Time-based remuneration and small liquidations – liquidator clocked for being on the clock

A decision of the Supreme Court of New South Wales[1] in recent weeks has focused attention on time-based recording in smaller liquidations.

The applicant liquidator[2] sought directions that he was entitled to remuneration in the amount of $49,510.50 plus GST (out of a total of $115,146 recorded time) and declarative relief in respect of his indemnity for legal costs and other expenses totalling some $12,000.

The Court closely assessed the liquidator’s remuneration and expenses and made a number of general observations to the effect that:

  • The liquidators of a company which is the trustee of a trading trust and has no other activities, are entitled to be paid their costs and expenses, whether for administering the trust assets or for ‘general liquidation work’, out of the trust assets.
  • Liquidators are entitled to ‘reasonable remuneration’ for their services in winding up a company, and the Court has a very wide discretion in allowing and fixing the level and the basis of remuneration but the liquidator bears the onus of establishing that the remuneration claimed is fair and reasonable, including that the work was properly performed and that the amount claimed is a fair and reasonable reward for it.
  • While the Court is generally supportive of liquidators who have incurred disbursements in the exercise of their commercial judgment, the liquidators bear the onus of justifying their disbursements.
  • An insolvency practitioner stands in a fiduciary relationship with the creditors, and must act with the same care as a prudent businessperson would act in their own affairs at their own cost and risk.

The Court noted that remuneration may be by way of commission on assets realised and/or assets distributed, or time-based.  However, particularly in smaller liquidations, questions of “proportionality, value and risk loom large” and that in such cases the ad valorem remuneration method (rather than a time-based method) is inherently proportionate, incentivises the creation of value rather than the disproportionate expenditure of time and could be a more appropriate measure.

In the circumstances of this case, the bulk of realisations in the liquidation period were said by the Court to have involved little work by this liquidator - the collection of books and records, extraction of scanned documents and correspondence with debtors by the liquidator’s staff took place during the voluntary administration, and collections during the liquidation were managed by a third party, which involved a ‘transfer of risk’ from the liquidator.  Further, much of the balance of the risk (and burden) in the liquidation period was borne by external solicitors and counsel.

The Court ultimately allowed 2% on realisations ($4,236), but 15% on distributions ($16,647), with a “mark-up” reflecting the size of the fund, the totality of work undertaken and time expended by the liquidator and his staff (including that for which he had not specifically claimed, or had written off), and the extent to which others (including lawyers and debt collectors) were engaged and remunerated for associated work, so that remuneration of $30,000 (which equated to about 14% of gross realisations) would be allowed, plus GST.

The liquidator’s claim in relation to legal costs and other disbursements was allowed in full.

Lavan Legal comment

In our view a carefully considered time-based remuneration remains an acceptable approach and practitioners should not treat this decision as a reason not to undertake smaller (and often equally complex) liquidations.  Indeed, Brereton J explicitly said that the Court ought not discourage liquidators from so doing.

This case (one of a number of cases decided by this judge that have preferred the ad valorem remuneration approach) does not change that position.

However, liquidators should always be mindful to ensure the amount of remuneration for which they seek approval does not have the appearance of duplicating work of external advisors (the disbursements for which in this case were all approved) and does not appear disproportionate to the outcomes of the liquidation process itself or unnecessary[3].


[1] In the matter of Independent Contractor Services (Aust) Pty Ltd ACN 119 186 971(in liq) (No 2) [2016] NSWSC 106.  Note:  this update only addresses the question of remuneration, however other issues were considered in the decision.

[2] of a small trustee company Independent Services (Aust) Pty Ltd.

[3]as with one of the Court applications in this case.

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.