The Court of Appeal in Madsen-Ries v Salus Safety Equipment Ltd (In liq) [2022] NZCA 101 has overturned a High Court decision that significantly discounted liquidators’ remuneration for what the High Court said was padding and inefficiencies. The Court of Appeal concluded that the High Court’s failure to forewarn the liquidators of the conclusions it had reached about the claimed remuneration was a miscarriage of justice. The Court considered that the liquidators ought to have been given an opportunity to respond to the adverse conclusions.

The High Court criticised the liquidators for padding and inefficiencies

Vivien Madsen-Ries and Henry Levin were appointed as liquidators of Green Securities Limited in 2010 and Salus Safety Equipment Limited in 2013. On completion of the liquidations, the liquidators sought approval of their remuneration from the High Court.

For Green Securities, the liquidators sought approval for the sum of NZ$159,500 plus GST and disbursements. The High Court fixed remuneration at NZ$120,00 plus GST and disbursements, and reduced the disbursements by NZ$5,000. For Salus, the liquidators sought approval for the sum of NZ$91,600 plus GST and disbursements. The High Court fixed remuneration at NZ$30,000 plus GST and disbursements.

In fixing remuneration, his Honour Associate Judge Bell was critical of the amount of time spent on the liquidations, the number of people involved, the charges for clerical work, and the conduct of certain litigation. He reduced the remuneration to remove what he saw as padding and inefficiencies. The liquidators appealed both decisions.

Liquidators should have had an opportunity to respond to adverse conclusions

On appeal, the liquidators argued that there had been a miscarriage of justice because, among other things, Bell AJ failed to give the liquidators notice of, and an opportunity to respond to, certain conclusions he had reached. The Court of Appeal agreed. It allowed the appeals and directed that each matter be reconsidered by the High Court.

The Court of Appeal summarised the principles for retrospectively determining liquidators’ remuneration, including:

• In fixing a liquidator’s remuneration, the Court is making a determination of the fairness and reasonableness of what has been charged measured against the work undertaken and the results achieved. The focus is on the value of services rendered to the creditors of the company.
• A liquidator must provide sufficient information for the Court to determine whether the amount claimed is fair and reasonable.
• The Court will consider whether there has been unnecessary work or over servicing.
• The Court may take a broad brush approach, provided there is an exercise of judicial judgment as opposed to an arbitrary choice of amount. A judge may draw on his or her experience, including any knowledge of the subject matter and the practices of liquidators.

In some cases a judge may be required to inform liquidators of his or her concerns or provisional views, so that the liquidators might remedy any information shortfall. This obligation to inform liquidators of a judge’s provisional view would likely arise where the liquidators could not reasonably anticipate the reason for the view, or where the judge has formed a significantly critical view of the liquidators’ conduct and intends to record that in the decision.

The Court of Appeal concluded that the High Court judge failed to forewarn the liquidators of his provisional views on several aspects of his decision, which amounted to a miscarriage of justice.

The decision largely focused on the High Court’s description of the liquidators’ billing practices as ‘padding’. The Court of Appeal concluded that the High Court should have forewarned the liquidators that he intended to characterise their billing practices in this way. The failure to do so was a breach of natural justice. In reaching this conclusion, the Court referred to the pejorative tenor of the word ‘padding’ and concluded that the liquidators had no reason to suspect the structure of their fees would be criticised in this manner.

The Court of Appeal also considered that Bell AJ ought to have forewarned the liquidators about the following:

• His concerns about the number of people working on the Green Securities liquidation.
• His conclusions about the accepted practice for administrative costs.
• His conclusion that litigation in the Green Securities liquidation was over-complex and excessive.

Takeaways for liquidators

The Court of Appeal decision shines the spotlight on the process for approving liquidators’ fees. It is important for liquidators to bear in mind that they have the onus of establishing that claimed remuneration is reasonable. Liquidators should take care to ensure that sufficient evidence is put before the Court to establish this point.

Liquidators should be aware that there may be some back and forth with the Court about the reasonableness of claimed remuneration. The Court of Appeal decision underscores the need for judges to give liquidators the opportunity to respond to adverse conclusions that the liquidators could not reasonably anticipate.

The Court of Appeal’s decision comes just months after its decision in Toon v Quinn [2021] NZCA 696, where the Court overturned a High Court decision that discounted a liquidator’s remuneration by over 70 per cent (recently the Supreme Court declined leave to appeal this decision to the Supreme Court).  These two decisions of the Court of Appeal should give some comfort to liquidators seeking approval of their remuneration.