Arbitrary percentages out the window: Sakr clarifies remuneration processes.

March, 2017

By Ariel Borland, Partner, Joanne Hardwick, Partner and Hannah Carne, Associate

The New South Wales Court of Appeal has given important guidance on the issue of practitioner remuneration in Sanderson as Liquidator of Sakr Nominees Pty Ltd (In Liquidation) v. Sakr [2017] NSWCA 38.  The Court of Appeal unanimously allowed the liquidators appeal against Justice Brereton’s decision at first instance fixing the liquidator’s remuneration on a percentage of recoveries basis.

The Court of Appeal has given practitioners much needed clarity on the basis on which Courts, particularly the New South Wales Supreme Court, will approach the difficult issue of remuneration approval and has emphasised that the factors in section 473(10) of the Corporations Act 2001 (Cth) (Act) are paramount in the Court’s assessment of whether the remuneration sought is reasonable.

The decision at first instance

The liquidator of Sakr was appointed in 2012 and realised three properties in North Sylvania. The liquidator paid all secured and unsecured creditors and held surplus funds of $517,000 to distribute to contributories.

Whilst creditors had approved the liquidator’s remuneration to $197,000, the liquidator had been required to undertake additional work to identify contributories and sought approval for this remuneration in the amount of $63,577.80 from the Court. As creditors’ claims had been paid, he could not seek creditor approval for this further remuneration.

At first instance, Justice Brereton referred to the Court’s wide discretion in fixing the level and basis of remuneration. His Honour stated that a liquidator would not necessarily be allowed remuneration at their firm’s standard hourly rates, particularly in smaller liquidations where questions of proportionality, value and risk loomed large. His Honour stated that in such cases, liquidators cannot be expected to be rewarded for their time at the same hourly rate as would be justifiable if more property was available. His Honour stated that whilst not without its shortcomings, ad valorem remuneration is inherently proportionate and incentivises the creation of value rather than the disproportionate expenditure of time.

His Honour noted that he was minded to approve remuneration for the entire liquidation in the amount of $200,000 (inclusive of that already approved by creditors), but ultimately approved the liquidator’s additional remuneration in the amount of $20,000 given there were no objections from contributories and further work had been necessary to identify the contributories.

The decision on appeal

The liquidator appealed Brereton J’s decision on the basis that His Honour had erred in failing to take into account the reasonableness of the remuneration on the time cost basis used by the liquidator. The liquidator argued that Brereton J misapplied considerations of proportionality, including in the way His Honour had determined the ‘value’ or a liquidator’s work and had instead applied arbitrary rates of ad valorem remuneration. The liquidator also submitted that His Honour had erred in finding that a different approach is warranted in smaller liquidations. The liquidator submitted that his remuneration, in so far as it had not already been approved by creditors, should be determined on the basis of the factors set out in section 473(10) of the Act, including on a time cost basis.

ASIC appeared at the appeal and submitted that in the ordinary course of determining remuneration in smaller liquidations, the calculation of fees on an ad valorem basis was to be preferred. ARITA appeared at the appeal as amicus curiae and submitted that percentage based remuneration based on monetary outcomes do not provide proportionality in the true sense of reward for reasonably necessary work properly performed. ARITA also submitted that the quantum of recoveries and distributions may be completely unrelated to the quality of the practitioner’s work, and that a number of factors can influence the amount of work that is reasonable and appropriate, including the complexity of the company’s affairs and the attitudes of creditors.

The Court of Appeal, in a unanimous decision, allowed the liquidator’s appeal. The Court of Appeal held that remuneration must be fixed having regard to the evidence before the Court and taking into account the matters set out in section 473(10) of the Act. Such an evaluative process, whilst difficult in some circumstances, must be undertaken by the Court.

Importantly, the Court of Appeal found that Brereton J had erred in his consideration of proportionality. Whilst the value of the property realised was a relevant factor, the Court of Appeal found that His Honour had erred in focusing solely on this issue and not giving consideration to the work actually done and whether it was proportionate to the difficulty and complexity of the tasks performed. The fact that work performed does not lead to an increase of the funds available for distribution does not mean the liquidator is not entitled to be remunerated for it.  Provided it was reasonable to carry out the work and the amount charged for it was reasonable, there is no reason why a liquidator should not recover remuneration for undertaking the work.

The Court of Appeal also expressly rejected the view that the assessment of remuneration in smaller liquidations should be approached differently, and found that the factors in section 473(10) of the Act apply in the Courts assessment of remuneration in all liquidations.

Discussion

The Court of Appeal’s unanimous decision in Sakr provides much needed certainty for practitioners, particularly those with appointments in New South Wales. The Court of Appeal has firmly rejected the approval of remuneration through the application of somewhat arbitrary percentages, and has recognised that a lot of the value added by practitioners may not result in realisations in the winding up. The Court of Appeal’s rejection of a two tier approach to remuneration application is also welcome, as such an approach would inevitably lead to increased complexity and uncertainty for practitioners.

Whilst the Court of Appeal did not conclude that a time based calculation of remuneration will always be appropriate, the Court appears to have accepted that time cost charging provides at least a starting point for the assessment that is undertaken by the Court. This can be contrasted with the approach taken in other jurisdictions, where time cost charging has received more support in recent times (See our article on this issue here) and Re Gunns Plantations Limited (In Liq) (Receivers & Managers Appointed) [2015] VSC 102 , Thackray v Gunns Plantations Ltd [2011] VSC 380 and Re Traditional Values Management Ltd (in Liq) (No 4) [2016] VSC 520. The Court of Appeal has made it clear that where a practitioner is approaching the Court, and their remuneration represents a sizable proportion of the estate, they must provide sufficient evidence to satisfy the Court that, having regard to the factors in section 473(10) of the Act, the remuneration is reasonable.

Contact Mills Oakley

For further information, please contact:

ariel-borland-mills-oakley

Ariel Borland | Partner
T: +61 3 9605 0015
E: aborland@millsoakley.com.au

 

Joanne Hardwick | Partner
T: +61 3 9605 0949
E: jhardwick@millsoakley.com

Hannah Carne | Associate
T: +61 3 9605 0811
E: hcarne@millsoakley.com.au

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