Horton v Cowley [2014] NZHC 20 (31 January 2014)

Last Updated: 12 February 2014

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2011-404-5022 [2014] NZHC 20

UNDER the Companies Act 1993

IN THE MATTER OF SHAFTSPRY LIMITED (In Liquidation) BETWEEN CHRISTOPHER HORTON

Applicant

AND BRIAN PATRICK COWLEY and GARTH WILLIAM COWLEY First Respondents

CALVIN BLAKLEY WEST Second Respondent

BRIAN PATRICK COWLEY Third Respondent

BRIAN COWLEY SURVEYING LIMITED

Fourth Respondent

Hearing: 3 December 2013

Appearances: K T Glover for Applicant

E J Werry for First, Third and Fourth Respondents

No appearance for Second Respondent

Judgment: 31 January 2014

_{JUDGMENT OF ASSOCIATE JUDGE BELL}

This judgment was delivered by me on 31 January 2014 at 4:00pm

_{pursuant to Rule 11.5 of the High Court Rules.}

_Solicitors:

...................................
Registrar/Deputy Registrar

Dukesons Business Law (Steven Dukeson), Auckland, for Liquidator

Simpson Dowsett Mackie, Mt Roskill, Auckland, for First, Third and Fourth Respondents

Counsel:

_{E J Werry, Auckland, for First, Third and Fourth Respondents}

HORTON v COWLEY and WEST [2014] NZHC 20 [31 January 2014]

[1] I gave an interim judgment on 23 November 2012.¹ That judgment resolved certain matters in the liquidation, but did not decide them all. I set out some of my findings:

(a) Mr Horton, the liquidator, was entitled to recover under s 305(3)(b) of the Companies Act 1993 from the Cowleys and Mr West interest on their mortgages from the date of advance to 8 May 2008, but not interest from 8 May 2008 to the date of sale of the Paddy Road property.² I did not fix the amount of the judgment, but I did award

interest.³

(b) Shaftspry Ltd was not able to pay its due debts as at 8 May 2008 and

22 July 2008.⁴

(c) The provision in the shareholders’ resolution of 8 May 2008 for the mortgagees to be secured for interest falling due under the mortgages after that date was not voidable under s 293 of the Companies Act.⁵

(d) The agreement to mortgage of 22 July 2008 was set aside as voidable under s 292 of the Companies Act.⁶

(e) The term loan contracts of 22 July 2008 could not be set aside under s

292 in this proceeding.⁷

(f) The Cowley interests needed to be separated out and could not be treated as a single creditor.⁸

(g) It was not possible to make a final decision under s 292 whether to set aside the agreement for prospective interest and the associated charge and if so, what relief to give under s 295.⁹

(h) It was not possible to decide under s 299 whether to set aside the

_{provision in the shareholders’ resolution of 8 May 2008 for the}

¹ _{Re Shaftspry Ltd, Horton v Cowley and West [2012] NZHC 3089.}

² _{Interim judgment at [89].}

³ _{Interim judgment at [160].}

⁴ _{Interim judgment at [104] and [105].}

⁵ _{Interim judgment at [110].}

⁶ _{Interim judgment at [111].}

⁷ _{Interim judgment at [114].}

⁸ _{Interim judgment at [51] and [121]}

⁹ Interim judgment at [126].

mortgagees to be secured for interest falling due under the mortgages after that date.¹⁰

(i) Mr Horton had been inefficient in not having fixed the creditors in the liquidation, and, if the only creditors were the Cowleys and Mr West, in having started this proceeding.¹¹

(j) Mr West’s bid to have the Cowleys pay the costs of liquidation was

rejected.¹²

(k) It was not possible to make a final decision on all questions. The outstanding matters were:

(i) Who are the creditors in the liquidation and what are the amounts of their claims?

(ii) What adjustments, if any, should be made to Mr Horton’s

remuneration on account of the inefficiency findings?

(iii) Was Mr West a director at the time of the shareholders’

resolution?¹³

[2] The parties have not been able to resolve outstanding matters. But there have been developments which have simplified the liquidation of Shaftspry Ltd considerably. The matters requiring decision now are:

(a) Mr Horton’s remuneration and expenses; (b) Mr West’s entitlement as creditor; and

(c) costs.

[3] Mr Horton has established that the only creditors in the liquidation are the Cowley interests and Mr West. Mr Horton rejected two claims by others alleging that they were creditors. His decisions to reject those claims have not been challenged. The Commissioner of Inland Revenue did not make a claim in the

_liquidation.

¹⁰ _{Interim judgment at [129].}

¹¹ _{Interim judgment at [152].}

¹² _{Interim judgment at [156].}

¹³ Interim judgment at [157].

[4] Mr Horton’s evidence did not state the amounts for which he admitted the Cowleys’ and Mr West’s claims. Aside from Mr Horton’s claim for remuneration and expenses, the preferential creditors are:¹⁴

_{Brian Cowley - advance to liquidator $1,500.00}

Calvin West – advance to liquidator $1,000.00¹⁵

Calvin West – costs on liquidation order $9,187.00

Brian Cowley – payment of excise duty $22,566.82

_{Total: $34,253.82}

[5] As agreed in the hearing the non-preferential unsecured creditors are:

_{Brian & Garth Cowley interest on 1}^st _{mortgage $63,333.00}

_{Brian Cowley interest on 2}^nd _{mortgage $15,833.00}

_{Calvin West interest on 2}^nd _{mortgage $15,833.00}

Sub-Total: $94,999.00

_{Brian Cowley Surveying Ltd $58,662.00}

_{Brian Cowley 1}^st _{term loan $169,270.00}

Brian Cowley 2^nd term loan $142,640.00

_{Calvin West expenses met $3,710.00}

Sub-Total: $374,282.00
_$469,281.00

[6] The calculation of interest was agreed. Mr West’s claim of $3,710 (expenses he paid on behalf of the company) is an amount recognised by Mr Horton and one that I applied in my judgment of 23 November 2012.¹⁶ Mr West has not contended for a higher figure. The amounts for the Cowleys’ claims come from the interim judgment.¹⁷

[7] As non-preferential creditors, the Cowleys’ claims total $449,738, Mr West’s

$19,543. For every $100 for non-preferential creditors, the Cowleys will receive

$95.84 and Mr West $4.16.

[8] In the interim judgment, I set out why the Cowley interests had to be considered separately and why they could not be treated as one and the same

_person.¹⁸ _{Notwithstanding that, the Cowleys say that to finalise matters they can be}

¹⁴ _{Interim judgment at [45]-[47] and [139].}

¹⁵ Taken from Mr Horton’s 1^st affidavit paragraph 23. At [140] of the interim judgment I

_{mistakenly assumed that Mr West and Mr Cowley had contributed equally.}

¹⁶ _{Interim judgment at [50] and [139]-[140].}

¹⁷ _{Interim judgment at [100] and[139].}

¹⁸ Interim judgment at [121]-125].

treated as one person. On my checking, Mr Werry confirmed that that meant that orders might be made against each of the Cowley interests – that is, Brian and Garth Cowley, as trustees of the Rentalength Trust, Brian Cowley in his own right, and Brian Cowley Surveying Limited.

[9] On the eve of the hearing, funds held by the Cowleys’ lawyers were paid to Mr Horton. These funds were part of the proceeds of sale of Paddy Road, which the Cowleys had identified as belonging to Mr West. The Cowleys’ lawyers have held that part of the proceeds in their trust account since then. Mr West has not had the use of the funds. The amount paid to Mr Horton was $46,287.88. That was the balance remaining after the Cowleys deducted $12,425.80 as the amount of an order for costs I had made in favour of Brian Cowley and Shirley van der Kley in West v

Cowley.¹⁹

[10] To back-track, the Cowleys had sold the Paddy Road property as first mortgagees in December 2009. They received $1,006,875.00. They were entitled to deduct from the proceeds of sale the sum of $715,579.17 to cover the principal under the first and second mortgages, GST and the costs of sale. Of that, they paid

$100,000.00 to Mr West to cover his principal in the second mortgage. That left a balance of $291,295.83.²⁰ Of that, $57,446.27, representing interest for Mr West on the second mortgage, back-dated to the date of the original advance, was held in the Cowleys’ solicitors’ trust account. The Cowleys kept the rest for themselves.

[11] For this judgment, the Cowleys and Mr Horton were content to treat the sum of $291,295.00 as a notional pool available to be distributed under ss 311, 312 and the Seventh Schedule of the Companies Act 1993. The money paid to Mr Horton is part of the funds available to meet the claims. The Cowleys, as the ones who received the balance of the $291,295.00 will have to meet the rest of the pool. The sum of $291,295 is a starting figure for the pool. There were also submissions that it

_{should be adjusted for interest.}

¹⁹ _{West v Cowley [2013] NZHC 2356.}

²⁰ Interim judgment at [32]-[34].

[12] With that, the remaining competing interests at play in the liquidation can be identified:

(a) Mr Horton’s interest is to receive an appropriate amount for his

remuneration and expenses as liquidator;

(b) Mr West’s is to receive his entitlement as preferential and non- preferential unsecured creditor;

(c) The Cowleys’ is to see that Mr Horton and Mr West recover no more

than is legally required.

[13] Given these positions, the parties do not have any interest in obtaining a final resolution of the matters I left undecided in my decision of 23 November 2012. In particular, Mr Glover confirmed that Mr Horton no longer sought orders under ss 294, 295 and 299 of the Companies Act 1993.

[14] Mr West has not appeared. Earlier, his lawyer was given leave to withdraw. While Mr West has not taken any active part in matters since his lawyer withdrew, I have taken account of his position as both preferential and non-preferential creditor.

[15] In my interim judgment I noted that if the Cowleys and Mr West were the only creditors, it might be possible to calculate adjustments that might be ordered between the parties without requiring all the retained interest to be paid to Mr Horton.²¹ It is now possible to take that further. So long as Mr Horton and Mr West are paid their entitlements, there is no reason to require the Cowleys to pay anything more. That is why only the matters in [2] above now require decision.

[16] One further preliminary matter. In this decision, as in my interim judgment, I refer to Mr Horton as liquidator. He has had charge of the liquidation, but he has also been assisted by others, including other professionals. For this case I have considered the conduct of the liquidation. While Mr Horton has overall

_{responsibility for the conduct of the liquidation, I have not had to inquire whether he}

²¹ Interim judgment at [125].

personally or others are responsible for particular steps taken. When I refer to particular steps taken in the liquidation, I am not to be taken as saying unequivocally that Mr Horton personally took those steps. While I disallow some of the remuneration and expenses claimed by Mr Horton, I do not allocate responsibility for the conduct of the liquidation among the members of Mr Horton’s team.

Mr Horton’s claim for remuneration

Principles on remuneration applications

[17] This is an opposed application for retrospective approval of remuneration for a liquidator appointed by the court under s 241(2)(a). Under s 276(2) a liquidator’s remuneration is limited to amounts fixed under s 277 or prescribed rates, unless the court orders otherwise. As Mr Horton is seeking approval of remuneration at a

higher rate, he has the burden of justifying the remuneration he seeks.²²

[18] In Re Roslea Path Ltd a Full Court generally affirmed the principles in Re

Medforce Healthcare Services Ltd (In Liq):²³

[45] In Medforce 1, the Full Court prefaced its discussion on specific issues raised by the following general comments, all of which we endorse, in the context of Court appointed liquidators:

[18] It seems clear that s 284(1)(e) applies to an application pursuant to s 276(2) so that put at its simplest, the duty of the Court on an application to fix a liquidator’s remuneration must be to fix a figure which is “reasonable in the circumstances”, This follows too from the provisions of subs (1) of s 276 which entitle a liquidator to charge “reasonable remuneration”.

[19] An allied question is as to what is included in the expression “remuneration”. 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” (emphasis added).

[20] It is also important to note that subs (2) limits the remuneration of liquidators to that fixed under the regulations “Unless the Court otherwise orders”.

²² _{Re Roslea Path Ltd [2013] 1 NZLR 207 (HC) at [143].}

²³ Re Roslea Path Ltd [2013] 1 NZLR 207 (HC). See also [113], [122] and adjustments to

Medforce at [187]. Re Medforce Healthcare Services Ltd (in liq) [2001] 3 NZLR 145(HC).

[46] Liquidators are paid out of assets of the company that have been realised for distribution to creditors. This creates a “common fund” in which all participants have an interest. The participants include all creditors and (to the extent a surplus may result) shareholders of the company. An analogy is a trust fund out of which a trustee is entitled to remuneration. In “common fund” cases, involving legal practitioners who seek remuneration, an inquiry is undertaken both into work carried out and whether it was reasonably necessary, having regard to the nature and value of the issues at stake. That principle was applied by Mahon J, in relation to legal aid remuneration paid out of public moneys, in Re Chapman, Feenstra, Cartwright & Gendall [1977] 2 NZLR 196 (SC). While there is no express reference to that principle in the Full Court’s decision in Medforce 1, Mahon J’s judgment was referred to with approval in Medforce 2, at 161.

[47] In dealing with retrospective applications to approve fees charged by a liquidator, Medforce 1 approved the following statements of principle taken from Mirror Group Newspapers plc v Maxwell (No 2) [1998] 1 BCLC 638 and Re Peregrine Investments Holdings Ltd [1998] 2 HKLRD 670:

(a) Court appointed liquidators are fiduciaries. As with any fiduciary it is necessary for remuneration to be justified.

(b) The appropriate test is to determine whether a particular cost would have been incurred; would the time spent have been undertaken by a reasonably prudent person faced with the same situation?

(c) While time is a relevant factor in fixing remuneration, the value of the services rendered is more important than the cost of rendering them.

[19] I add a qualification to the statement in Medforce that the court may only review the remuneration, but not the expenses of a liquidator. That is directed at the court’s power to review the reasonableness of liquidators’ remuneration. If liquidators take a course of action which is not required for the liquidation, the court may disallow both their expenses and their remuneration for that course of action. It would be absurd to refuse their remuneration while still allowing their expenses for the same matter. The legal basis for this is that regardless of the court’s power of review of remuneration under ss 276 and 284, liquidators have no right to claim for expenses not required for a liquidation. Under Schedule 7(1) of the Companies Act

1993 liquidators may be paid only “the fees and expenses properly incurred”. In this case I have found that Mr Horton did carry out unnecessary matters and I have disallowed both remuneration and expenses for them.

[20] The Full Court in Re Roslea Path Ltd approvingly cited the judgment of

McLure JA in Conlan v Adams:²⁴

[80] Citing from Ferris J’s judgment in Mirror Group (at 336–337) her Honour identified (at [39]) three propositions, in the context of time- costing procedures:

(a) Time spent represents a measure not of the value of the service rendered but of the cost of rendering it.

(b) Remuneration should be fixed so as to reward value, not so as to indemnity against cost.

(c) Time spent is only one of a number of relevant factors in assessing the value of work undertaken.

[81] Approving Finkelstein J’s review of authorities in Korda, McLure JA

quoted the following passage from his judgment in that case:

[47] It seems to me that the proper approach is first to establish what ... is called the “lodestar” amount. This amount is reached by the number of hours reasonably spent by the insolvency practitioner multiplied by a reasonable hourly rate ... This step will require the tribunal to decide whether the work performed was necessary to the [liquidation], whether it was performed within a reasonable time and whether the rate is reasonable having regard to what the practitioner, and other practitioners, usually charge their clients. The “lodestar” amount should then be adjusted (up or down) to reflect other factors including the quality of the work performed, the complexity in the administration over and above the normal complexity of such work, the novelty and difficulty of the issues that confronted the [liquidator] as well as the ultimate result obtained by him.

[82] McLure JA considered that it would be helpful, for practical purposes, to identify categories of conduct that would not represent time reasonably expended at a reasonable rate. She said:

[44] ... They include, without intending to be exhaustive:

(a) work that is beyond the power of the liquidator;

(b) conduct that is negligent (whether that be in undertaking, or in the performance, of the work);

_{(c) unnecessary work;}

²⁴ Re Roslea Path Ltd citing Conlan v Adams [WASCA] 61, [2008] WASCA 61; (2008) 65 ACSR 521.

(d) work undertaken by persons of inappropriate seniority (having regard to level of training and experience); and

(e) work undertaken at inappropriate hourly rates.

McLure JA accepted that the expression “unnecessary work” in (c) above was “unhelpfully vague”. The Judge accepted that the first two categories of conduct (ultra vires or negligent) could also be classified as “unnecessary work” but emphasised that (c) was intended to be wider, relating “to both decisions to embark on a course of action and the work undertaken in performance thereof and is captured by the concept of “over-servicing”: at para [45].

[21] The Full Court’s description of the court’s function is also helpful:²⁵

The nature of the Court’s function

[102] In fixing a liquidator’s remuneration, the Court is making a determination of the fairness and the reasonableness of what has been charged when measured against the work undertaken and the result achieved. Fair and reasonable remuneration reflects the value of the services rendered to the creditors of the company and, if a surplus were achieved, its shareholders. “Value” is an elusive concept which goes beyond mathematical application of hourly rates to hours spent by individuals involved in administering the company’s affairs.

[103] In analogous decisions dealing with challenges to costs rendered by solicitors, the Court has taken into account a variety of factors that may, in some cases, result in fair remuneration being assessed at an amount higher than that computed on a strict application of hourly rates multiplied by hours spent. For example, in Gallagher v Dobson, at 615, Barker ACJ referred to the factors for assessing costs, then set out in the New Zealand Law Society’s Costing and Conveyancing Practice Manual, at 4:

(a) the skill, specialised knowledge, and responsibility required

(b) the time and labour expended

(c) the value or amount of any property or money involved

(d) the importance of the matter to the client and the results achieved

(e) the complexity of the matter and the difficulty or novelty of the questions involved

(f) the number, and importance of the documents prepared or perused

²⁵ Re Roslea Path Ltd, n 22.

(g) the urgency and circumstances in which the business is transacted

(h) the reasonable costs of running a practice.

[104] Those principles are equally applicable to remuneration for liquidators’ services.

[105] We consider that, in assessing “value”, on a retrospective application or a review, similar factors ought to apply. While Medforce 1 held that the appropriate test was to determine whether the time spent would have been undertaken by a reasonably prudent person faced with the same situation (at [32(b)]), we read that observation as referring to an inquiry that goes to determination of the reasonableness of the remuneration claimed. If it were more than that, the need for liquidators to fulfil statutory duties would be given too little weight: see Simion v Brown, at 25 and [70(a)] above.

[106] In determining a liquidator’s remuneration, the Court must be mindful that, in many cases, the number and value of individual creditors will not be sufficient to provide an incentive for a particular creditor to apply to the Court to review the fees charged by the liquidator. The lack of an appropriate incentive to challenge what might be unreasonable fees requires the Court to act in a more protective manner than might, otherwise, be desirable: cf the comments of the Law Commission on this topic, in its 1989 report, at [36] above. ...

[108] The need for a “proportionate” approach is inherent in the authorities and literature... Not only must remuneration be proportionate to the nature, complexity and extent of work undertaken, but the information required by the Court to justify it should be proportionate to the amount sought, as well as those other factors...

[22] The judgment encouraged liquidators to disclose relevant information as to remuneration to creditors and shareholders during the liquidation.²⁶

[23] The Full Court also noted that the liquidators’ costs associated with applications to fix remuneration are to be treated as costs of the liquidation, unless the court orders otherwise.²⁷

[24] The judgment in Re Roslea Path Ltd was given on 17 December 2009. The parties were soon aware of it. In early 2010 Mr Horton’s lawyer charged him for advice on remuneration, including on recent case law. In later correspondence the

_{Cowleys’ lawyer referred to the case.}

²⁶ _{Re Roslea Path Ltd at [146]-[152] and [177].}

²⁷ Re Roslea Path Ltd at [240].

This case

[25] In updating affidavits, Mr Horton claims remuneration and expenses up to

22 August 2013:

Remuneration (inclusive of GST) $76,630.00

Miscellaneous disbursements $17,049.17

Legal fees and disbursements $160,983.77

_{Total: $254,662.94}

[26] In the liquidation so far he has recovered $25,499.95.²⁸ When that is added on to the notional pool of $291,295 and Mr Horton’s claim is paid in full, $62,132.01 is left for all creditors. That would leave enough to pay other preferential creditors in full and $27,878.19 for non-preferential creditors, giving them a dividend of about

5.9 cents in the dollar.

[27] Mr Horton has applied charge-out rates of $280 plus GST per hour for liquidation work and $120 plus GST for administrative work. He says that counsel has charged an hourly rate of $300 plus GST. He adds that he and counsel also spent unrecorded time on the liquidation, for which no claim is made. Their hourly rates are lower than their standard rates. He has made no claim for the abortive hearing on

26 June 2012.

[28] His case is that his entire claim is justified. The rates of remuneration are reasonable. He conducted the liquidation efficiently. There were factors making this liquidation complicated: the Cowleys had not been co-operative with providing information; this liquidation arose out of a breakdown in the relationship between Mr Cowley and Mr West; the Cowleys had taken matters into their own hands by selling the Paddy Road property as mortgagees after he had tried to sell it as liquidator; the Cowleys refused to account for the proceeds of sale of Paddy Road and refused to pay the proceeds to him; and the Cowleys tried to control the liquidation, whereas he was the liquidator. With the Cowleys running matters, there was reason to suspect that Mr West would not receive his due entitlement. The position facing him after the sale of Paddy Road was that he had carried out

_{significant work on the liquidation, but what he had received in the liquidation was}

²⁸ Taken from receipts shown in Mr Horton’s 2^nd, 3^rd and 4^th reports as liquidator.

not enough to meet his fees and expenses. The Cowleys, not he, had started proceedings with the August 2011 application to fix his remuneration. This proceeding offered him the way to recover the remuneration he was entitled to. My findings on the merits of his claim under s 305 of the Companies Act vindicated his decision to challenge the Cowleys’ retention of interest from the proceeds of sale of Paddy Road. The court should be wary of making hindsight judgments.

[29] His submissions and evidence did not address how he had produced value for the creditors.

[30] The Cowleys’ case relies on my findings of inefficiency on the part of Mr Horton in not having identified creditors early in the liquidation and in taking this proceeding when it could not benefit creditors. While Mr Horton had been successful in his claim under s 305, there was no net benefit to Mr West and the Cowleys, the only creditors. From October 2009 they had made it clear that fixing Mr Horton’s remuneration was a key issue that needed to be resolved. They were willing to pay Mr Horton’s reasonable remuneration and expenses. Mr Horton erred in not discussing his remuneration when they raised the matter. This should have been a simple and straightforward liquidation, as the liquidator was required only to sell the chattels and attend to the usual statutory functions. There were no trade creditors. Mr Horton should have disclaimed the Paddy Road property once he knew that it was worth less than the mortgages secured against it. In June 2009 the Cowleys had reasonably offered to take the Paddy Road property for $855,000, a sum calculated to cover money due to Mr West under the second mortgage, including backdated interest. In July 2009 Mr Horton obtained a report from a registered valuer putting the current market value of the property at $765,000. Mr Horton erred in not taking up their offer. The steps he took to sell the property by tender were inept. They had made it clear that they reserved their rights to sell the property under the powers in the first mortgage.

[31] Two straightforward matters can be dealt with now. The disbursements of

$17,049.17 are accepted. Mr Werry made the point that they were not all non-legal expenses, because they included payments for legal services, advice on taxation and

advice on insolvency, but that is no more than a quibble. Mr Horton’s hourly rates

were not challenged and are in order.

[32] For the remaining matters, I consider the conduct of the liquidation. First a general outline of events. The liquidation began on 3 April 2009. By the end of

2009 the Cowleys had completed the sale of the Paddy Road property to Black Beagle Properties Ltd under an agreement of September 2009. During 2009 the Cowleys and Mr Horton were at cross-purposes on the sale of Paddy Road. While the Cowleys show that they reserved their rights to sell the property under their first mortgage and made an offer in June 2009 to take the property at $850,000, Mr Horton believed that he had the green light to sell the property by tender. A valuer’s report he obtained in July put the market value of the property at $765,000. He claimed to be surprised by the Cowleys’ sale of the property to Black Beagle. Once he found out about the sale, he sought more information, but the Cowleys were not as forthcoming as Mr Horton hoped. Mr Horton contended that the mortgagees should account to him as liquidator for the mortgage interest they had retained from the sale proceeds. The Cowleys rejected that and countered that the only matter requiring resolution was Mr Horton’s remuneration. The correspondence between the parties shows them talking past each other. In about December Mr Horton prepared a schedule for an indicative distribution of the company’s assets. By the end of February 2010 Mr Horton had obtained information about the sale proceeds.

[33] In September 2010 Mr Horton served the notices under s 294 of the Companies Act. In August 2011 the Cowleys filed their application to have the court fix Mr Horton’s remuneration. In September 2011 Mr West filed an application seeking various orders in the liquidation.²⁹ In October 2011 Mr Horton filed his application for orders under ss 294 and 295. From August 2011 the liquidation has been directed mainly at this proceeding. Mr Horton did not finally determine

creditors in the liquidation under s 304 until after my interim judgment of November

2012.

[34] Aside from the dispute with the Cowleys and this proceeding, Mr Horton’s

_{work has included general administration of the liquidation including the normal}

²⁹ That application was not actively pursued. Mr Horton abided the court’s decision.

statutory requirements, plus stocktakes, meetings and correspondence with Mr West and the Cowleys, examining Mr West’s claim, dealing with Customs, taking advice on tax aspects, selling chattels and collecting payment (which included issue of a statutory demand), and managing the Paddy Road property including obtaining grazing fees.

[35] During the liquidation Mr Horton has used lawyers not only to run this proceeding, but also to prepare tender documents for the sale of Paddy Road, give advice on a proposal by Cowley that he be assigned a cause of action by the company against Mr West, advice on the sale to Black Beagle, advice on recovery from the mortgagees of sums retained for interest including voidable transaction and voidable charge claims, issuing a demand under s 261 for information from the Cowleys, advice on remuneration and to deal with the Cowleys’ lawyer before proceedings started. For completeness I note that counsel who appeared for the parties in this proceeding had not been instructed in the early days of the liquidation.

[36] For their contention that the liquidation could have been carried out in a simpler and more straightforward way the Cowleys rely on the evidence of Mr Dalton. In the interim judgment I summarised his evidence:³⁰

Mr Dalton, an insolvency practitioner, gave opinion evidence for Mr Cowley. He had not been provided with copies of Mr Horton’s work records or a full breakdown of the time and costs spent on the job, so could not comment in detail on those aspects. His evidence is at a more general level. If liquidator, he would have done matters differently. He notes that there were only two assets, land and chattels at Paddy Road. They would be identified and secured. He would have identified and contacted the creditors. He assumes that there were only two, the Cowley interests and Mr West. As the land was mortgaged and the valuation obtained by Mr Horton showed that the land was worth less than the amounts the mortgagees said were due to them, he would not have put the property up for tender, as Mr Horton had. It was better to leave the mortgagees to sell the property themselves. He would have disclaimed Paddy Road as onerous under s 269 of the Companies Act. That meant that only the proceeds of sale of the chattels and grazing fees would be available to meet the costs of liquidation. If all mortgagees had agreed to the liquidator selling Paddy Road, he would have negotiated with them for payment for his work in selling the property. Even if Mr Horton is correct that the interest under the mortgages is recoverable, he would not have taken proceedings to recover the interest from the mortgagees, as no other creditors were prejudiced. As a minor point, he noted that his practice would not have engaged lawyers to

³⁰ At [136].

prepare tender documents. In a second affidavit, he noted that by the time of the sale to Black Beagle Property Ltd, the costs of liquidation (including legal fees) were $28,586.67 plus GST and disbursements. While he queried the need to carry out all the work, those costs were not completely unreasonable. He notes that Mr Cowley was offering to top up the liquidator’s fees. He regarded this proceeding as an unnecessary exercise in recovering funds from creditors only to return it to them again.

[37] No doubt by now even Mr Horton would accept that Mr Dalton’s approach was the most efficient way of dealing with the liquidation. But that is a hindsight assessment. While Mr Dalton’s approach was open to Mr Horton, it was not the only one. I accept that different insolvency practitioners could properly go about this liquidation in different ways while still acting in a reasonable and efficient manner. In the early days of the liquidation, matters were still not clear. Complicating factors were that the failure of the company had come about because of the breakdown in relations between Mr Cowley and Mr West. Experience shows that liquidations arising from a fallout among directors and shareholders are often more difficult and

more expensive than those arising only from insolvency.³¹ The mortgagees were not

external creditors, but the shareholders at loggerheads. The Cowleys held five-sixths of the debts secured by registered mortgage. Under the agreements of 22 July 2008 they were also claiming that they had security for other funds advanced and expenses they had met. On the other hand Mr West was asserting significant claims against the company, but apart from his interest in the registered second mortgage he was unsecured. The fact that later examination of Mr West’s claim as unsecured creditor showed it to be largely without substance is beside the point at this stage. There were other potential creditors, including the Commissioner of Inland Revenue. It is quite proper for a liquidator to examine the claims asserted by a secured creditor to ensure that the interests of unsecured creditors are protected. So Mr Horton had some basis for not accepting at face value everything claimed by the Cowleys.

[38] Caution at accepting the Cowleys’ proposal in their lawyer’s letter of June

2009 is understandable. Having the property valued was sensible, as Mr Dalton accepted. Perhaps Mr Horton should have gone back to the Cowleys once he received a report showing the property as worth less than the Cowleys were offering,

_{but he also knew that the Cowleys had obtained another valuer’s report showing the}

³¹ Re Roslea Path Ltd is a case in point.

property as worth $1,000,000. So putting the property up for tender can be accepted. Mr Horton is not to be criticised for having lawyers draw up the tender documents. His marketing efforts were minimal. If he were a mortgagee they would expose him to a potential claim under s 176 of the Property Law Act, but in this case they were overtaken by the Cowleys’ sale to Black Beagle. At this stage Mr Horton had received claims, but he had not decided whether to accept or reject them. That was something he was required to do under s 304 but had not done.

[39] For his work up until he was told of that sale in September 2009 plus some administrative work in October and November, he claims $24,081 including GST. Mr Dalton accepted that this part of the claim was not completely unreasonable. I accept that part of the claim. During the same period Mr Horton incurred legal fees of $8,602.50 including GST for work on the liquidation, other than on the sale to Black Beagle. They were properly incurred for the liquidation.

[40] I take as the next phase the time up to the end of February 2010. This is part of the period of talking past each other. Mr Horton dealt with the mortgagees’ sale to Black Beagle. He asked for information about the sale. He got it only piecemeal and in part indirectly but he had a clear enough picture by the end of February 2010. The information was used as evidence for the proceeding. To the extent that time was required to obtain information the Cowleys added to the costs of the liquidation. During this period Mr Horton, with his lawyer’s help, developed the position that the mortgagees should account to him for interest from the proceeds of sale of Paddy Road. The lawyer’s letter to the Cowleys’ lawyer of 18 December 2009 shows that position, which relies on ss 292-295 and 299 of the Companies Act. Clearly significant work had gone into investigating both facts and law. Mr Horton’s lawyer pressed for payment. The response from the Cowleys’ lawyer was that that was not necessary. As Mr West and the Cowleys were the only creditors, their entitlements had been met out of the proceeds of sale. All that was required was to fix Mr Horton’s remuneration for his work as liquidator. They offered to pay that. The Cowleys’ lawyer tried to engage Mr Horton’s lawyer on remuneration but without success. The response from the Horton side was to reject these overtures out of hand. During this period Mr Horton prepared an indicative distribution to creditors, which was included in his lawyer’s letter of 18 December 2009.

[41] It is clear that during this phase the creditors of the company needed to be identified. The Cowleys believed that they and Mr West were the only creditors, but their lawyer’s correspondence does acknowledge their uncertainty on the point. They could not be sure because it was Mr Horton as the liquidator who was to accept or reject claims. If the Cowleys were correct, then they had an argument that it was only necessary to consider Mr Horton’s remuneration. On the other hand if there were other creditors then it would also be necessary to address Mr Horton’s claims that they account for interest under the mortgages. Mr Horton seems to have accepted that the Cowleys and Mr West were the only creditors. His lawyer’s letters do not suggest that there were other creditors. Mr Horton’s indicative distribution records only the Cowleys and Mr West as creditors. Nevertheless the uncertainty continued until after the hearing in 2012.

[42] The Cowleys clearly put Mr Horton on notice that any further work, beyond fixing his remuneration and paying for it and completing the administrative aspects of the liquidation, would only cause unnecessary cost to the creditors. Their offers to resolve the question of remuneration are understandable and Mr Horton’s refusal to address the issue is not. Mr Horton regarded their offers as niggardly, but the Cowleys were at a disadvantage. They could not gauge what work Mr Horton had done. They asked to see his records, but he refused. Mr Horton would not tell them what he had done or why or what his charges to date were.

[43] Aside from what the Cowleys were saying, Mr Horton already had the facts to tell him that any further work would only cause unnecessary cost to the creditors. It is found in his indicative distribution. It is similar to the kind of calculation I did in my interim judgment.³² Mr Horton has used rounded figures. Differences between his approach and mine are that he made his calculation on the basis that there would be no litigation and that he allowed $150,000 for Mr West’s claim as

non-preferential creditor, whereas I allowed $3,710. Mr Horton qualified Mr West’s claim as “to be confirmed”. For present purposes the calculation is generous to Mr West. Mr Horton allowed $75,000 for all liquidation costs as an estimate only on the basis that costs ought not to exceed that amount. Mr West’s position is relevant

_{as he is the creditor whose interests Mr Horton might be concerned to protect for}

³² Interim judgment at [137]-[141].

receiving less than under a distribution under the Companies Act. Mr Horton noted that Mr West had a claim for $55,000 for interest on the second mortgage. That roughly matched the sum that the Cowleys’ lawyers had held back for Mr West. His distribution shows Mr West as receiving his order for costs of $9,187 as preferential creditor and $47,639.89 as unsecured creditor, a total of $56,826.89. On that calculation the benefit to Mr West is negligible. If proceedings were issued, the costs of the liquidation would go up markedly. Any benefit to Mr West would be lost. As a hindsight comment, Mr West was never going to receive $57,000 odd on a distribution under the Companies Act because Mr Horton overstated Mr West’s claim as unsecured creditor. The overstatement arose because Mr Horton had not yet fixed the value of Mr West’s claim.

[44] What was clear at the time is that if the Cowleys and Mr West were the only creditors, as Mr Horton assumed they were, no useful purpose could be served by pressing further for the Cowleys and Mr West to hand over the sums they had retained for interest under their mortgages. The parties should have sorted out what Mr Horton should be paid for carrying out the liquidation. Mr Horton did the opposite. He gave notices under s 294 and applied to set aside, but refused to talk about his remuneration.

[45] For his work during this period, up to the end of February 2010, Mr Horton claims $15,028 including GST for his own work and $27,502.13 including GST for legal expenses. Mr Horton’s work included trying to obtain information about the sale to Black Beagle, dealing with Mr West, who was also concerned about the sale, conferring with his lawyer, seeking and receiving advice, investigating the possibility of setting aside some of the securities the Cowleys were relying on. His claim also includes administrative work. The lawyer’s bills show extensive research on liquidator’s remedies, voidable transactions, liquidator’s remuneration and drafting notices under s 294. They also sought information under s 261 of the Companies Act, but some of this was misdirected. As well as information they also asked for legal explanations and justifications.

[46] It was proper for Mr Horton to investigate the mortgagees’ sale to Black

Beagle. After all, the Cowleys had an interest in Black Beagle. It was proper to

investigate the availability of remedies, such as setting aside some of the securities claimed by the Cowleys. It was also worthwhile taking the matter up with the Cowleys. Where Mr Horton fell down is that he did not take on board what the Cowleys were telling him, did not settle who were creditors in the liquidation and would not discuss his remuneration with the Cowleys. By the end of February 2010, it should to have been clear to him that there was no point in requiring the Cowleys to pay him the sums they had retained for interest under the mortgages. To reach that conclusion he would have found that only Mr West and the Cowleys were creditors. Apart from Mr West’s claim, he already had the information to reject other claims. Mr West’s claim did require additional work, which I deal with later. That aside it is not necessary to make any allowance for him to settle creditors. I do not consider that he needed extra time to work out that there was no point in setting aside the securities at that stage. With those qualifications I accept his claim for $15,028 for his own work during this period. The lawyer’s bill of 28 February 2010 for

$2,632.50 includes time spent on preparing notices under s 294. That was not required for the liquidation. I deduct $1,000 from the bill on that account. The rest of the legal bills for this period are in order.

[47] After February 2010, the bulk of the work in the liquidation was on giving notices under s 294 and this proceeding. Because none of that work could produce any benefit for creditors even if the proceeding succeeded entirely, it was unnecessary in the sense used by McLure JA in Conlan v Adams. Mr Horton has no claim for remuneration and expenses related to giving the notices under s 294 or his proceeding to set aside the resolution of 8 May 2008 and the agreement to mortgage of 22 July 2008 and to recover interest from the mortgagees. That is subject to one adjustment, which I deal with in paragraphs [53]-[55]. His claim is reduced to what he would have recovered if he had run matters efficiently.

[48] There was however other work on the liquidation after February 2010. In March 2010 Mr Horton examined Mr West’s claim. This required an audit of documents submitted by West. It led to Mr Horton rejecting the bulk of the claim and asking Mr West to resubmit (but Mr West did not). This took 12.4 hours. Mr Horton claims $1,711.20 including GST. That is in order.

[49] In March 2010 Mr Horton served a statutory demand on Black Beagle to enforce payment for chattels bought. He claims $1,127 including GST for that. I allow that. He asked his lawyers for advice on the demand. It is part of the work they did in March 2010, but the charge for that is not separately identified. I allow

$500 including GST for the advice.

[50] Mr Horton dealt with Customs on destroying stock held in the bond store at

Te Kauwhata. I allow his claim for $257.60 including GST.

[51] Mr Horton claims for ongoing administration at $138 including GST per month to cover filing GST returns, maintenance of cashbook, document filing, bill payments and the like for the period August 2012 to September 2013. In my judgment the liquidation ought to have been completed no later than December

2010. I allow $1,380 including GST for ongoing administration work for 10 months.

[52] In September 2011 Mr West filed his own application for directions in this proceeding. Mr Horton filed a notice that he would abide the decision of the court. Mr Horton has not isolated the costs for doing this. Mr West abandoned his application in April 2012. Apart from filing his notice of non-opposition Mr Horton did no other work on that aspect. It is not clear that Mr West would have filed his application if this proceeding had not already been started. He had little heart in it because he tried another tack by starting a fresh proceeding which did not involve the liquidator. I treat Mr Horton’s work on Mr West’s application, slight as it is, as related generally to Mr Horton’s own application and make no allowance for it.

[53] It is necessary to make an allowance for something Mr Horton did not do but which he ought to have done – resolve the remuneration issue at the outset. The allowance is required as a counter to my refusal to allow him the costs of the litigation. If Mr Horton had addressed the remuneration question with the Cowleys, he would have been put to extra work which I have not so far allowed for. His claim for unnecessary work on the litigation should be reduced to leave him with payment for what he should have done. His remuneration is to be adjusted to allow him to recover no more than what he would be paid if he had run matters efficiently.

[54] He would have explained to the Cowleys what his charge out rate was, what work he had done, why it was required for the liquidation and what expenses he had incurred. The Cowleys had signalled their willingness to pay Mr Horton’s reasonable remuneration. I assume that they would have taken issue with at least some parts of whatever Mr Horton might have claimed. While the Cowleys held the funds, Mr Horton did have some leverage. He could point to the court’s practice of allowing liquidators to recover their costs on obtaining orders to approve their remuneration. He had also done the homework for voidable transaction claims in case the Cowleys had second thoughts about paying him. In these circumstances the Cowleys’ lawyer is likely to have advised them not to allow the remuneration issue to go to court. It is more likely that the remuneration issue would have been resolved without the matter going to court. (On this point it is irrelevant that the Cowleys did apply in August 2011 to fix Mr Horton’s remuneration. They only did so because the matter was unresolved and Mr Horton had refused to discuss it.)

[55] Clearly any amount I allow for Mr Horton to resolve the remuneration question involves some guesswork because it is impossible to know exactly how the matter would have played out. I expect the matter to have taken some time – that is why I have allowed for the liquidation to run up to the end of 2010. Mr Horton is likely to have used his lawyer in the matter. Taking these matters into account I allow $7,500 including GST for fixing his remuneration. That sum includes any legal expenses incurred for that matter.

[56] There will be additional work to finish off the liquidation. To a certain extent I have allowed for that in the $1,380 for ongoing administration. But in the circumstances of this case there is likely to be further work. As an example, at my request Mr Horton came to the hearing on 3 December 2013 to help with some accounting aspects. In uncontested applications for retrospective approval of remuneration liquidators typically allow about $1,500 for the finishing off work. I allow that sum here. An alternative course would be to leave Mr Horton to complete the work and then submit a claim, but that is likely to be time-consuming and not cost effective. This liquidation has taken a long time. Finality is required.

[57] From the information provided by Mr Horton I am not able to see any other matters for which he ought to be paid for his remuneration and expenses on the liquidation. I summarise what I have allowed for Mr Horton’s remuneration and expenses:

Remuneration

Up to September 2009 $24,081.00

October 2009 to February 2010 $15,028.00

Mr West’s claim $1,711.20

Statutory demand $1,127.00

Customs $257.60

Ongoing administration $1,380.00

Resolving remuneration $7,500.00

Finishing off $1,500.00

Subtotal $52,584.80

Expenses

Legal - to September 2009 $8,602.50

Legal - October 2009 to February 2010 $26,502.13

Legal - statutory demand $500.00

Miscellaneous $17,049.17

Subtotal $52,653.80

_{Total $105,238.60}

Calculation of Mr West’s entitlement

[58] The assets to be distributed are the notional pool of $291,295 and the sum of

$25,499.95 for assets realised by Mr Horton. It is appropriate to make an adjustment to the notional pool on account of interest. That is because the Cowleys have had the use of their share of the pool in the meantime but Mr West has not. Adding interest will give Mr West an allowance for having been kept out of the money. I add interest for four years at 5% per annum: $58,259.

[59] Mr West is entitled to $10,187 as preferential creditor.³³ The calculation of his dividend as non-preferential creditor goes:

Pool

Assets realised $25,499.95

Interest retained by mortgagees $291,295.00

_{Adjustment for interest $58,259.00}

_{Available for distribution $375,053.95}

³³ See [4] above

Preferential creditors

Liquidator’s remuneration and expenses $105,238.60

Messrs Cowley and West $34,253.82

_{Subtotal $139,492.42}

Available for non-preferential creditors $235,561.53

Cowley share – 95.84% $225,762.17

West share – 4.16% $9,799.36

[60] The sum of Mr West’s entitlements as creditor is $19,986.36.

Top up by the Cowleys

[61] Mr Horton does not hold the funds to meet both his claim and Mr West’s. The Cowleys are required to top him up as they have received more than their entitlement. It was agreed in the hearing that Mr Horton would pay Mr West from the funds he had received. Subject to the matter of costs, the calculation of the top up

_is:

Amount required

Remuneration $105,238.60

West $19,986.36

Total $125,224.96

Less funds held

Assets realised $25,499.95

Payment from Cowleys’ lawyers $46,287.88

_{Subtotal $71,787.83}

_{Shortfall to be made up $53,437.13}

Costs

[62] As between Mr Horton and the Cowleys, the Cowleys have succeeded under r 14.2(a) of the High Court Rules. They have been vindicated in their initial basic position in late 2009, almost two years before the s 294 notices were served, that matters could be resolved by sorting out Mr Horton’s remuneration. They consistently maintained that position. As this decision demonstrates, they have

shown that it was not necessary to go into the mortgagees’ retention of interest because it could not benefit the only creditors. The final disposition of this matter does not require those matters to be addressed. Mr Horton’s s 294 notices and his later applications were not necessary. In Re Roslea Path Ltd the court awarded the creditors costs for their less successful challenge to the liquidators’ remuneration. One reason was to avoid creating a financial disincentive for a creditor or shareholder to raise reasonable arguments about the fairness of remuneration

charged.³⁴ That also applies here. The Cowleys are entitled to costs against

Mr Horton.

[63] Against that, Mr Horton asks me to take into account a Calderbank letter. His lawyer sent the letter in July 2012, shortly after the abortive hearing the month before. Mr Horton’s proposal was that Mr West should be paid $9,000 and he should be paid $51,700 including GST for his remuneration and $100,000 including GST for his legal expenses. That would be funded by $57,000 held for Mr West and

$103,750 to be paid by the Cowleys. The Cowleys did not accept the proposal.

[64] The typical Calderbank case is one where a defendant makes an offer without prejudice as to costs to a plaintiff with a view to limiting the defendant’s exposure to liability and costs. In this case Mr Horton is in the position of a plaintiff but made a proposal that he would accept a lesser sum in settlement. But that circumstance should not stand in the way of considering the merits of the offer. Such efforts to resolve proceedings without a hearing should not be discouraged. By analogy with r 14.11(3)(b), the inquiry is whether the Cowleys are better off under Mr Horton’s proposal than they are under this decision. The amount Mr Horton sought in settlement ($103,750) is nearly twice the top up amount the Cowleys are to pay under this decision ($53,437.13). The Calderbank offer should not alter the normal incidence of costs.

[65] Accordingly Mr Horton is to pay the Cowleys the costs on the proceeding. I invite the parties to confer as to costs. If they cannot agree, memoranda should be filed so that I can decide costs on the papers. The party filing second should do so

_{within five working days of the first party. The parties will need to take into account}

³⁴ Re Roslea Path Ltd at [245].

the costs order I made on 26 June 2012. Provisionally I indicate that category 2 is appropriate, but I am open to argument otherwise. The Cowleys will be entitled to deduct the costs from the top up amount to be paid to Mr Horton. There is a ceiling on any costs the Cowleys may seek – the amount of the top up payment.

[66] I do not make any order for costs for or against Mr West. The contest in this case was mainly between Mr Horton and the Cowleys. While Mr West supported Mr Horton, he was a secondary participant.

[67] Mr West has done better under this decision than if I had upheld Mr Horton’s claim for remuneration in its entirety. If Mr Horton had got all he had sought, the amount available for non-preferential creditors would be in the order of $28,000 (of which Mr West would receive 4.16%). Under this decision it is $235,561.53. It would not be right to award Mr West costs: he supported Mr Horton’s case. Admittedly he tried to get round the difficulty of Mr Horton’s remuneration by contending that that should fall entirely on the Cowleys, but that was a hopeless submission. When a party has put his efforts into opposing an outcome under which he has benefited, that is a good reason under r 14.7(g) of the High Court Rules for not awarding him costs.

[68] Nor would it be just to award costs against Mr West. As between Mr Horton and Mr West, Mr Horton carries primary responsibility for the conduct of their side of the case. I see no basis for Mr Horton to require Mr West to contribute to payment of costs.

Outcome

[69] This decision is intended to address all outstanding issues. Aside from any question as to costs, it should not be necessary for the parties to come back to court for further directions. It is important that this liquidation be wrapped up promptly. Once he has paid Mr West and received the top up payment less costs, it should be open to Mr Horton to file his final report and have the company struck off.

[70] One effect of this decision is that the orders I made in the interim judgment have become largely redundant. In particular in the present circumstances Mr West can be under no liability for judgment for backdated interest on his mortgage: his funds representing that interest have already been paid over to Mr Horton. The Cowleys’ liability under that judgment will be satisfied by them paying the top up to Mr Horton. They cannot be required to pay more.

[71] I make these orders:

(a) I fix Mr Horton’s remuneration and expenses at $105,238.60 (inclusive of GST);

(b) I order the Cowley interests, that is, Brian and Garth Cowley, as trustees of the Rentalength Trust, Brian Cowley in his own right, and Brian Cowley Surveying Limited, to pay Mr Horton $53,437.13 but they may deduct from the payment costs for this proceeding, either agreed or as fixed. Interest runs on the net amount to be paid at 5 per cent per annum from the date of this decision;

(c) I order Mr Horton to pay Mr West $19,986.36 for his claim in the liquidation;

(d) I declare that Mr West is under no liability for the judgment as to backdated interest in the interim judgment;

(e) I declare that the Cowleys will have satisfied any liability under the judgment for backdated interest upon their paying Mr Horton the sums ordered under (b) above;

(f) I reserve leave to apply for further orders, including as to costs.

...........................................

Associate Judge Bell