In defence of indemnity

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By Ariel Borland, Partner and Ken Lin, Senior Associate

In Re Traditional Values Management Ltd (In Liq) (No 3) [2016] VSC 475, the Supreme Court of Victoria determined that the joint and several liquidators of Traditional Values Management Ltd (In Liquidation) (TVM), the responsible entity of The Blue Diamond Deposits Trust No. 1 (the Scheme), were entitled to payment of their remuneration and expenses on a time cost basis without deduction, given the complex nature of the issues involved in the administration and liquidation of TVM.

The Court also held that the liquidators were entitled to payment of their remuneration and expenses in their defence of a proceeding brought against them personally by the secured creditors of TVM (the Personal Liability Proceeding).

The application for remuneration

Associate Justice Gardiner considered Liquidators’ detailed Remuneration Report and the statutory criteria set out in section 473(10) of the Corporations Act 2001 (Cth) (Act), noting his previous finding that the administration and liquidation of TVM was at the higher end of complexity and involved considerable responsibilities on the part of the Liquidators.

His Honour was satisfied with the level of detail provided by the Remuneration Report – including that it set out the overall quantum of remuneration, provided the total quantum claimed under different job codes and set out a description of categories of tasks performed by the Liquidators and their staff in the ARITA recommended format. His Honour also found that the rates charged by the Liquidators were reasonable, having regard to the prevailing rates charged by liquidators in Victoria.

Noting that the Court appointed Contradictor had no objections to the application, Associate Justice Gardiner approved the Liquidators’ application for payment of their remuneration and expenses on a time cost basis without deduction.

The Personal Liability Proceeding

The Liquidators also sought orders that their remuneration and expenses arising out of the Personal Liability Proceeding be paid from the Scheme’s assets.

The Personal Liability Proceeding was an action commenced by the secured creditors of TVM against the Liquidators personally. The claim was based on the alleged failure of the Liquidators to uncover a fraud that had been perpetrated on TVM by an employee, and hidden by her from the directors and auditors for several years prior to the appointment of the Liquidators.

Associate Justice Gardiner noted that, ordinarily, liquidators who are defendants to proceedings are entitled to the indemnified out of the assets of a company to fund their costs and to satisfy any costs order against them, unless the liquidator has acted unreasonably in defending the litigation.

His Honour likened the liquidator’s right of indemnity to that of a trustee in bankruptcy, in that trustees are entitled to be indemnified for their costs, charges, and expenses properly incurred for the benefit of the trust.

In making the finding that, albeit indirectly, it was in the interests of creditors that the Liquidators defend the Personal Liability Proceeding, the Court likened the present situation with that of the removal of a liquidator. In these cases, the benefit to the creditors might also be characterised as an “indirect benefit” due to the saving of additional costs that would be incurred if a new liquidator were to be appointed.

His Honour held that the Liquidators’ defence of the Personal Liability Proceeding was directly related to the work the Liquidators performed in administering and winding up the affairs of TVM and the Scheme.

The Liquidators were joined as defendants to the Personal Liability Proceeding and had no other choice than to take part in it. It could not be said that the Liquidators acted other than reasonably in their defence of that proceeding.

For these reasons, and the fact that the Personal Liability Proceeding could not have been considered “successful” as against the Liquidators as it was settled for a modest sum, Associate Justice Gardiner ordered that both the legal expenses incurred by the Liquidators and the work performed by them in relation to the Personal Liability Proceeding be met entirely out the Scheme’s assets.

Take away points

This decision is another instance of the Supreme Court of Victoria finding that an insolvency practitioner’s remuneration can be appropriately claimed on a time cost basis, rather than on a “percentage of realisations” basis which has gained traction recently in a number of decisions in the Supreme Court of New South Wales.

Further, this case provides guidance for insolvency practitioners who are seeking approval for their remuneration and expenses for proceedings that have been instituted against them personally. This decision provides authority for the insolvency practitioner’s reasonable remuneration and expenses of defending such proceedings to be paid from the funds available in the insolvent estate where the insolvency practitioner’s defence of a proceeding can be characterised as having a direct or indirect benefit to creditors.

For further information, please do not hesitate to contact us.

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