Returning 'cap' in hand: Section 449E(2) review by the Court of an administrator's remuneration

In the recent case of Paul’s Retail Pty Ltd v Morgan [2009] NSWSC 1222, the Supreme Court of New South Wales ordered, upon hearing competing claims for review of the administrator’s remuneration pursuant to section 449E(2) of the Corporations Act 2001 (Cth) (Act), that a review be undertaken of fees that exceeded an express ‘cap’ estimated by the administrator.

The defendant, Mr Morgan, was appointed as the administrator of Paul’s Retail Pty Ltd (Paul’s) on 24 January 2008.  A deed of company arrangement was executed on 21 April 2008 (DOCA), pursuant to which Mr Morgan became the DOCA administrator.

At the second meeting of creditors held on 1 April 2008, three resolutions relating to Mr Morgan’s remuneration as administrator, and prospective remuneration as DOCA administrator, were passed by the creditors.  The amounts of remuneration fixed by the second resolution (relating to Mr Morgan’s prospective remuneration as administrator leading up to the execution of the DOCA) and the third resolution (relating to Mr Morgan’s prospective remuneration as DOCA administrator pending effectuation of the DOCA) were expressed as being fixed ‘up to a cap of $….’ in each instance. 

The creditors also resolved at the meeting to execute the DOCA.  It is well settled that remuneration of a deed administrator may be fixed prospectively by the meeting of creditors which resolves to adopt the deed of company arrangement.

A committee of creditors appointed at the 1 April 2008 meeting continued as a committee of inspection for the purposes of the DOCA.  At subsequent meetings of the committee, Mr Morgan moved motions seeking to increase the capped amounts of remuneration fixed by the creditors’ 1 April 2008 resolutions.  The motions were not seconded.

Paul’s Retails Pty Ltd and its sole director and shareholder, Mr Dwyer, brought this action under section 449E(2) of the Act seeking an order that the ‘maximum remuneration’ to which Mr Morgan is entitled ‘be confirmed to be that which was determined by’ the creditors’ resolutions and an additional order that the Supreme Court Registrar review the ‘fees paid to’ Mr Morgan.  By way of cross-claim, Mr Morgan sought an order for a section 449E(2) review of the remuneration to which he is entitled pursuant to the creditors’ resolutions.

In rejecting the plaintiffs’ arguments that Mr Morgan was precluded, both in contract and by estoppel, from seeking a review of his remuneration pursuant to section 449E(2), the Court held that the amount of prospective remuneration fixed by the second and third creditors’ resolutions ought be reviewed on the basis that, at the time Mr Morgan proposed the resolutions and the creditors voted to pass them, all parties were ‘dealing with the unknown’.  In relation to the ‘capped’ nature of the prospective amounts, the Court determined that:

The ‘cap’ was, in each case, applied…to mark a limit beyond which there could be no remuneration without either a further determination of creditors or an order of the Court.  The existence of the ‘cap’ did not imply that remuneration could never exceed the stated amount.’

In a subsequent application to the Court, the plaintiffs argued that the existence of the stipulated caps ought to limit the nature of the review so that it relates only to those costs incurred by the administrator that could not have been foreseen at the time he agreed to cap his fees.  The Court, however, referred to the matters identified in section 449E(4), which must be taken into account in any review pursuant to section 449E(2). 

Interestingly, the Court noted that the impending review must be undertaken by the Supreme Court Registrar astutely and with vigilance given that both the committee of inspection and the meeting of creditors were unwilling to vote in favour of the additional remuneration sought by Mr Morgan, although this was not a consideration which militated against the Court making the orders.

This is the last insolvency newsletter for 2009.  We look forward to continuing this service in the new year and will send our next newsletter in February 2010.

For further information please contact Tim Coyle on 9288 6761/ or Amy Rumble on 9288 6809 /

Disclaimer – the information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.