18 June 2019
In Lock, In the matter of Cedenco JV Australia Pty Ltd (in liq) (No 3)  FCA 879, the Federal Court ordered liquidators John Sheahan and Ian Lock (Liquidators) to repay approximately AU$1.9 million (or 30%) of the remuneration they drew in their 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).
The Court also ordered that the Liquidators:
To add to our previous takeaways (summarised here) following the delivery of the Judge’s reasons on 11 February 2019:
To recap, the Liquidators commenced the proceedings in July 2015, after ASIC raised concerns that they had failed to comply with the requirements (then in sections 449E(7) and 499(7) of the Corporations Act 2001 (Cth) (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.
On 11 February 2019, Justice Besanko refused the Liquidators’ application under s 1322(4) and found that the Liquidators had contravened sections 449E and 499(7) of the Act . His Honour found that the remuneration claimed could not be said to appear reasonable and that it was ‘very high’ in the circumstances.
In his reasons, Justice Besanko also provided for significant discounts to the remuneration claimed by the Liquidators, including a 20% discount on partner and senior manager rates and a 10% discount on manager rates. Those reasons translated into a reduction of approximately AU$1.9 million, or about 30% of the AU$5.8 million remuneration claim made by the Liquidators.
On 12 June 2019, the Court delivered its final judgment in the proceedings. As mentioned above, the orders made resulted in the Liquidators being required to repay approximately AU$1.9 million.
Significantly, Justice Besanko also ordered that the Liquidators pay interest on the amounts drawn which exceeded the amounts approved by the Court (i.e., AU$1.9 million) from the date the amounts were drawn to the date they are repaid in accordance with the Court’s Practice Note (GPN-INT) which stipulates a pre-judgment interest rate four basis points above the Reserve Bank of Australia (RBA) cash rate, increasing to six basis points after judgement is delivered.
His Honour disagreed with the Liquidators’ submissions that the Court lacked the power to award interest in the case. His Honour also had regard to clause 16.3 of the Code of Professional Practice for Insolvency Practitioners, which requires insolvency practitioners upon becoming aware that they are not entitled to fees to repay them immediately.
Finally, His Honour found that, contrary to the Liquidators’ submissions, the issue of what persons or entities may benefit from the repayment of monies is irrelevant to whether interest should be paid.
Justice Besanko ordered that the Liquidators bear their own costs personally without any right of indemnity from the assets of the companies (which position the Liquidators had accepted). More significantly, Justice Besanko also ordered that the Liquidators pay ASIC’s costs as intervener, personally without any right of indemnity from the assets of the companies.
His Honour acknowledged that ASIC’s role as intervener in this case was quite different from what it might be in other cases and said that ASIC’s submissions provided ‘an overwhelming case for payment’ of ASIC’s costs, saying, “it is difficult for me to see how there could have been a proper review of the plaintiff’s remuneration without the substantial role played by ASIC.”
This decision emphasises that the failure to properly obtain creditor approval of remuneration and then failing to immediately repay that remuneration until such time as it is approved poses a significant financial risk to insolvency practitioners personally.
In addition, the practitioners may also be at risk of paying the regulator’s costs in circumstances where the regulator is the only other ‘party’ to the case and has played a significant and substantial role in the proceedings.
Corrs acted for ASIC for the entirety of these proceedings, which commenced in 2015.
This publication is introductory in nature. Its content is current at the date of publication. It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice based on your specific circumstances before taking any action relating to matters covered by this publication. Some information may have been obtained from external sources, and we cannot guarantee the accuracy or currency of any such information.