TGIF 1 April 2022 – Remuneration cut due to ‘unreasonable prolongation’ of administration

This week’s TGIF considers In the matter of Guided Knowledge Group Pty Ltd [2022] NSWSC 255 in which a liquidator sought approval for his remuneration under Schedule 2 of the Corporations Act 2001 (Cth).

Key Takeaways

• Under section 60-12 of the Insolvency Practice Schedule (Corporations), a court considers a number of factors to determine whether the amount of remuneration sought is reasonable.
  
  
• The onus is on the liquidator to establish the reasonableness of remuneration claimed.
  
  
• If a court believes the liquidator unreasonably delayed finalising the winding up, remuneration for ongoing administrative costs are unlikely to be recoverable.  

What happened?

In the matter of Guided Knowledge Group Pty Ltd involved an application by the Liquidator of Guided Knowledge Group Pty Ltd (Company) for an order for remuneration pursuant to section 60-10 of the Insolvency Practice Schedule in Schedule 2 of the Corporations Act 2001 (Cth) (the Act).

The Liquidator was appointed to the Company in November 2016. Over the course of his appointment, the Liquidator’s total costs came to just over $76,000, of which the creditors had approved over $55,000. By October 2021 there were no creditors of the Company remaining, thus the Liquidator applied to the NSW Supreme Court under section 60-10 of the Schedule for an order that he was entitled to the extra remuneration. The Liquidator claimed this remuneration related to the period from May 2019 to January 2022.

What was the applicable law?

In making the determination, Justice Williams considered the factors set out in section 60-12 of the Schedule to assess whether each aspect of the remuneration sought was reasonable. Her Honour’s assessment included consideration of:

• the extent to which the work was necessary;
  
  
• the complexity and quality of the work; and
  
  
• the value and nature of the property dealt with.

Justice Williams was guided by the principles which emerge from Sanderson as liquidator of Sakr Nominees Pty Ltd v (in liq) v Sakr (2017), which further calls for a consideration of the proportionality of the work performed against the size of property subject of the administration, and the benefit to be obtained from the work.

What did the Court decide?

Justice Williams classified the work done into four discrete categories and was satisfied that three of the four categories involved necessary and properly performed actions.

However, her Honour identified issues with the fourth category, which she characterised as “‘attending to tasks of an ongoing, repetitive nature”. The costs attributed to this category made up approximately half of the remuneration claimed and included attending to statutory lodgements, bank statement reconciliation, internal meetings and file maintenance.

Her Honour noted that despite the fact the individual items involved in this category were relatively inexpensive, the small charges added up to a significant amount.  

Justice Williams observed that the necessity of the work (and therefore the reasonableness for the liquidator to recover costs for it) depended on whether it was necessary for the administration to continue for the length of time it had.

The Liquidator submitted that part of the delay arose from reduced working hours implemented for staff during the COVID-19 pandemic to avoid redundancies. However, Justice Williams noted that “had the work been attended to efficiently after November 2019 [when the Liquidator had received advice regarding how the surplus in the winding up should be dealt with], it is likely to have been completed or substantially completed before the COVID-19 pandemic…”

In making an order for a lesser amount of remuneration, Justice Williams concluded there would be a lack of proportionality in approving remuneration equivalent to nine per cent of known recoveries where half the amount claimed was attributable to the unreasonable continuation of the administration.

Comment

This decision serves as a useful reminder to insolvency practitioners and their advisors that:

• amounts for approval through remuneration orders from a court should be carefully considered;
  
  
• the onus will be on liquidators to establish the reasonableness of amounts claimed; and
  
  
• where an administration is completed over a prolonged period, evidence should be provided that sufficiently justifies its duration.

The observations of Justice Williams further highlight the importance of proportionality and emphasise the fact that a court will have regard to the size of the insolvency or benefit obtained when determining reasonableness of remuneration claimed.