By Nirupa Manoharan, Special Counsel
The recent New South Wales Supreme Court decision of Mainz Developments Pty Ltd (in liquidation)  NSWSC 1146 provides a degree of comfort for liquidators in rejecting the proposition that their remuneration should be assessed solely by reference to a percentage of the value of the property recovered, divorced from all of the other relevant circumstances of the winding up.
Mainz Developments states that when the issue of remuneration is brought before a court, the process engaged by the court should not involve the adoption of any particular percentage of recoveries as a starting base but rather an evaluative assessment of a number of discretionary factors and the court’s experience of other cases as a guide to assessing the appropriate remuneration in the particular case.
A liquidator was appointed to Mainz Developments (“Mainz”) in 2014. In early 2015, the liquidator entered into a contract of sale of a property owned by Mainz. Prior to settlement, a title search revealed that four caveats had been lodged against the property. Each caveat was said to protect a charge, which Mainz had granted the caveators under various pre-appointment agreements. After considerable negotiation, the four caveators agreed to withdraw their caveats on the basis that the liquidator would set aside the balance of the sale proceeds, after paying out the mortgagee, pending determination of the caveators’ claims.
Following settlement, the balance of the sale proceeds was paid into court and the liquidator sought orders that the balance be paid to him on account of his lien arising from the care, preservation and realisation of the property following the principles laid down by Dixon J in Re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171. In calculating his remuneration, the liquidator relied on a resolution passed at the second meeting of creditors fixing his remuneration on a time basis in accordance with his firm’s hourly rates. The liquidator also submitted that his lien extended to his fees and expenses in scrutinising and determining the validity of the charges, the amount secured by charges and their relative priority.
The caveators resisted the orders and, relying on Re Independent Contractor Services (Aust) Pty Limited ACN 119 186 971 (in liquidation) (No 2)  NSWSC 106, sought to limit the liquidators’ remuneration to two percent of the property’s realised value, and further asserted that the liquidator’s lien did not extend to work done that was not necessary for the realisation of the property.
Priority of a liquidator’s lien
All parties accepted a liquidator’s right to a lien pursuant to the principle elucidated by Dixon J in Re Universal Distributing and explained by the High Court in Stewart v Atco Controls Pty Ltd (in liq)  HCA 15 (7 May 2014):
“a secured creditor may not have the benefit of a fund created by a liquidator’s efforts in the winding up without the liquidator’s costs and expenses, including remuneration, of creating that fund being first met. To that end, equity will create a charge over the fund in priority to that of the secured creditor.”
Robb J formed the view that the liquidator’s lien would not take priority over the pre-existing charges where those costs and expenses related to work which was not necessary in realising the fund to which the lien attached. In this context, Robb J pointed out that a number of alternative options were open to the liquidator to secure the removal of the caveats and procure a sale of the property – for example inviting the mortgagee to adopt the contract for sale and sell the property without regard to the caveats, negotiating, as was eventually agreed with the caveators, to set aside the net proceeds of sale pending determination of the caveators claims and so on.
Accordingly, it did not appear to Robb J that the liquidator’s costs of scrutinising and challenging the validity of the existing charges resulted in the creation of any fund which was secured by the liquidator’s lien. However, his Honour also conceded that it was not an easy matter to analyse the significance of protracted and complex correspondence from the perspective of identifying whether the nature and extent of work undertaken was reasonably necessary for the care, preservation and realisation of the property.
Claims for remuneration and expenses distinguished
Justice Robb rejected the caveators’ submission that the court had the power to limit the expenses which a liquidator is entitled to a percentage of the amount realised from the sale of the property. Robb J stated the basis upon which a liquidator’s remuneration is determined differs from the basis that governs a liquidator’s entitlement to reimbursement for expenses incurred. In the latter case, a liquidator has a right to reimbursement from the company of all expenses in a similar manner to a trustee and there is no requirement for these expenses to be “determined” by the court unless expressly challenged as part of the liquidator’s accounts being audited (s539) or as part of an investigation into the liquidator’s books or an inquiry into the liquidator’s conduct (s536).
Liquidator’s remuneration as a percentage of assets realised
Robb J also rejected the caveators’ submissions that the appropriate approach in determining a liquidator’s remuneration was to start with the selection of a rate expressed as a percentage and then simply apply that percentage to the value of assets realised: “it is not correct to say that the process by which the court determines the amount of remuneration to be allowed to liquidators has evolved to the point where the determination involves the selection of a percentage, divorced from all of the other relevant circumstances of the winding up.”
His Honour reviewed a number of recent cases relating to liquidators’ remuneration and concluded that the process of determining a liquidator’s remuneration entitlement involves an evaluative assessment of a number of discretionary factors as well as the court’s experience in similar cases.
Justice Robb ultimately concluded that the liquidator may need to revise his claim for the remuneration claimed given that his original claim appeared to include work that was not in fact reasonably done for the purposes of realising the property. In the circumstances, Robb J invited the parties to explore the possibility of reaching a compromise as to how the (relatively small) amount paid into court should be distributed between them.
Take home thoughts
Mainz Developments provides a degree of comfort for liquidators in rejecting the proposition that their remuneration should be assessed solely by reference to a percentage of the value of the property recovered. As a practical matter, to further reduce the risk of challenges relating to the extent of a liquidator’s Universal Distributing lien, liquidators should retain a detailed itemised bill of costs which explains, among other things, how and when work was completed and the different classifications/charge out rates of its employees.
Get the latest news insights and articles straight to your inbox, simply enter your details.