In the matter of Karim Pty Ltd (in liq)

By Originating Process filed on 17 August 2020, the Plaintiffs, Mr Vincent Pirina and Mr Steven Naidenov (“Liquidators”) as liquidators of Karim Pty Ltd (in liq) (“Company”) seek an order, under s 60-10 of the Insolvency Practice Schedule (Corporations) (“IPSC”) that their remuneration in respect of the liquidation of the Company be set in a specified amount for the period of work they carried out between 8 June 2019 and 3 July 2020. The First Defendant, Mr Edgar Francis, who is a contributory of the Company, has not appeared and does not oppose that order. The Second Defendant, Mr Kevin Nol, also a contributory of the Company, has raised a legal issue in opposition to that application, namely whether the Liquidators can claim remuneration for work done by employees of two incorporated accounting firms with which they have been associated. I address that question in this judgment. The question of the quantum of the Liquidators’ remuneration will then have to be determined, although it presently appears that Mr Nol does not actively contest the Liquidators’ quantification of their remuneration.

The Liquidators’ application is supported by an affidavit dated 17 August 2020 of Mr Pirina, which refers to the issue of a third report to creditors to Mr Francis and Mr Nol on 5 June 2020, containing the Liquidators’ remuneration report, the issue of a fourth report issued to the contributories on 9 July 2020, and to correspondence between the Liquidators and the contributories’ solicitors. It is not necessary to address the substance of those reports, or work-in-progress sheets on which the Liquidators propose to rely, to determine the issue raised by this application.

Mr Nol in turn relied on an email dated 21 August 2020 from his solicitor, Mr Balog, to the Liquidators’ solicitor which seeks production of certain documents (Ex D1) and company searches for the companies with which the Liquidators are associated, Veritas Advisory Pty Ltd (“Veritas”) (Ex D2) and Aston Chace Group Pty Ltd (“Aston Chace”) (Ex D3). It is common ground that the Liquidators were appointed by the Court in their personal capacity as liquidators of the Company, although they conducted business through Veritas and subsequently Aston Chace. Mr Johnson, who appears for Mr Nol, refers to aspects of the history of the matter and to directions for production of documents which were made before a Registrar. Mr Johnson also postulates an “engagement” of Veritas and Aston Chace to provide relevant services, and notes that no documents evidencing such an engagement have been produced. Mr Johnson also postulates that Veritas and Aston Chace were “third party service provider[s]” to the Liquidators in the performance of their duties in the administration, but that matter was not established by evidence.

Mr Johnson points out that the liquidation of the Company commenced after the commencement of the Insolvency Law Reform Act and the introduction of the IPSC and the Insolvency Practice Rules (Corporations). Section 60-5 of the IPSC provides that an external administrator of a company is entitled to receive remuneration for necessary work properly performed by the external administrator in relation to the external administration, in accordance with any remuneration determination for the external administration. I pause to note that the reference to “work properly performed by the external administrator” in that section is not necessarily to be read as requiring that that work be performed by the external administrator personally, as distinct from work that the external administrator has caused staff to perform. I will return to that matter below. Section 60-10 of the IPSC in turn provides for the manner in which remuneration determinations are made, including by resolution of creditors, or by a committee of inspection or, if a determination is not made by the creditors or by a committee of inspection, by the Court. Mr Johnson draws attention to several matters to which the Court must have regard in making a remuneration determination under IPSC s 60-10, although it is necessary to address those matters where the quantum of the Liquidators’ remuneration is not presently to be determined.

Mr Johnson then referred to s 60-20(1) of the IPSC which prohibits an external administrator directly or indirectly deriving any profit or advantage from the external administration of the company. Section 60-20(2) of the IPSC in turn refers to the circumstances in which a “profit or advantage” is taken to be derived, and includes (in paragraph 60-20(2)(c)) the position where a related entity of the external administrator directly or indirectly derives a profit or advantage from the external administration of a company. Mr Johnson submits that the Liquidators are prohibited from receiving direct or indirect benefits or profit or advantage from the Company’s liquidation, “through [their] position as a director/shareholder” of Veritas or Aston Chace, absent approval under s 60-20(4) of the IPSC, to which I refer below. Mr Johnson submits, on that basis, that the only remuneration that the Court may presently approve is remuneration for time spent by the Liquidators personally and not time spent by their staff on the liquidation.

However, the operation of IPSC s 60-20(1)-(2) is narrowed by several exceptions. Section 60-20(3) provides that the prohibition does not apply to the extent that another provision of the Act, or another law, requires or permits the external administrator to derive the profit or advantage or the Court grants leave to the external administrator to derive the profit or advantage. A note to s 60-20(3) records that:

Mr Johnson also refers to my judgment in Re Bonny Glen Fruits Pty Ltd (prov liq apptd) [2019] NSWSC 1784 at [16]-[18], where I dealt with the application of IPSC s 60-20 to “internal” disbursements incurred within an external administrator’s firm and observed that:

I also addressed the operation of s 60-20(3) of the IPSC in Re JPD Media & Design Pty Ltd (subject to deed of company arrangement) [2020] NSWSC 1311, where I followed the decision of Williams J in Lucantonio v Benscrape Pty Ltd (No 2) [2020] NSWSC 1114 in giving leave to an administrator and deed administrator to recover internal disbursements which were modest in amount and of the kind that were likely to be incurred in the course of the external administration. The case did not involve any claim for approval of the administrator’s remuneration on that basis.

Section 60-20(4) in turn provides other circumstances in which s 60-20(1) does not apply, namely that:

Section 60-20(4A) then provides that:

It seems to me that the reference to “remuneration paid to the external administrator” in s 60-20(4A) reflects the approach long taken in the general law, which permitted a liquidator to recover remuneration for work undertaken by the liquidator or his or her firm’s employees, servants or agents working under his or her supervision. Mr Turner, who appears for the Liquidators, refers to Re Trustees Executors and Agency Co Ltd (recs and mgrs apptd) (1984) 9 ACLR 497 at 500 where Hampel J proceeded on that basis in addressing the question whether a provisional liquidator’s remuneration was required to be taxed under the then Supreme Court (Companies) Rules, as follows:

Mr Turner also points to several later cases which treat that decision as authority that a liquidator is entitled to recover remuneration in respect of work performed by his or her employees, servants and agents, including Venetian Nominees Pty Ltd v Conlan (1998) 16 ACLC 1653 and Re Timeshare Resort Club Ltd (in liq) (2010) 187 FCR 13; (2010) 78 ACSR 705; [2010] FCA 673 at [70]-[71], where Barker J applied that approach to a liquidator conducting his or her practice within a company, and observed that:

In RiverCity Motorway Pty Ltd (recs and mgrs apptd) v Madden (No 2) [2012] FCA 312 at [19], Logan J similarly observed that:

Mr Johnson fairly acknowledges that the Liquidators are entitled to receive remuneration for necessary work properly performed by them in relation to the liquidation. However, Mr Johnson points to references to Veritas and Aston Chace in the Liquidators’ remuneration report dated 8 June 2019 and in their schedule of current rates and submits that the claim “in reality” is a claim for disbursements by Veritas Advisory or Aston Chace as third party service providers falling within the ambit of s 60-20 of the IPSC. Mr Turner responds, and I accept, that the Liquidators’ claim for remuneration referable to staff employed by associated companies is not a claim for disbursements, given the approach taken in the cases to which I have referred above. The decision in Re Bonny Glen Fruits above at [9]-[10], on which Mr Johnson relied, itself treated the remuneration claimed by the liquidator separately from disbursements for which leave was required under s 60-20 of the IPSC. However, that is not a complete answer to the possible application of s 60-20 of the IPSC to that claim.

I am comfortably persuaded that the Liquidators are entitled to recover their remuneration in this matter, without the need for leave to derive a profit or advantage under IPSC s 60-20(3)(b) or establish an exception under IPSC s 60(4). I reach that result as a matter of statutory construction. This application, like many applications of this character, is an application by the Liquidators personally to recover remuneration in respect of the Company’s liquidation, although they quantify that remuneration by reference not only to the work they did personally but also by reference to work done by employees of their associated firms. That approach is well established in the case law to which I referred above.

It seems to me that it is not necessary for the Liquidators to seek leave to derive a profit or advantage under IPSC s 60-20(3)(b) or establish the exception s 60-20(4) in respect of the engagement of a person to provide services in connection with the Company’s liquidation, in respect of the Liquidators’ claim for remuneration (including remuneration qualified by reference to work done by employees of their incorporated entities), although it would be required to obtain such leave in respect of a claim for disbursements payable to those entities. That result arises because s 60-20(4A), which I set out above, expressly provides that, despite IPSC s 60-20(2)(c), s 60-20(1) does not apply to the extent that a related entity of the Liquidators (here, the relevant companies) directly or indirectly derive a profit or advantage from remuneration paid to the Liquidators, in accordance with IPSC s 60-5 of the IPSC. That exception applies here, where the remuneration claimed and recovered here will be paid to (or, possibly, at the direction of) the Liquidators, notwithstanding that remuneration will be quantified by reference to work done by employees of the firm as well as work done by the Liquidators personally.

This reasoning is consistent with the approach taken in the many cases determined since the introduction of the IPSC which have approved external administrators’ remuneration without distinguishing between the position of sole practitioners, members of partnerships and persons working within incorporated entities, and without requiring applications for leave under IPSC s 60-20(3). It avoids an otherwise surprising result, namely that a liquidator who is a sole practitioner or works within a partnership may readily recover remuneration for employees who assist him or her in the conduct of a liquidation, but a liquidator who works within an incorporated firm faces additional constraints in doing so. There is no apparent reason in policy to treat sole practitioners, partners in a partnership or persons with an incorporated firm differently in that respect.

For completeness, Mr Johnson also points out that the Liquidators brought no application seeking leave for employee remuneration under s 60-20 of the IPSC. No such application is necessary, where I have found that the exception under s 60-20(4A) applies, although the Court would not have been constrained from granting such relief, in an appropriate case, so long as Mr Nol had had procedural fairness in respect of the order made. I would have granted such leave had it been necessary to do so.

The Liquidators claim their costs of this aspect of the application against Mr Nol. Mr Johnson submits that the proceeding has been brought about because Mr Nol has exercised his “entitlement” not to consent to the Liquidators’ remuneration claim, and that an order for costs should not be made against him. He refers to my judgment in Re Shield Mercantile Pty Ltd [2020] NSWSC 1545 which was directed to the entirely different situation of an application for leave to transfer shares in a voluntary administration under s 444GA of the Corporations Act and does not assist Mr Nol. Mr Turner responds, and I accept, that Mr Nol should pay the Liquidators’ costs of this aspect of the application. I reach that conclusion on the straightforward basis that this aspect of the application involved only a question of law; the Liquidators have sustained the position for which they contended as to that question; Mr Nol has failed to establish the position for which he contended; and costs should follow the event.

I have previously made orders listing the matter to determine any remaining questions as to the quantum of the Liquidators’ remuneration and that determination should now proceed. The only order I need now make in respect of this application is an order for costs, namely that Mr Nol pay the costs of and incidental to the matters addressed at the hearing on 9 November 2020, as agreed or as assessed. I so order.