Federal Court orders liquidators to repay excessive remuneration drawn with interest and to bear costs personally - Insolvency/Bankruptcy

In Lock, In the matter of Cedenco JV Australia Pty Ltd (in liq) (No 3) [2019] 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:

pay interest from the date on which the remuneration was drawn; and
bear ASIC's costs and their own legal costs personally.

To add to our previous takeaways (summarised here) following the delivery of the Judge's reasons on 11 February 2019:

The Court has power to, and will, order repayment of remuneration taken and retained without entitlement, with interest, particularly having regard to the obligation on insolvency practitioners to repay fees to which they are not entitled immediately into the administration account of the affected company. The persons or entities who benefit from repayment is irrelevant to whether interest should be paid.
Despite the usual position being that an order for costs will not be made in favour of an intervener, in appropriate circumstances the Court will order a party to pay an intervener's costs.

The proceedings

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:

inadequate remuneration reports;
remuneration reports which did not cover the correct period of time; or
no relevant remuneration report.

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.

Final judgment

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.

Excess remuneration to be paid back with interest

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.

Intervener's costs and Liquidators' costs to be borne personally

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."

Key takeaways

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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.