Unusual but uplifting: Court approves liquidators reasonable success fee – Insolvency/Bankruptcy

This week’s TGIF considers a recent decision in
Re HRL Limited (in liq) & Anor [2022] VSC 693, in
which the Court approved a success fee in addition to the
liquidators’ remuneration calculated by the application of a
time-based costing method.

Key takeaways

• Liquidators may obtain court approval of success or uplift fees
  on top of time-cost remuneration where the method of calculation is
  reasonable.




• Percentage-based fees can help to manage the risks for
  liquidators in pursuing claims with limited funding to achieve a
  potential return for creditors.




• Approval from creditors or the committee of inspection
  (COI) can also be sought but it is prudent to seek
  court approval where a company’s only creditor is another
  company in liquidation or where claims will otherwise expire.

What happened?

HRL Limited (in liq) and HRL Infrastructure Services Pty Ltd (in
liq) (the Companies) went into liquidation in
2016, following a 2014 acquisition.

In 2020, the liquidators (Liquidators)
commenced litigation against certain officers of the Companies
claiming breaches of duty in relation to the acquisition.

The Companies had insufficient assets to fund the litigation and
their secured creditor elected not to provide financial
assistance.

Accordingly, after speaking with several litigation funders and
with the limitation period for the claims about to expire, the
Liquidators entered into funding agreements (with subsequent court
approval).

Funding terms

Whilst the funding terms were confidential, they provided
for:

• capping of the Liquidators’ remuneration at 60% of standard
  rates, with the balance (and costs in negotiating the funding)
  recoverable only if there was a sufficient recovery in the
  litigation. This aspect of the Liquidators’ remuneration was on
  a standard time-cost basis; and




• a success fee of 5% of property recovered, to be paid in
  accordance with a waterfall for priority distribution of net
  recoveries to the funder, solicitors, Liquidators and
  Companies.

Creditor approvals

The Liquidators’ remuneration prior to the funding
agreements had been approved by creditors. In 2021, the Liquidators
also sought approval from the COI for the success fee. The COI
members abstained from voting on the aspect of the resolution
dealing with the success fee but otherwise approved the
Liquidators’ remuneration. Accordingly, the Liquidators were
required to apply for court approval of the success fee.

Court application

The Liquidators sought approval of their remuneration 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) (the Act).
The application also sought approval of related agreements pursuant
to section 477(2B) of the Act, including an acknowledgment from the
Companies’ secured creditor which would involve yielding
priority rights in favour of rights to recovery under the funding
agreements.

The application was amended to refer to (the now repealed)
section 473 of the Act because it continued to apply in this case
given that the liquidation had commenced before September 2017.

Accordingly, Associate Justice Matthews was required to take
into the factors listed in section 473(10), which ultimately boil
down to the question whether the remuneration is reasonable.

Although the principles for approving remuneration are well
established, and include approvals of percentage-based remuneration
and some comparison as against time-based remuneration, the
Liquidators submitted that the use of a mixture of these methods
had not been finally determined in relevant case law.

The Liquidators submitted that the Court would need to resort to
first principles. Counsel for the Liquidators indicated they had
not found cases dealing with an application of this type, i.e.
cases involving remuneration based on a percentage of recoveries on
top of remuneration on a time-costed basis at liquidators’
usual hourly fees.

Her Honour was referred to ARITA’s Code of Professional
Practice: Insolvency Services (Code), stating that
ARITA has no preference as to the method of calculating fees. Her
Honour also referred to ARITA’s practice statements, allowing
for success fees.

In particular, her Honour considered paragraph 5.5 of the Code,
which is geared towards avoiding any potential conflicts, providing
for circumstances in which a contingent fee agreement is suitable
and for disclosure with the purpose of obtaining approval from the
creditors, the COI or a court.

Her Honour also considered other submissions from the
Liquidators as to:

• the extent that the Liquidators’ work was critically
  important because without it there would be no potential
  recovery;




• the period of work required, being six to seven years;




• the work needing to be of high quality in order to achieve a
  successful outcome (noting that the relevant remuneration was only
  payable if successful);




• the level of risk accepted by the Liquidators, both in terms of
  the risk of delay and non-payment of fees beyond the 60% cap
  previously referred to, as well as costs in negotiating the
  funding; and




• the nature of the property being dealt with, given that the
  value of the estate could only be realised through the
  litigation.

Objections

In the absence of a contradictor, her Honour dealt with a number
of objections that had been previously made by creditors but later
withdrawn before the matter was heard after the provision of
additional information.

The objections included, by analogy to class action litigation
funding, reference to views of the Joint Parliamentary Committee
(JPC) on the appropriate percentage of recoveries
to be distributed to plaintiffs. Her Honour did not regard the
majority recommendation of the JPC to be of any assistance in this
case, nor the percentage of recovery distributable to the creditors
to be of any significance, given that claims in the litigation were
not the creditors’ claims. Her Honour rejected the class action
analogy.

Decision

Her Honour described the application as unusual given the lack
of reported cases awarding a success fee for liquidators on top of
remuneration on a time-cost basis.

In the absence of precedent, her Honour referred to an analogous
case in 2014 involving receivers and managers appointed by a court
at the instigation of ASIC, where a 25% uplift on hourly rates was
awarded.

Her Honour held that the remuneration in this case, including
the success fee, was reasonable, having regard to a range of
factors including that:

• it is not an arrangement which would place the Liquidators in
  conflict with their duties, including their duties to
  creditors;




• it is not an arrangement which would disadvantage creditors and
  it comes at no cost to the creditors;




• it is the only arrangement which the Liquidators would be able
  to enter into so as to obtain funding for the litigation;




• by commencing the litigation, the Liquidators were attempting
  to achieve a substantial recovery for creditors and, in some
  scenarios, possibly even a return to shareholders. Accordingly, if
  it results in a recovery at a level sufficient to invoke the
  payment of the success fee, then it will have been work which
  produced a high value outcome for the Companies, from which
  creditors will benefit;




• in agreeing to the funding agreements and commencing
  litigation, the Liquidators took on significant risk given that,
  even if the proceeding were successful, they may not get all of
  their fees paid if the level of recovery is not at an amount
  sufficient to cover everything;




• ASIC had the opportunity to intervene in this case and chose
  not to do so;




• although there had been objections raised by a number of
  creditors (which were later withdrawn), the objections were
  considered and rejected; and




• the statutory provisions and the case law do not mandate a
  particular method of calculating a liquidator’s remuneration
  but rather allow for a mixture of methods in some instances. The
  only requirement then is that the remuneration be reasonable.

Comment

This decision reveals that a court will be willing to approve
percentage-based remuneration together with time-based remuneration
for insolvency practitioners in consideration for the significant
personal commercial risk taken on when commencing proceedings for
the benefit of creditors.

Although this application was made under section 437 of the Act,
which has now been repealed, it is anticipated that applications on
similar grounds will be available under the new provisions referred
to above.

The case is also useful in outlining the range of evidence that
a court will require for the purposes of such an application. For
example, the Liquidators provided confidential affidavit evidence
to the Court setting out an estimate of the effect which a recovery
of various amounts made by the Companies in the litigation would
have on the success fee and the net funds available for
distribution to creditors.

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.

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