The New South Wales Supreme Court of Appeal's decision in Sanderson as Liquidator of Sakr Nominees ^[1] has given cause for optimism amongst insolvency practitioners. The decision confirms that the correct approach was taken by the Court in Idylic Solutions ^[2], bucking a trend in recent years of limiting or reducing practitioner remuneration by reference to a proportion of the funds recovered.

This decision follows the outcome in Idylic Solutions, in which Black J of the Supreme Court of New South Wales re-affirmed that time-cost charging is an appropriate method of calculating remuneration in circumstances where there is sufficient evidence to justify the remuneration sought. Liquidators in Idylic Solutions also set out the high level of evidential detail that may be required to succeed in seeking remuneration on a time-cost basis. The decision in Sakr Nominees follows the findings reached in Idylic Solutions, overruling the use of percentage-based remuneration by the primary judge at first instance.

Key Points

In Sakr Nominees, the liquidator was able to challenge a reduction in the remuneration sought on the grounds that the primary judge had erred by focusing solely on the proportionality of the work undertaken compared to the size and complexity of the liquidation. The decision emphasises the importance of:

• not attributing inappropriate importance to proportionality between the work undertaken and the size and complexity of the liquidation in question; 

• assessing the work undertaken by the liquidator to determine whether it was reasonable to undertake that work and whether the remuneration sought in respect of that specific work is reasonable; and 

• applying all of the factors set out in s 473(10) of the Corporations Act 2001 (Cth) ("Act").

Facts

• The liquidator was appointed to Sakr Nominees Pty Ltd (the "Company") on 3 September 2012, for the purposes of winding up the Company. The only significant assets were three adjacent properties in North Sylvania that were realised by the liquidator for a total of AUD3.72 million. 

• The liquidator paid AUD2 million to secured creditors and approximately AUD904,000 to unsecured creditors out of recoveries. All creditors were paid out by December 2014, with a total surplus of AUD517,830. 

• The creditors approved the liquidator's fees for the period up until 3 November 2014. The liquidator claimed to have undertaken further work following that period with fees totalling the sum of AUD70,283. Of this amount AUD34,870 was approved by a resolution of creditors on 25 November 2014, leaving a balance of AUD35,413 which could not be approved as all creditors had by this time been paid out. 

• The liquidator sought approval from the primary judge for remuneration of AUD63,577.80 including GST, being the AUD35,413 outstanding and a further AUD22,385 the liquidator claimed for future work to complete the administration of the Company. Some of these additional costs were incurred by the liquidator in settling the list of contributories entitled to the surplus, following efforts by the non-corporate shareholders to exclude a related company from its entitlements as a contributory of the Company. 

• The primary judge, Brereton J, approved additional remuneration of AUD20,000, stating that the liquidator would not be guaranteed remuneration according to their firm's hourly rates, especially where the liquidation is smaller in scale. Brereton J stated that questions of proportionality, value and risk are of particular importance in smaller-scale liquidations, and that calculation of remuneration on an ad valerom basis has an inherent proportionality by emphasising value-creation over disproportionate expenditures based on time. 

• The liquidator appealed the decision of the primary judge, contending that his Honour had erred in determining the remuneration to be paid to the liquidator.

Decision

After reviewing the findings of the primary judge, submissions made on behalf of the liquidator, submissions made on behalf of the Australian Securities and Investments Commission in support of the primary judge and on behalf of the Australian Restructuring Insolvency and Turnaround Association (ARITA) in support of the liquidator, Bathurst CJ reached the conclusion that:

• on the basis of the factors for consideration of whether remuneration is reasonable as listed in s 473(10) of the Act, it is not appropriate to fix remuneration merely by applying a percentage considered satisfactory for an entire class of liquidations without giving proper attention to the specific work that was done or is required to be done in that particular liquidation; 

• applying the findings of Black J in Idylic ^[3], evidence of the percentage of total realisations that the remuneration claimed constitutes at least provides a mechanism against which to objectively test whether remuneration sought on a time-cost basis is proportionate; and 

• the mere fact that work performed does not contribute to the recoveries available for distribution or is unsuccessful in contributing to recoveries does not prevent a liquidator from being entitled to remuneration for that work, provided the remuneration is reasonable and it was reasonable for the work to be undertaken.

On the evidence, Bathurst CJ held that the primary judge erred in assessing remuneration solely on a consideration of proportionality of the work undertaken and the size of the liquidation. His Honour was of the view that the primary judge failed to properly assess the work that was actually undertaken by the liquidator and whether the remuneration sought was proportionate to the difficulty and complexity of that work.

Beazley P, Gleeson AJA, Barrett AJA and Beach AJA agreed with Bathurst CJ. The Court allowed the liquidator's appeal and remitted the matter to a judge of the Equity Division of the Supreme Court for rehearing.

Implications

This decision has come at a time when the trend of court judgments in recent years has emphasised the importance of proportionality when assessing whether remuneration sought by a liquidator is reasonable. The Court's decision in this case moves against this trend by affirming that while the requirement of proportionality is an important element of assessing remuneration, it does not automatically preclude the use of time-cost charging in smaller or less complex liquidations.

Further, the conclusions reached by the Court affirm that remuneration may still be reasonable, even in small liquidations, where it relates to work undertaken which did not augment the total recoveries available for distribution to creditors and shareholders. It is only necessary that the remuneration is reasonable according to the factors under s 473(10) of the Act.

This decision will no doubt assist insolvency practitioners and their lawyers by confirming that the use of time-cost charging in liquidations of any size or level of complexity is an acceptable basis for determining remuneration, provided the remuneration sought is reasonable.

_{[1] Sanderson as Liquidator of Sakr Nominees Pty Ltd (in liquidation) v Sakr [2017] NSWCA 38
[2] In the matter of Idylic Solutions Pty Ltd as trustee for Super Save Superannuation Fund and others [2016] NSWSC 1292
[3] In the matter of Idylic Solutions Pty Ltd as trustee for Super Save Superannuation Fund and others [2016] NSWSC 1292 at [50]}