Fraser Thomas Limited v Springs Town Limited HC Auckland CIV 2010-404-007829 [2011] NZHC 1467 (20 April 2011)

Last Updated: 12 November 2011

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

_{CIV 2010-404-007829}

UNDER the Companies Act 1993

IN THE MATTER OF of an application for putting a company into liquidation by the Court

BETWEEN FRASER THOMAS LIMITED Plaintiff

AND SPRINGS TOWN LIMITED Defendant

Hearing: 13 April 2011

Appearances: G Bogiatto for David Lee, Director of the Defendant

N Malarao for the Liquidators

Judgment: 20 April 2011

JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSEN

This judgment was delivered by me on

20.04.11 at 4:30pm, pursuant to

Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date...............

Solicitors/Counsel:

G Bogiatto, Auckland – [e-mail]

N Malarao, Meredith Connell, Auckland – [e-mail]

FRASER THOMAS LIMITED V SPRINGS TOWN LIMITED HC AK CIV 2010-404-007829 20 April 2011

The applications

[1] There are two applications before the Court:

(a) The first is Mr Lee‟s application for an order pursuant to s 250 of the

Companies Act 1993 to terminate the liquidation of the defendant.

(b) The second is the liquidators‟ application to fix remuneration

retrospectively.

[2] This judgment concerns the second of those applications. In the outcome of that application the Court will determine what fees will have to be paid as a condition of granting Mr Lee‟s application.

Basis of challenge to liquidators’ charges

[3] Mr Lee is a director of the defendant. His position is that the liquidators‟

charges are grossly excessive bearing in mind the fact that when liquidated on 10

February 2010 the total owed by the defendant to creditors was $12,127.43. At that time the defendant held $7,720.05 in account with the ASB Bank. As well it owned a property at Parkhurst Road, Parakai which was unencumbered.

[4] Shortly after the commencement of the liquidation Mr Lee indicated he would take steps to pay the creditors himself and have the defendant taken out of liquidation.

[5] The liquidators immediately indicated to Mr Lee via his then solicitors that they had certain minimum statutory duties to comply with but once the process was completed they would advise the amount required for the defendant to be taken out of liquidation.

[6] Between 10 February 2010 and 16 April 2010 the liquidators undertook the initial steps in the liquidation. During that period they worked with Mr Lee and through his solicitors. As they explained the process involved payment to creditors

in full, a discharge by the liquidators of their obligations to the Court and their statutory duties and, once that was completed, support for the termination application that Mr Lee had indicated he was pursuing.

[7] As at 7 April 2010 the liquidators completed all the initial necessary steps in the liquidation, including securing company assets, dealing with the Parakai property, statutory reporting and receiving and admitting all claims into the liquidation.

[8] On 16 April 2010 the liquidators wrote to Mr Lee‟s solicitors outlining the final position and what was required for the liquidators‟ support for having the liquidation terminated. They advised, inter alia, that the costs of the liquidation including disbursements as at 7 April 2010 was $10,392.19 (including GST); that the estimated costs and disbursements to complete distribution, complete and file a memorandum for costs required by the Court, complete a statutory report and prepare necessary information and confirmation supporting the company being removed from liquidation were $4,106.25 (including GST).

[9] At that time the liquidators held $7,382.55 of the defendant‟s funds in trust. This left $19,243.35 that would be required to complete the liquidation including paying creditors and meeting the liquidators‟ costs.

[10] Mr Lee‟s present concern is that the liquidators now require the sum of

$72,400.82 to complete the liquidation including:

$

(a) Liquidators fees 32,362.92 (b) Disbursements, including legal fees 25,013.87 (c) Estimated fees to complete liquidation 1,500.00 (d) Estimated legal expenses to complete liquidation 6,500.00

(e) Plus GST 6,724.03

[11] Mr Lee‟s case is built around the fact that he applied to terminate the liquidation on 23 August 2010 and that prior to the first call of that application he on or about 7 September 2010 paid sufficient funds to meet the claims of unsecured creditors at date of liquidation. As well, he paid the sum of $15,495.83 to meet the sum, inclusive of disbursements, indicated by the liquidators as uncharged work in progress to 26 August 2010.

[12] According to Mr Lee he believed he had cleared all of the liquidators‟ costs

prior to the date of the first call of his application to terminate the liquidation.

[13] Contrary to his expectations the liquidators filed a notice of opposition. Further and by their letter dated 30 September 2010 they sought payment of a further

$24,065.59 in addition to the $15,495.83 paid on 8 September 2010, together with the fees of $6,996.98 earlier paid from the company‟s funds held with the ASB Bank.

[14] Mr Lee‟s position is that by 8 September 2010 he had paid the unsecured creditors and as well sufficient to meet the liquidators‟ uncharged costs and disbursements to 26 August 2010. He believes this should have discharged his responsibilities to the liquidators. He is concerned that the liquidators believe much more than that is now required. In particular he is concerned at the level of disbursements claimed to meet payment of the liquidators‟ solicitor‟s costs.

[15] Mr Bogiatto‟s submissions rely upon the authority of Flynn v McCallum 1 and re Medforce 1 2. In brief those authorities note that while time is a relevant factor in fixing remuneration the value of the services rendered is more important than the cost of rendering those; that remuneration should be fixed so as to reward

value, not so as to indemnify these costs; that time spent is only one of a number of relevant factors in assessing the value of work undertaken.

[16] Mr Bogiatto acknowledged the confirmation of those Courts that the High

_{Court is not able to review the level of disbursements incurred by the liquidators in}

1 _{HC Tauranga CIV 2005-470-611 (17/12/09).}

2 Medforce Healthcare Services Limited (In liquidation) 2001 [3 NZLR 145].

the course of the liquidation. However, as referred to later in this judgment Mr Bogiatto submitted this Court has the means to cap the hourly charge out rate of lawyers engaged to provide services for the liquidator. He also submits the Court ought to be able to rule on whether the legal services provided were needed at all.

[17] In this case the liquidators seek approval of fees retrospectively in line with those approved by this Court at the time of their appointment. The issue for this Court then is whether proper value has been given for the fees charged, or as Mr Lee contends fees charged have been claimed for services not required to achieve the termination of the liquidation.

[18] Mr Lee‟s position is that all fees incurred or charged after 26 August 2010 relate solely to issues concerning the liquidators‟ application for approval of their fees. The focus, Mr Bogiatto submits should be upon the value of services rendered rather than upon the liquidators‟ focus upon timesheets to justify the level of fees claimed.

[19] In that context Mr Bogiatto challenges the necessity for the engagement by the liquidators of solicitors. Their fees are part of the significant claim by the liquidators for reimbursement of disbursements incurred. Unarguably the bulk of those solicitor‟s fees have been incurred in connection with the liquidators‟ application for approval of fees; that they relate to a period when the liquidators had ceased undertaking the usual work in the liquidation and when negotiating with Mr Lee about the termination of the liquidation of the defendant.

[20] As at 16 April a figure of about $14,500 was indicated to be sufficient to complete the liquidation process. For Mr Lee it is contended that the bulk of the work done since was not related to the completion of the liquidation but rather to resolving the issue of the liquidators‟ unpaid costs. In that period the solicitor‟s invoices appear to relate to advice provided to respond to Mr Lee‟s challenge to the liquidators‟ application for a retrospective approval of their fees.

[21] Mr Bogiatto submits that the liquidators, seeking to classify the invoices of

their solicitors as “expenses” or “disbursements”, are in effect seeking to avoid any

scrutiny of those invoices, and removing the jurisdiction of the Court to determine who should be liable for those invoices associated with the liquidators‟ application for retrospective approval of their fees.

[22] His view is that the maximum that can be charged for the engagement of a solicitor is, by reference to Regulation 28 of the Companies Liquidations Regulations 1994, $200 per hour – significantly less than the hourly rate charged by the solicitors engaged by the liquidators. Mr Bogiatto submits therefore fees charged by those solicitors are not in the nature of disbursements but rather that those solicitors are employed by the liquidators for the purposes of the operation of Regulation 28.

Summary of Mr Lee’s challenge

[23] In summary:

(a) The liquidation debt was minor. A total sum of little more than

$12,000 was sufficient to meet the defendant‟s obligations to creditors

at liquidation.

(b) The defendant had nearly $8,000 in the bank and as well an unencumbered property self valued by Mr Lee at $500,000.

(c) Immediately, Mr Lee intimated a desire to terminate the liquidation by

meeting unsecured creditors‟ claims.

(d) Having been advised by the liquidators of their obligations and requirements to complete a termination Mr Lee applied to this Court for termination but before paying the defendant‟s creditors‟ claims.

(e) When subsequently the unsecured creditors claims were met he paid a sum also that he believed was sufficient to meet the liquidators‟ unbilled costs to a time two weeks prior, or about at that date when he applied to terminate the liquidation.

(f) On the day Mr Bogiatto sent trust cheques by ordinary mail to pay unsecured creditors‟ claims, the liquidator filed an opposition to the termination application upon the basis that no satisfactory provision had been made for payment of creditors‟ claims or for payment of liquidators‟ remuneration and expenses.

(g) The following day Mr Bogiatto sent a trust cheque to pay the amount Mr Lee considered met any obligation for payment of liquidators‟ costs i.e. the $15,495.83.

(h) Since, all costs and solicitor‟s fees incurred have, Mr Lee claims, related to the justification of liquidators‟ costs claims and have not

_{otherwise been connected to liquidation termination claims.}

Issues

[24] They concern the extent to which issues affecting a liquidators‟ claims for fees and disbursements ought influence the Court‟s consideration of an application for termination of a company‟s liquidation. It is undisputed that a reasonable sum ought to be paid to the liquidators in consideration of their consent to termination. The issue then concerns the level of fees and disbursements properly chargeable. What recourse is there available to the company seeking to terminate its liquidation? Is there any recourse at all to challenge the disbursements the liquidators incur in the form of legal advice received in support of the liquidators‟ position to oppose the termination on the basis that their claim for fees due is challenged?

[25] In this case a factual assessment of Mr Lee‟s claims is needed. The Court needs consider if the costs the liquidators incurred in defending their claim for fees and disbursements were reasonable. The Court needs also consider whether it has any authority to challenge at all the costs of the liquidators‟ solicitors.

Other evidence supporting Mr Lee’s challenge to fees charged

[26] Mr Lee‟s challenge is supported by two affidavits from Mr Buchanan an insolvency practitioner with more than 40 years experience specialising in insolvency and taxation issues. He has previously appeared as an expert witness in the High Court in relation to matters concerning valuation of companies, liquidation and taxation issues. He has reviewed the timesheets supporting the liquidators‟ claim for fees charged. He was formerly employed by the accountancy firm with which the liquidators practice. He has indicated a number of concerns with time recording practices including engagement of five separate staff members in the defendant‟s liquidation. He considers there was a great deal of duplication of effort by different authors in respect of the same task, each of whom levied charges against the liquidation. In his opinion the liquidation file of the defendant company was handled in an inefficient way in circumstances where the liquidators were aware that there was a substantial asset (the Parakai property) against which they could recover liquidators‟ fees. In his view the liquidators ought to have completed the liquidation at a cost in the region of $10,000 – $12,000 plus GST.

[27] In his second affidavit Mr Buchanan complained about the lack of working papers or file notes attached to the liquidators files. In his view it was a simple liquidation. He considered nothing appeared to have been done in relation to the normal steps required for the sale of company assets. In his view the file had been passed around the office to a number of employees, none of whom appear to have done any work of substance in the normal liquidation process. He said the timesheets indicated minimum attendances by the liquidator as opposed to the attendances by staff members.

Considerations

Factual analysis

[28] I am not satisfied that Mr Lee‟s perspective of value for money is an accurate

one. I believe the evidence indicates that Mr Lee‟s actions are in large part

responsible for the way in which issues surrounding the defendant‟s liquidation have

unfolded.

[29] When his application for termination was made the creditors in the liquidation were unpaid and there was no arrangement for payment of liquidators‟ expenses and remuneration. Also, there was no evidence that Mr Lee‟s 50 per cent shareholder in the company had consented to the application.

[30] The other shareholders‟ position regarding the termination application is

unknown. The evidence indicated it was a matter which required consideration.

[31] It is clear that had Mr Lee put in place an arrangement to pay the sum of about $20,000 in response to the liquidators‟ letter dated 16 April 2010 that would have brought the liquidation to an end and at a cost in the range that Mr Buchanan had estimated. To that time the liquidators‟ costs related to attendances to certain

„always required‟ steps. As well the liquidators had assisted Mr Lee‟s legal advisors

to prepare an application for termination.

[32] But, the arrangement was not finalised. Mr Lee dispensed with the services of his previous solicitors. The creditors were not paid. Mr Lee initiated correspondence levelling a number of allegations in relation to the conduct of the liquidation. This required a response by the liquidators.

[33] On 12 August 2010 Mr Buchanan contacted the liquidators advising he had been approached by Mr Lee. A proposal was outlined whereby he would replace the liquidators. An arrangement could not be agreed because no provision was made for payment of the liquidators‟ remuneration and expenses. Also the liquidators did not consider it appropriate to hand over the assets of the company to a nominee appointed by a shareholder, without having secured payment for creditors.

[34] In the outcome of further correspondence between the parties in mid-August the liquidators again outlined a proposal in relation to the proposed termination of the liquidation. No agreement could be reached with Mr Lee regarding this proposal.

[35] Mr Lee made his application for termination on 25 August 2010, without the liquidators involvement and when the creditors have not been paid and no arrangement was made for payment of liquidators‟ costs. The liquidators have an obligation to oppose the application 3 when concerned about the potential for further significant added costs. The liquidators initiated a further proposal through their solicitor‟s letter of 3 September 2010. It precisely detailed the extent of uncharged

work in progress to 26 August 2010. It is clear from a reading of a letter that a further calculation of costs and disbursements would be required. It imposed an obligation for sufficient funds to be held in trust pending completion of the termination.

[36] Because Mr Lee did not respond to the proposal in time, the liquidators required to prepare, file and serve papers in opposition to the termination application. The Court infers that by that time the liquidators were not aware of the payments forwarded to creditors. It was after they filed their opposition the liquidators learned of the payment to their solicitor‟s trust account in the amount Mr Lee believed was sufficient to meet liquidators‟ costs.

[37] By these payments and assuming Mr Lee had agreed to a process to resolve liquidation issues, they prepared their memorandum for approval of their fees. Final approval of their fees was still subject to Court consideration. The liquidators‟ memorandum was finalised on 24 September 2010. A copy was delivered to Mr Bogiatto.

[38] Some weeks later Mr Lee wrote directly to the liquidators. He said he was a creditor of the company having advanced funds to pay off other creditors and was requesting a meeting of creditors to be called with a review to replacing Mr Levin as liquidator. It was clear that Mr Lee was no longer interested in a proposal for resolving termination issues in terms previously advanced on behalf of the liquidators. Indeed, in the same letter wherein he requested a creditors meeting be called, Mr Lee mentioned he was considering taking advantage of the service provided by the liquidators‟ professional body, New Zealand Institute of Chartered

_{Accountants (NZICA) for review of the liquidation.}

3 Re Bell Block Lumber Limited (In liquidation) 5 PRNZ 642, at 643, Tipping J.

[39] It is clear that had Mr Lee taken this latter course an assessment of the liquidators‟ fees could have been addressed in an inexpensive and straightforward way. Mr Lee did not pursue that option.

[40] Further extensive correspondence ensued between the parties. Discussions for resolution were unsuccessful. In that process the liquidators provided a copy of their timesheets on a without prejudice basis to Mr Buchanan. This Court has already commented on Mr Buchanan‟s assessment of those.

Whether the Court has jurisdiction to review disbursements or expenses incurred by a liquidator

[41] Earlier I reviewed Mr Bogiatto‟s submission wherein he asserted it was not outside of this Court‟s authority to review the level of charges paid to solicitors engaged by a liquidator.

[42] That submission notwithstanding it is clear the Court has no jurisdiction to review disbursements or expenses incurred by a liquidator. As the Court noted in Medforce 1 4:

It seems clear that it is only the remuneration of the liquidator which is subject to review, not his expenses. The distinction between the two is apparent from s 278 which provides that “the expenses and remuneration of the liquidator are payable out of the assets of the company”.

[43] Mr Bogiatto submitted that Regulation 28 of the Companies Act 1993

Liquidation Regulations 1994 prescribed hourly rates for fees of no more than $200 per hour for any solicitor employed by the liquidator and no more than $140 per hour for any employee.

[44] I do not accept that the fees of the solicitors engaged by the liquidator are controlled by Regulation 28. In short, they were not the employees of the liquidators. The Regulations do not apply them to them but might apply to any

_{solicitor who is at any particular time in the employee of the liquidators.}

4 [2001] 3 NZLR 145 at [19].

[45] In relation to issues raised concerning legal fees charged, the more appropriate forum to challenge these would have been by making a complaint to the New Zealand Law Society under s 134 of the Lawyers and Conveyancers Act 2006.

[46] Likewise it is clear that costs incurred by a liquidator in responding to this litigation (arising from the liquidators‟ application for approval of costs) are costs of the liquidation and may be claimed unless the Court orders otherwise c.f. Flynn v McCallum 5 and Medforce 1 6.

Conclusions

[47] This liquidation has some unusual features. Clearly the company was not “balance sheet” insolvent when it was placed into liquidation. Perhaps because of this no steps were taken by the appointed liquidators to sell the Parakai property. Also Mr Lee had, post liquidation, immediately notified his intention to pay creditors‟ claims. Considerable effort was made to assist him with his intention to terminate the liquidation. Yet, and despite efforts to assist him, the creditors‟ claims were not promptly paid. His subsequent initiative to apply for termination, without resolving issues of liquidators‟ costs have in turn caused yet further costs to be incurred by the liquidators. So too, he is responsible for the approach he has taken in opposition to the liquidators‟ application for retrospective approval of their fees.

[48] It is in connection with the offer of assistance initially to help Mr Lee make his termination application, that the liquidators engaged the services of solicitors. It is since Mr Lee‟s application for termination that those solicitors have had to be engaged in a robust manner to assist with proposals to settle conditions for termination of the liquidation, and to assist the liquidators in responding to Mr Lee‟s challenge to their fees claims.

[49] I earlier observed in [28] that the actions of Mr Lee have largely accounted for the course of events since April 2010. It seems to this Court that Mr Lee has

_{failed adequately to address a responsibility for payment of liquidators‟ costs as a}

5 _{at [240].}

6 at [38].

condition of the termination of his company‟s liquidation. The closest he came was to pay a sum of money on 8 September 2010 having been advised there was uncharged work in progress (and some expenses) which had accrued to a date some two weeks earlier. With respect it was naive to assume thereby that liquidators‟ costs would be capped at the level of his payment and that no charges would have accrued in the two weeks to the time of his payment.

[50] It is this Court‟s assessment that all of the fees incurred after April 2010 were directly attributable to reactive costs that the liquidators had to incur as a result of Mr Lee‟s actions. Those related to steps taken in order to protect the position of the creditors and for the liquidators to appropriately respond to the requirements placed on them by steps taken by Mr Lee, and by the need to comply with Court and statutory requirements. In this case the Court considers the steps taken by the liquidators were appropriate. The liquidators were obliged to respond to the evidence offered by and on behalf of Mr Lee.

[51] Mr Lee could have challenged the liquidators by application to NZICA. The liquidators were bound by NZICA rules. That body is able to deal with overcharging allegations, and essentially in this Court that is what Mr Lee‟s challenge is all about.

[52] Mr Buchanan has made some observations regarding the numbers of persons involved in what he perceives to have been a straightforward liquidation. A review of timesheets indicates that until April 2010 the process was straightforward. Further than that the parties were cooperating to resolve termination issues. The charges indicated at that time to be paid were in line with Mr Buchanan‟s own assessment. Wisely, I think, Mr Buchanan has offered no view regarding the extent of work undertaken or for what purpose it was undertaken post-April 2010.

[53] It is this Court‟s assessment that the attendances taken in that post-April period are those which reasonably prudent persons in the liquidators‟ position would have undertaken. In overview it appears Mr Lee has become fixated about liquidators‟ fees. His endeavour to arrange for a creditors meeting to be called and his actions in proceeding unilaterally with the termination application, appear to be examples of this fixated behaviour. Likewise his efforts to pay liquidators‟ fees at a

time when clearly more fees would be payable, illustrate this element of fixation further.

[54] This Court‟s view is that throughout the liquidators‟ approach was reasonable. They are entitled to charge for the further work required to bring the liquidation to conclusion. There is no reason to challenge as unreasonable the fees charged since April 2010. Before that time it does not appear that there is any real challenge to the liquidators‟ charges for the core work undertaken. As much can be inferred from Mr Buchanan‟s perceptions of reasonable charges for that core work.

[55] Since August 2010 Mr Lee has conducted a somewhat acrimonious case in respect of the liquidators‟ fees. The liquidators were obliged to respond to it. Very detailed affidavits have been filed. The liquidators are officers of the Court and thus had to prove to the Court that all of their attendances were necessary. It is this Court‟s decision that the liquidators have provided that proof.

Judgment

[56] The liquidators‟ retrospective request for remuneration is approved in full. [57] The costs of the liquidators‟ solicitors for the preparation for this hearing and

for their attendance at it shall be fixed on a category 2B basis. Although this Court exercises no authority to challenge the level of solicitor‟s charges given in aid of a liquidator that principle does not dictate what costs are paid for the solicitor‟s attendance at this hearing, including preparation for it. As always those costs are subject to approval of the Court.

[58] If any issue arises about the level of costs awarded in the outcome of this case then leave is reserved to the parties to apply on short notice for the matter to be considered.

[59] Mr Lee‟s application for termination of the liquidation is adjourned for call in

the chambers list before me on 1 June 2011 at 2:15pm, for the purpose of review.

Associate Judge Christiansen