THE COMMISSIONER OF INLAND REVENUE v TUUPARI FARMS LTD (in liq) [2022] NZHC 2059

THE COMMISSIONER OF INLAND REVENUE v TUUPARI FARMS LTD (in liq) [2022] NZHC 2059 [18August 2022]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2014-488-0136[2022] NZHC 2059UNDER the Companies Act 1993BETWEEN THE COMMISSIONER OF INLANDREVENUEPlaintiffAND TUUPARI FARMS LIMITED (inliquidation)DefendantHearing: On the papersCounsel: Memoranda filed by liquidators dated 8 April 2022 and 11 July2022Judgment: 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:PriceWaterhouseCoopers, AucklandIntroduction[1] The liquidators of Tuupari Farms Limited (in liquidation), Mr Craig Sansonand Mr Malcolm Hollis, have applied for approval of the liquidators' fees in thisliquidation totalling $140,674.87 excluding GST plus disbursements.[2] Mr Sanson and Mr Colin McCloy were first appointed on 29 September 2014.Mr McCloy vacated the position on 18 December 2015 and was replaced by Mr DavidBridgman. Mr Bridgman was then replaced on 9 December 2020 by Mr Hollis.[3] The liquidators have attached their draft final report to the Registrar ofCompanies to their memorandum, prepared on the basis that their fees have beenapproved. In addition, they have attached copies of their 14 six-monthly reports issuedsince the company was put into liquidation.[4] The liquidators filed a second memorandum dated 11 July 2022 attaching aletter on behalf of the Commissioner of Inland Revenue. This confirms that theCommissioner is satisfied with the outcome of the liquidation and the proposedremuneration.[5] I describe the background and work undertaken below, followed by the legalprinciples applying to approval of liquidators' remuneration. I then apply thoseprinciples to the circumstances of this liquidation.Background and work undertaken[6] The company was incorporated in November 1999 and owned and operatedtwo dairy farms in Northland. It ceased trading on 3 June 2014.[7] Following appointment on 29 September 2014, the liquidators were advisedthat in 2008, two of the company's shareholders asked to be bought out, which resultedin the company being burdened with significant additional debt. As a result of thisincrease in debt, there was considerable pressure on the company's cashflow.[8] The company was also affected by the economic downturn of 2008 and a seriesof droughts in subsequent seasons which led to a decrease in production. As a result,the company began a farm sales process in 2013. The farms were sold in June 2014,prior to the liquidation.[9] As at the date of liquidation, the company's assets consisted of a number ofitems of plant and equipment, miscellaneous livestock, shares held in various entities,and some outstanding accounts receivable. The liquidators undertook a significantamount of work investigating and identifying claims, including identifying fixedassets that were located at the director's residence, the company's previously ownedfarms or that were held by third parties.[10] In addition, the company held shares in two companies and had a thirdallotment of shares that had been transferred in error for nil consideration to thepurchaser of the company's farms.[11] Prior to liquidation, the company sold approximately 122 cows to a third partywith a further 32 cows to be leased for a year and purchased upon expiry of the leasein May 2015.[12] The company also had accounts receivable relating to final milk cheques forthe 2014 season, and money owing on a sharemilking agreement on a third farm.[13] The liquidators identified and realised these assets, and settled a number ofvoidable transaction claims leading to total realisations of $688,157.22.Creditors and distributions[14] The company had three secured creditors with one discharging their securityshortly after liquidation. A distribution of $110,830 was made to the ANZ bank fromthe sale of fixed assets pursuant to a General Security Agreement.[15] The petitioning creditor received a distribution of 100 cents in the dollar for itspetitioning creditor's costs of $3,776.36 and its preferential claim of $332,713.77relating to unpaid GST and PAYE.[16] Seven non-preferential unsecured claims totalling $1,063,169.28 werereceived. A small distribution of $11,999.99 was made to the non-preferentialunsecured creditors.Legal principles[17] 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[18] 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[19] 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 creditors1 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].(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.[20] 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.[21] Although the Commissioner of Inland Revenue is satisfied the fees charged arereasonable, I am therefore still required to be satisfied that the remuneration reflectsthe value of the services rendered to the creditors of the company.Discussion[22] The liquidator's first memorandum records that the fees have been charged inaccordance with the rates fixed by the Court on the date of liquidation, 29 September2014. The draft final report attached to the memorandum sets out the background tothe appointment of the liquidator, the steps taken during the liquidation in significant7 At [54].detail and, at Appendix B, a statement of realisation and distribution for the period ofthe liquidation together with a summary of fees charged and a breakdown of tasksundertaken.[23] The liquidators confirm their conclusion that all areas of recovery have beenexplored and dealt with, thus enabling the completion of this liquidation.[24] The liquidators have provided copies of their 14 six-monthly reports to thecompany's creditors and shareholders. Each of these sets out the fees incurred to thedate of the report and provides an estimated breakdown of these fees across fivecategories of work with the relevant percentages set out. The reports each record thats 284 of the Companies Act allows creditors, shareholders, other entitled persons ordirectors of a company in liquidation to apply for a review of the liquidators'remuneration. The memorandum filed by the liquidators records that no objectionshave been received in respect of their remuneration.[25] Appendix B includes a breakdown of the total hours charged by the rates atwhich those hours were charged. The breakdown indicates that 26 per cent of thehours worked were at partner or director level, at a rate of $375 to $450 per hour, withalmost 50 per cent of the hours worked at senior associate level or below, at an hourlyrate of between $110 to $240 per hour. Annexure B to the draft final report providesa narrative of the work performed at each of the staffing levels in significant detail.[26] The total hours worked were 463.9 for an average hourly recovery rate of$303.24 (excluding GST). The second memorandum filed by the liquidators recordsthat the amount of fees paid was less than actually incurred by approximately $1,000.Appendix B includes in the statement of realisation and distribution for the period ofthe liquidation, an amount for "liquidators' disbursements" of $7,486.67. This numberis not broken down. It represents slightly more than five per cent of the liquidators'remuneration for which approval is sought. It would be useful in future for thisnumber to be broken down or for further explanation to be provided as to what thischarge covers. Some liquidators charge an administration fee equal to five per cent ofthe liquidators' remuneration rather than separately charging for disbursements. If thatis the case, this needs to be specified in the report so that the average hourly ratecalculated takes that into consideration as some liquidators absorb these costs in theirhourly rate.8 If these disbursements are added to the fees for which approval is sought,the average hourly rate increases to $319.88 (excluding GST).[27] The liquidation has taken a considerable period of time and there have been anumber of changes in liquidators (although Mr Sanson has remained throughout).During this time there has been a significant realisation of assets with distributions of$459,320.12 paid to creditors. Confirmation that fees have been disclosed in each ofthe six-monthly reports and no objections received provides some comfort that thefees appropriately reflect the value of services to the creditors.Commissioner of Inland Revenue's position[28] The liquidators sought confirmation from the petitioning creditor, theCommissioner of Inland Revenue, that the Commissioner was satisfied with the levelof fees and expenses for which approval is sought. The Commissioner has confirmedthat they have reviewed the memorandum and the draft final report. Theyacknowledge the amount of work that has been undertaken to investigate and identifyclaims in the liquidation, realise fixed assets for distribution and to address voidabletransactions.[29] The Commissioner confirms that they received 100 per cent of their creditor'scosts and 100 per cent of the preferential claim. The Commissioner is satisfied withthe outcome of the liquidation and the fees charged of $141,628 plus GST anddisbursements. I note that this is the amount of fees incurred rather than the amountof fees charged, which is a slightly lower figure of $140,674.87 excluding GST plusdisbursements.Result[30] I am satisfied having regard to the memoranda filed and their attachments,including the letter on behalf of the Commissioner of Inland Revenue, that theliquidators' remuneration appropriately reflects the value of the services rendered to8 See the discussion in my earlier decision Ng v M & C Malaysia Restaurant Ltd [2022] NZHC 882at [22].the creditors of the company. As a result, I grant the application for approval ofliquidators' fees totalling $140,674.87 excluding GST plus disbursements.__________________________Associate Judge Sussock