THE COMMISSIONER OF INLAND REVENUE v S.K. HOSPITALITY NZ LIMITED (in liquidation) [2023] NZHC 1307

THE COMMISSIONER OF INLAND REVENUE v S.K. HOSPITALITY NZ LIMITED (in liquidation) [2023]NZHC 1307 [29 May 2023]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2019-404-2570[2023] NZHC 1307IN THE MATTER of the Companies Act 1993BETWEEN THE COMMISSIONER OF INLANDREVENUEPlaintiffAND S.K. HOSPITALITY NZ LIMITED (inliquidation)DefendantHearing: On the papersAppearances: Memorandum filed by liquidators dated 9 Febrary 2023Judgment: 29 May 2023JUDGMENT OF ASSOCIATE JUDGE SUSSOCKThis judgment was delivered by me on 29 May 2023 at 4.00 pmpursuant to r 11.5 of the High Court RulesRegistrar/Deputy RegistrarIntroduction[1] The liquidators of S.K. Hospitality NZ Limited (in liquidation) (Company),Luke Norman and Janet Sprosen of KPMG, have applied for approval of their fees inthis liquidation totalling $22,379.26.[2] The liquidators have filed a memorandum attaching a copy of their draft finalreport to the Registrar of Companies prepared on the basis that the liquidators' feeshave been approved. The liquidators have also attached copies of their five reportsissued during the liquidation. Due to staff shortages in the Registry, the memorandumwas only referred to me recently. I apologise on behalf of the Court for the delay.[3] The background and work undertaken are set out below. I then outline the legalprinciples applying to approval of liquidators' remuneration and apply those principlesto the circumstances of this liquidation.Background and work undertaken[4] The Company was incorporated on 3 February 2016 and operated a restaurantand events catering business in Manukau, Auckland.[5] Following application by the Commissioner of Inland Revenue, Vivian JudithFatupaito and Luke Norman were appointed as liquidators of the Company on7 August 2020.[6] On 8 March 2022, Janet Sprosen replaced Vivian Judith Fatupaito as liquidatorupon her resignation.[7] The liquidators' memorandum records that following appointment on7 August 2020 the liquidators made multiple attempts to contact the director of theCompany but were unsuccessful.[8] The liquidators issued a formal notice to attend an examination on oath butwere advised the director was unable to attend due to health issues. Enforcement ofattendance at an examination was complicated by the COVID-19 restrictions applyingduring the relevant period.[9] The liquidators report that the Company's business had been sold prior toliquidation. Pursuant to the terms of the sale and purchase agreement, part of thepurchase price was held in trust until both parties confirmed satisfaction ofundertakings regarding chattels. The purchaser maintained the retained funds werepayable to the purchaser as the undertakings were not satisfied. The director's positionwas the retained funds should be released to the Company.[10] The liquidators corresponded with the purchaser and the director's solicitorregarding the retained funds. The purchaser provided information to the liquidators insupport of their position, but the director provided no information despite repeatedrequests. In the end, after obtaining legal advice, the liquidators consented to therelease of the retained funds to the purchaser.[11] Following review of the documents regarding the sale of the business, theliquidators identified that proceeds from the sale were paid to a related party pursuantto a purported security. After attempting to resolve validity issues with the securitythrough correspondence, the liquidators filed and served notices to set aside thevoidable charge and voidable transaction on the related party.[12] The related party filed a notice of opposition, and the matter was set down fora hearing on 24 May 2021. A few days prior to the hearing the related party made asettlement offer. Settlement was ultimately agreed and paid and the liquidators'application was discontinued. Due to the lateness of the settlement offer, however, theliquidators had already incurred significant costs.[13] In addition, the liquidators requested that the director return a company vehiclein her possession. The director's solicitor advised that the vehicle was purchased bythe director prior to liquidation and that the director had been required to remedymechanical issues. The liquidators determined that it was uneconomic to pursue thedirector for the vehicle given the value.[14] During the liquidation, the liquidators also complied with a request from theMinistry of Business, Innovation and Employment (MBIE) for information regardingthe director, Reet Maan (formally known as Sonia Singh). On 20 December 2021,Reet Maan was prohibited from managing a company for seven years by theRegistrar of Companies.[15] The draft final report records that there were insufficient asset realisations toenable a distribution to be made to any class of creditors.Legal principles[16] The Court's power to approve liquidators' remuneration is provided for ins 284 of the Companies Act 1993. The principles that apply in consideringapplications for approval are set out in the full High Court decision, Re Roslea PathLtd (in liq).1[17] 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 the 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 is taken is for the liquidators to voluntarily disclose in theirsix-monthly reports the amount of fees charged, such that creditors have anopportunity to ask questions as the liquidation progresses.41 Re Roslea Path Ltd (in liq) [2013] 1 NZLR 207 (HC) at [102].2 At [102].3 At [108].4 At [151].[18] The Court of Appeal in Madsen-Ries v Salus Safety Equipment Ltd (in liq)recently confirmed the approach set out in Re Roslea Path Ltd.5 The Court approvedcounsel assisting's summary of the principles that apply to the determination ofretrospective applications (for approval of liquidators' remuneration) as follows:6(a) Liquidators are fiduciaries and their fundamental obligation is a dutyto account. There is a conflict between the interests 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 creditors.[19] 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.5 Madsen-Ries v Salus Safety Equipment Ltd (in liq) [2022] NZCA 101.6 At [15].7 At [54].Discussion[20] The liquidators' memorandum records that the time spent by the liquidatorsand their staff can be broken down by task as follows:(a) two per cent on general enquiries and discussions with creditors in theliquidation;(b) 24 per cent on administration, statutory reporting and case closure; and(c) 74 per cent on investigating, issuing claims, litigation, negotiating andattending on settlement of claims in the liquidation.[21] The memorandum further sets out a summary of the liquidators' fees incurredby hours worked, staff level and the average rates applied as follows:Summary of Liquidation Fees(All figures excludeGST)Court ApprovedHourly Rates($)Average HourlyRate Charged($)Hours Worked Fees Incurred($)Percentageof HoursWorked(%)Liquidator /Director 550 526.39 50.25 26,450.00 2415592Manager/SeniorManager/AssociateDirector400-500 438.39 31.45 13,787.50GraduateAnalyst/Analyst/SeniorAnalyst170-330 240.53 121.50 29,225.00Support Staff 100-170 170 4 680.00Total 207.20 70,142.50 100Total Fees ActuallyPaid from Liquidation22,379.26[22] As the summary above shows, a significant proportion of the work undertakenin the liquidation was completed at the graduate analyst/analyst/senior analyst level.[23] In addition, the summary shows that the fees incurred were $70,142.50whereas the fees for which approval is sought are only $22,379.26. The memorandumrefers to $48,142.50 being written off by the liquidators as insufficient recoveries weremade. This figure does not match the amounts in the table exactly, with the differencebetween the fees incurred in the table and the total fees paid from the liquidation being$47,763.24. Whichever is the correct figure however, a very substantial sum has beenwritten off with the result that the average hourly rate for the liquidation was only$108 (excluding GST), significantly below the usual rate.Commissioner of Inland Revenue[24] The Commissioner of Inland Revenue was the petitioning creditor. Theliquidators' memorandum attaches a letter from the liquidators to the Commissionerdated 27 January 2023 which attached a copy of the liquidators' draft final report andinvited any queries or objections to be raised with the liquidators. The liquidators'memorandum records that no objections were received.Result[25] Considering the steps taken as discussed in the background above and thehours spent, the staff involved and the amount of time written off, I am satisfied thatthe liquidators' proposed remuneration sufficiently reflects the value of servicesrendered to the creditors of the company in liquidation. As a result, I grant theapplication for approval of the liquidators' fees totalling $22,379.26 (excluding GSTand disbursements).__________________________Associate Judge Sussock