results butwith fees of $30,000. I do not consider that these liquidators' claims for more thanthat count as value to the creditors.[21] Accordingly, I fix the liquidators' remuneration at $30,000 (exclusive of GST).The liquidators may also recover the expenses they have claimed. This remunerationis to cover their costs of completing the liquidation.Associate Judge R M Bell