In the recent case of Re Crosbie (in their capacity as liquidators of HRL Ltd (in liq) and HRL Infrastructure Services Pty Ltd (in liq))  VSC 693 the Supreme Court of Victoria considered an application by liquidators for approval of a remuneration structure that included a “success fee”.
Specifically, the liquidators sought approval for their remuneration to include both time-costed remuneration as well as an uplift fee equal to 5% of any property recovered (whether by way of settlement, judgment or order) in certain specified legal proceedings.
The Court carefully considered the law in relation to approval of liquidators’ remuneration, the facts of the case including the circumstances of the litigation funding arrangement giving rise to the success fee structure, and other matters such as objections from certain creditors and the ARITA Code, before approving the remuneration structure and the success fee.
In October 2014, HRL Infrastructure Services Pty Ltd and HRL Limited (the HRL Companies) entered into a transaction to acquire a number of companies owned by Vemco Australia Pty Ltd. However, the performance of the Vemco business deteriorated rapidly following completion, and the HRL Companies were placed into voluntary administration in October 2015. Subsequently in June 2016, the creditors voted to place the HRL Companies into liquidation and the administrators were appointed as liquidators of the companies (Liquidators).
In the course of their investigations, the Liquidators identified claims by the HRL Companies against certain officers of the companies for failing to exercise due care and diligence in relation to the Vemco acquisition. The total amount of the claims was approximately $63m.
As the HRL companies had insufficient assets and funds to pursue the claims beyond the preliminary stages of the litigation, the Liquidators sought and obtained orders in October 2020 allowing them to enter into certain litigation funding agreements including an agreement with Claims Funding Australia Pty Ltd (CFA) pursuant to which CFA agreed to fund part of the HRL Companies’ costs of the proceedings (CFA Funding Agreement).
Although the CFA Funding Agreement was subject to confidentiality orders, the key terms of the agreement were as follows:
A COI had been established in the liquidation of HRL Limited. The Liquidators sought to obtain approval from the COI for the Success Fee, but the COI members abstained from voting on the proposed resolution. There was no COI established in the liquidation of HRL Infrastructure Services Pty Ltd, and the only known unsecured creditor of that company was HRL Limited.
Given these matters, the Liquidators then applied to the Court for approval of the Success Fee.
The Liquidators originally applied for orders under sections 60-10(1)(c), 90-15 and 90-20 of the Insolvency Practice Schedule (IPS) at Schedule 2 of the Corporations Act 2001 (Cth) (Act).
However, as the Liquidators had been appointed as liquidators of the HRL Companies prior to 1 September 2017, the Liquidators subsequently amended their application to seek the remuneration approval under the now-repealed section 473 of the Act (which continues to apply to pre-1 September 2017 appointments by reason of section 1581 of the Act).
Objections to the application were initially raised by the three members of the COI established in the liquidation of HRL Limited as well as by two members of HRL Limited (Objectors), but all of the Objectors withdrew their objections on 17 August 2022 prior to the hearing of the application.
ASIC was given notice of the application but advised the Liquidators that it did not propose to intervene in the application.
In considering the application, Matthews AsJ noted that while the Courts had previously approved applications for remuneration based on a percentage of recoveries or realisations, this appeared to be the first case involving a “success fee” where the liquidators would receive an amount based on a percentage of recoveries on top of remuneration on a time-costing basis at the liquidators’ usual hourly rates.
Her Honour also noted that as to the law in relation to the approval of a liquidators’ remuneration:
Matthews AsJ then considered the submissions of the Liquidators as well as the objections raised by the Objectors (even though those objections had been withdrawn), before approving the Success Fee on the following grounds:
This case is important as it appears to be the first case where the Court has approved a liquidator’s remuneration to include both a time-costing component as well as a success fee component.
The decision also provides a useful illustration of how the Courts will approach an application for approval of a success fee structure, having regard to the ultimate question of whether the remuneration claimed by the liquidator is reasonable.
If you have any questions about this decision, success fees, or liquidator remuneration generally, the experienced Lavan team is here to help.