TGIF 18 November 2022 – Court requires payment of liquidators’ remuneration before terminating winding up

This week’s TGIF considers a recent case where a court ordered that a company’s winding up be stayed, with a view to being terminated, pending payment of the liquidator’s remuneration.

Key takeaways

• Even if a court agrees that a company’s winding up should be terminated, payment of the liquidator’s remuneration can be a condition to the termination becoming operative.
  
  
• A liquidator remains entitled to be receive remuneration for the necessary work properly performed by them in relation to the external administration of a company and this is not dependent on the continued existence of an order appointing them as liquidator.
  
  
• A party considering whether to seek an order staying or terminating a winding up should have regard to the potential costs of the liquidator. 

In a recent decision of the Supreme Court of Western Australia (Hume v Carey (No 2) [2022] WASC 377), Justice Hill ordered that a company’s winding up be stayed, with a view to being terminated, pending payment of the liquidator’s remuneration.

The case is a useful reminder that termination of a company’s winding up is not as simple as succeeding on the application, as payment of a liquidator’s costs must still be taken into account.

Background

In February 2021, the first and second defendants (the Defendants) successfully applied to have HHA Architects (the Company) wound up and liquidators (the Liquidators) were appointed. The plaintiff shareholder (the Plaintiff) of the Company originally attempted to appeal this decision but was unsuccessful due to errors in the original filing. Following this, in April 2022 the Plaintiff eventually applied to have the winding up terminated on the basis that the Defendants did not have standing in the first instance to seek winding up.

Hill J of the Supreme Court of Western Australia agreed and stayed the winding up, leaving the issue of payment of the Liquidators’ costs to be resolved.

Twelve months had passed between the winding up originally being ordered and the termination application during which the Liquidators had incurred costs totalling A$65,273.

The Liquidators ultimately agreed to reduce their claim for remuneration to A$31,800.50 on the basis that it was highly unlikely that any amount would be paid to them in respect of their remuneration.

The application

The Plaintiff argued that the Defendants ought to bear the costs of the Liquidators and of the application, as the Defendants’ lack of standing was the origin of the dispute.

The Defendants argued the Court lacked power to require that they pay the costs of the Liquidators. They also argued that the Plaintiff “must be prepared” to pay the costs of the liquidation that cannot be met from the Company’s assets as a condition of obtaining relief.

Relevantly, the Defendants also referred to a deed they had entered with the Liquidators in relation to an insurance policy dispute (the Deed), which had formed part of the original decision to apply for winding up. Under that Deed, the Defendants had agreed to pay reasonable costs incurred by the Liquidators in relation to the insurance policy dispute.

Applicable law

Hill J began by identifying the basis for the Liquidators’ entitlement to remuneration. Specifically, her Honour noted that under section 60-5 of the Insolvency Practice Schedule 2016 (Corporations) (Cth), external administrators are entitled to receive remuneration for the work that is properly performed by them in relation to the external administration of a company. As this right is not dependant on the continued existence of an order appointing them as liquidator, it did not matter that the order originally appointing them was made without power.

Further, her Honour referred to section 556(1)(a) of the Corporations Act 2001 (Cth), which provides that liquidators (as the ‘relevant authority’) have a statutory right to be paid their costs in priority to other claims in liquidation.

In terms of who ought to bear these costs, her Honour noted that liquidators have a “charge or lien over the assets of the company” in order to secure the priority mentioned above. Her Honour also referred to case law indicating that a liquidator’s rights in this regard bear heavily on deciding whether to terminate a winding up.

What did the Court decide?

Hill J concluded the Liquidators were entitled to their remuneration and that this cost should be borne in part by the Plaintiffs. Her Honour held that, in circumstances where the Liquidators’ remuneration was recoverable from the Company’s assets, the Plaintiff should pay the Liquidator’s fees in order to have the winding up terminated.

In determining the amount payable by the Plaintiff, her Honour had regard to the amount likely to be recovered by the Liquidators from the Defendants under the aforementioned Deed. Her Honour reduced the amount payable by the Plaintiff to this extent.

Finally, her Honour ordered that the Plaintiff should pay or secure his share of the Liquidators’ remuneration within three months; otherwise the stay would be lifted and the Company would remain in liquidation.

Comment

This case is a useful reminder that termination of a company’s winding up is not as simple as succeeding on an application to terminate the process. Liquidator’s costs remain payable and secured by the company’s assets.

Although each case turns on its facts, before applying to terminate a winding up, parties should consider the quantum of the liquidator’s fees and the potential sources from which these fees might be paid.