By Ariel Borland, Partner and Bella Green, Law Graduate

In a first, the Supreme Court of Victoria has approved a success or ‘uplift fee’ on top of a liquidators’ remuneration calculated on a time-cost basis. This provides an important pathway for practitioners to be compensated for risk assumed in running recovery actions with limited assets.

In Re HRL Limited (in liq) & Anor [2022] VSC 693 liquidators sought approval for their remuneration under sections 60-10(1)(c), 90-15 and 90-20 of the Insolvency Practice Schedule (IPS) at Schedule 2 of the Corporations Act 2001 (Cth) (Act). The remuneration was sought on a standard time-cost basis plus a fee equal to 5% of any property recovered by the HRL Companies after payment of funding costs and normal time-cost remuneration (Success Fee).

Background

The liquidators of HRL Limited (In Liq) brought proceedings against various officers for breach of duty (Proceedings). The liquidators were only able to pursue the Proceedings by obtaining litigation funding from a litigation funder, which included an uplift fee payable to the funder and payment of 60% of the liquidators’ time-cost remuneration associated with the proceedings. The Proceedings were still on foot at the time the liquidators brought this application, and it was not known whether they would settle at mediation, run to trial or even be the subject of an appeal. As such, the liquidators faced significant delay and payment risk in recovering their remuneration in their pursuit of the claims in the Proceedings.

Prior to applying to the Court, the liquidators sought approval from the committee of inspection for their standard time-cost remuneration and the Success Fee. The COI approved the liquidators’ remuneration sought on a time-cost basis but abstained from voting on the aspect of the resolution dealing with the liquidators’ Success Fee. Accordingly, the only issue for the Court’s consideration was approval of the Success Fee.

Judgment

The Court approved the Success Fee for the following reasons:

1. The relevant arrangement was not one which placed the liquidators in conflict with their duties, including those to creditors, as creditors and the liquidators both benefited from a successful recovery in the Proceeding;
2. Similarly, it was not an arrangement that disadvantages creditors and came at no cost to creditors;
3. The litigation funding agreement was the only option available to the liquidators by which they were able to obtain funding to pursue the claims made in the Proceedings;
4. The liquidators by commencing the Proceedings were attempting to achieve substantial recovery for the creditors and possibly a return to shareholders. The Court referred to the Western Australian Court of Appeal decision in Conlan v Adams [2008] WASCA 61 which considered the disadvantages of time-based costing, considering that time spent is not a measure of the value of the service rendered. The Court considered the comments made in Conlan v Adams with regard to the value of the liquidators’ work in respect of the Proceeding noting the following at [118]: If it results in a recovery at a level sufficient to invoke the payment of the Success Fee, then it will have been work which produced a high value outcome for the HRL Companies, from which creditors will benefit. If there is no recovery or it is at an insufficient level, then there will be no Success Fee payable and no detriment to creditors will have been caused;
5. The liquidators in agreeing to the funding agreements and commencing the Proceedings took on significant risk;
6. ASIC had the opportunity to intervene in this matter and chose not to do so, and as such it was concluded that ASIC took the view the liquidators’ remuneration application for approval of the Success Fee does not require regulatory intervention; and
7. The relevant statutory provisions and case law contemplate a mixture of methods for calculating a liquidator’s remuneration and do not mandate a particular method of calculation. They instead require that the Court must be satisfied the remuneration is reasonable.

 Key Takeaway

This is a welcome development, as too often insolvency practitioners are asked to carry significant personal commercial risk when running important claims for the benefit of creditors. This decision highlights the Court’s willingness to award remuneration having regard to the value of a liquidator’s work, including the delay and risk they are assuming in a particular appointment.