08 March 2019
This week’s TGIF covers the Federal Court’s refusal in Lock, in the matter of Cedenco JV Australia Pty Ltd (in liq) (No 2)  FCA 93 to validate creditors’ resolutions fixing $5m+ of remuneration where creditors were given insufficient information; reduced remuneration to be fixed.
On 11 February 2019, Justice Besanko of the Federal Court of Australia refused an application under s 1322(4) of the Corporations Act 2001 (Cth) by Adelaide liquidators, John Sheahan and Ian Lock (Liquidators), to validate creditors’ resolutions fixing over $5 million in remuneration for the Liquidators’ role as administrators and 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, the Companies). Justice Besanko’s reasons also form the basis for reductions which will be made to the Liquidators’ remuneration.
The Liquidators commenced the proceedings in July 2015, after ASIC raised concerns that the Liquidators had failed to comply with the requirements (then in sections 449E(7) and 499(7) of the Act). It appeared that the Liquidators had drawn remuneration where the creditors’ resolutions fixing the remuneration were passed on the basis of:
ASIC intervened in the proceedings and opposed the orders sought by the Liquidators under s 1322(4) effectively “rubber stamping” the remuneration as well as raising extensive objections to the remuneration sought. Corrs acted for ASIC in the proceedings.
Justice Besanko held that the Liquidators contravened sections 449E and 499(7) of the Act in that all of the remuneration reports provided to the creditors were inadequate. His Honour found that the contraventions had caused substantial injustice to creditors who had been deprived of the opportunity for meaningful examination and discussion of the remuneration sought.
His Honour also referred to further reasons to exercise the discretion against granting relief under s 1322(4) as he found that the remuneration claimed could not be said to appear reasonable and that it was “very high” in the circumstances.
A further hearing is listed on 24 April 2019 for final orders fixing the Liquidators’ remuneration, taking into account Besanko J’s reasons, which will require substantial reductions to be made including with respect to the Liquidators’ hourly rates which His Honour found were “excessive”.
By way of comparison to the Liquidators’ hourly rates, ASIC tendered evidence from 10 insolvency practitioners practicing in different offices in Australia and from firms of different sizes.
Having regard to that evidence, His Honour considered a discount of 20% was appropriate on partner and senior manager rates, and 10% on manager rates.
His Honour’s reasons also provided for significant discounts to be made to the remuneration claimed by the Liquidators for some of the work performed by them.
The Court also received expert opinion evidence from Mr Peter Gothard (managing partner at Ferrier Hodgson in Sydney) as to what work the Liquidators should have done in the circumstances from the perspective of a competent and prudent insolvency practitioner applying what is now the ARITA Code of Professional Practice.
His Honour overruled the Liquidators’ objections to that evidence and held that evidence of what a competent and prudent insolvency practitioner would do in the circumstances would likely be of assistance to the Court in considering whether the work performed was reasonably necessary. His Honour rejected the submission that the evidence of Mr Gothard was no more than one professional commenting on the conduct of another, as he considered that Mr Gothard had the necessary additional training, study or experience to demonstrate specialist knowledge of what a competent and prudent insolvency practitioner would do.
Final orders are yet to be made in relation to the matter which will next be before the Court on 24 April.
In the meantime, His Honour’s reasons emphasise:
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