Remuneration scrutinised by the Federal Court of Australia

A recent Federal Court of Australia decision shed some light on the requirements for remuneration of liquidators.

A copy of the decision can be found here.‍

Key Takeaways

‍Liquidator's ought to comply with sections 449E(7) and 499(7) of the Act as it is of the upmost importance. In doing so, liquidators should carefully consider their work-in-progress in preparation of remuneration reports. It is recommended to keep in mind that the circumstance may arise where your remuneration is required to be reviewed and scrutinised by the Court.

It is important to ensure that fees applied are proportionate to the relevant enterprise and to the difficulty and importance of work undertaken. In appropriate circumstances, the Court will apply the proportionality principle to remuneration. In addition to the above, remuneration reports must always be provided to creditors prior to resolutions for remuneration.

‍Background

‍On 6 May 2010, Mr Ian Lock and Mr John Sheahan were appointed as joint and several liquidators of SK Foods Australia Pty Ltd (in Liquidation), Cedenco JV Australia Pty Ltd (in Liquidation) and SS Farms Australia Pty Ltd (in Liquidation) (collectively Companies). Prior to acting as liquidators, Mr Lock and Mr Sheahan were administrators of the Companies.

The Companies were in the business of primary production and food processing, and part of a multi-national group known as SK Foods Group. Mr Lock and Mr Sheahan performed their roles, first as administrators and later as liquidators, undertaking a large quantity of tasks in complex circumstances. Mr Lock and Mr Sheahan claimed to have received remuneration following resolutions by creditors of the Companies.

Prior to creditors determining the remuneration of administrators or liquidators, the administrator or liquidator must provide a report containing specific information to the creditors. This is a requirement under sections 449E(7) and 499(7) of the Corporations Act 2001 (Cth) (Act). Mr Lock and Mr Sheahan failed to comply with this requirement.

Mr Lock and Mr Sheahan subsequently made an application under section 1322(4)(a) to the Court seeking various orders to confirm that the remuneration passed by the creditors was not invalid as a result of non-compliance with the requirements under sections 449E(7) and 499(7) of the Act.

Mr Lock and Mr Sheahan's professional fees as administrators and liquidators had claimed a total sum of $5,787,246.27 (exclusive of GST). ASIC intervened in the proceeding under section 1330 of the Act and took on a role as an interested party in the proceeding.

‍Decision

‍The Court was required to satisfy itself that the persons concerned in, or party to the contravention or failure, acted honestly. In this instance, the Court was satisfied that the liquidators had acted honestly.

The Court was also required to be satisfied that no substantial injustice had been, or was likely to be, caused to any person. ASIC submitted, amongst other things, that substantial injustice had already been caused to the creditors as they were deprived of the opportunity to undergo meaningful examinations of the liquidators' fees and discussions with the other creditor's about the fees, prior to the resolutions for remuneration being carried.

Justice Besanko determined that it was not satisfied that a substantial injustice had been, or was likely to be, caused to any person, and it was stated that this conclusion was sufficient to dispose of the liquidators' application. Justice Besanko considered the discretion available to grant the relief sought by the liquidators, but held that there was prima facie a case for review of the remuneration.

It was ordered that the liquidators' application be refused, and attention be directed on to the liquidators' application to determine or fix the liquidators' remuneration. In reviewing the liquidators' claimed expenses, Justice Besanko concluded that the liquidators' hourly charges were excessive and fell outside the bounds of a sum that was reasonable.

If you require our assistance, or have any queries about this decision or insolvency in general, please don't hesitate to contact Aaron or Elizabeth on (08) 6188 3340, aaron@pragma.law or elizabeth@pragma.law.