Supreme Court New South Wales

• Medium Neutral Citation: In the matter of AAA Financial Intelligence Ltd (in liquidation) ACN 093 616 445 [2014] NSWSC 1004
• Hearing dates: 21 July 2014
• Decision date: 25 July 2014
• Jurisdiction: Equity Division - Corporations List
• Before: Brereton J

Decision

Directions for notice to persons interested

• Catchwords: CORPORATIONS - External administration - winding up - liquidator's applications - application for directions - liquidator's remuneration - entitlement to remuneration out of assets held by company on trust - fixing remuneration
• Legislation Cited: (CTH) Corporations Act 2001, s 436A, s 439C, s 473, s 511; (NSW) Trustee Act 1925, s 60, s 63; (SA) Trustee Act 1936, s 29
• Cases Cited: 13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (in liq) (1999) 30 ACSR 377; Alphena Pty Ltd (in liq) v PS Securities Pty Ltd atf Joseph Family Trust [2013] NSWSC 447; (2013) 94 ACSR 160; Australian Securities and Investments Commission v Rowena Nominees Pty Ltd (in liq) [2006] WASC 36; (2006) 56 ACSR 673; Bastion v Gideon Investments Pty Ltd (in liq) (2000) 35 ACSR 466; Berkeley Applegate (Investment Consultants) Ltd; Harris v Conway [1989] Ch 32; Grime Carter & Co Pty Limited v Whytes Furniture (Dubbo) Pty Limited [1983] 1 NSWLR 158; In re MF Global Australia Ltd (in liq) (No 2) [2012] NSWSC 1426; In the matter of North Food Catering Pty Ltd [2014] NSWSC 77; Re Anderson Group Pty Ltd [2002] NSWSC 764; (2002) 20 ACLC 1607; Re Application of Sutherland [2004] NSWSC 798; (2004) 50 ACSR 297; Re French Caledonia Travel Service Pty Ltd (in liq) [2003] NSWSC 1008; (2003) 59 NSWLR 361; 48 ACSR 97; Re GB Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674; Re Greater West Insurance Brokers Pty Ltd [2001] NSWSC 825; (2001) 39 ACSR 301; Re Suco Gold Pty Limited (1993) 33 SASR 99; 7 ACLR 873; Re Sutherland; Re French Caledonia Travel Service Pty Ltd (in liq) [2003] NSWSC 1008; (2003) 59 NSWLR 361; 48 ACSR 97; Re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171; Re Wm Rose & Co Ltd (1897) 3 ALR (CN) 65; Trio Capital Ltd (Admin App) v ACT Superannuation Management Pty Ltd [2010] NSWSC 941; (2010) 79 ACSR 425
• Category: Interlocutory applications
• Parties: Bradley John Tonks and John Vouris in their capacity as liquidators of AAA Financial Intelligence Ltd (plaintiffs)
• Representation: Counsel: D.L. Cook (plaintiffs); Solicitors: Norton Rose Fulbright Australia (plaintiffs)
• File Number(s): 2014/200292

Judgment

1 The plaintiffs Bradley John Tonks and John Vouris are the liquidators of AAA Financial Intelligence Ltd in a creditors' voluntary winding up consequent upon a resolution of creditors on 19 March 2013 under (CTH) Corporations Act 2001, s 439C(c), that the company be wound up, having previously on 13 February 2013 been appointed under s 436A as voluntary administrators.

2 The company was a financial services licensee and its business involved the provision to clients of financial products and services. It had Authorised Representative Agreements with approximately 162 representatives who sold products and services on behalf of the company utilising the company's license, 152 of them as Advisers and ten as Stockbrokers.

3 Under the terms of the Adviser Agreements, the Advisers utilised the company's licence to sell financial products to clients, and commissions received by the company (as principal) from the product providers were received by it on trust for the Advisers, to be remitted to them on certain terms, subject to payment to the company by the Advisers of clawback of commissions paid in respect of products that were subsequently terminated early, and certain agreed charges payable by the advisers. The company had an agreement with Acompli Commissions Pty Ltd, by which it outsourced to Acompli the collection of commission from product providers and the payment of remittances to Advisers. The stockbrokers' agreements were in practically identical terms, but collection and payment of their commissions was not outsourced.

4 The liquidators identified seven bank accounts operated by the company. Three of them ("Commission Accounts") were used to receive and distribute commissions to Advisers and amounted in all to about $104,000: see paragraph 2.6.3(h) of the report to Creditors of 11 March 2013. One, a general business account, included $7,427 identifiable as moneys received in respect of commissions payable to Stockbrokers. These funds have been segregated from the general liquidation of the company and treated as trust assets, and the Advisers and Stockbrokers have been treated as trust creditors and not as unsecured creditors of the company.

5 In addition, the liquidators took steps to recover clawback and other charges payable by those Advisers who were indebted to the company. It is unclear to what extent this was successful. The Report to Creditors estimated that about $390,000 was owing in this respect to the Company (see para 2.6.3(h)). As the liquidators ultimately received a total of $180,000 from the Commission Accounts and recoveries, it may be inferred that recoveries amounted to some $76,000 (although some of that amount may represent not recoveries but receipt of further commission payments from product providers).

6 The liquidators incurred and paid debt collection and legal expenses of in the order of $30,000 to achieve that result. They also incurred and paid a further $30,000 in legal costs associated with advice about the trust assets, and commission management fees payable to Acompli. They retain approximately $120,000 in trust assets.

7 On 28 June 2013, the liquidators gave notice to the Advisers under (NSW) Trustee Act 1925, s 60, and (SA) Trustee Act 1936, s 29, and as a result identified total Adviser claims of $623,572. The notice did not indicate the amount proposed to be admitted in respect of each Adviser, nor that only a dividend would be paid. (That is not to suggest that it ought to have done so, but it is relevant to the state of knowledge and notice of the beneficiaries). The remaining Adviser trust funds of $120,000 are manifestly insufficient to satisfy those claims in full.

8 Similarly, on 25 September 2013, the liquidators gave notice to the Stockbrokers under (NSW) Trustee Act 1925, s 60 and (SA) Trustee Act 1936, s 29. In this case the notice did specify the amounts proposed to be admitted. As a result, total Stockbroker claims of $8,108 were identified, which with one exception correspond with specific deposits identified by the liquidators; the Court was informed that they propose to reject the claim of Mr Cole, which does not so correspond.

9 The court was informed, but there is no evidence, that apart from the Adviser and Stockbroker Funds there are no assets of significance. In the light of the Report to Creditors, which indicates that the company had or may have had non-trust assets of up to $482,966 (para 4.0, Scenario 2), and which predicted a potential dividend to non-trust creditors of up to 36 cents in the dollar, this is somewhat surprising and requires further clarification and explanation.

10 By originating process filed on 7 July 2014, the liquidators seek directions pursuant to the Corporations Act, s 511, and advice pursuant to (NSW) Trustee Act, s 63, to the effect that they would be justified in applying the Adviser trust funds and Stockbroker trust funds in the following order and priority (1) in payment of their reasonable costs and expenses associated with these proceedings, (2) in payment of their remuneration and expenses as approved by the Court, (3) in payment of any further remuneration and expenses that the Court might subsequently approve, (4) pari passu among the admitted Adviser and Stockbroker claims, and (5) to the liquidators as an asset of the company.

11 As to (1), the liquidators estimate that they will incur $36,500 costs and $18,000 disbursements in connection with the present application, a total of $54,500. As to (2), the liquidators claim remuneration of $58,487 plus GST said to be attributable to identifying and collecting the Adviser Funds and the Stockbroker Funds. Together, these amount to $118,836, which will practically exhaust the remaining trust funds of about $120,000. Accordingly, there would be practically nothing distributable under (4), and nothing under (5).

12 The directions sought raise three issues (1) whether in principle the liquidators should be permitted to recover their remuneration and expenses from the trust assets; (2) whether in principle the residue of the trust assets after payment of such remuneration as might be approved should be on a pari passu basis; and (3) the quantum of the remuneration and expenses claimed. In addition, there is the question whether the directions and advice sought should be given without notice to those who will be affected, namely the Advisers and Stockholders.

13 As to the first, the applicable principles may be stated as follows:

(1) Where the company is trustee of a trading trust and has no other activities, the liquidators are entitled to be paid their costs and expenses, whether for administering the trust assets or for "general liquidation work", out of the trust assets [Re Suco Gold Pty Limited (1993) 33 SASR 99; 7 ACLR 873; Grime Carter & Co Pty Limited v Whytes Furniture (Dubbo) Pty Limited [1983] 1 NSWLR 158; Re Sutherland; Re French Caledonia Travel Service Pty Ltd (in liq) [2003] NSWSC 1008; (2003) 59 NSWLR 361; 48 ACSR 97, [201]; Bastion v Gideon Investments Pty Ltd (in liq) (2000) 35 ACSR 466, 480 [70]; In the matter of North Food Catering Pty Ltd [2014] NSWSC 77].

(2) Where the company does not act solely as trustee, costs and expenses referable to work done in relation to trust assets which may nonetheless be considered as having been done for the purpose of winding up the company ought ordinarily be borne primarily by the (non-trust) property of the company, to the extent that the assets permit [Re GB Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674, 685-689; Re Greater West Insurance Brokers Pty Ltd [2001] NSWSC 825; (2001) 39 ACSR 301; French Caledonia, [209]].

(3) At least where the non-trust assets do not permit that course, and perhaps even when they do, a liquidator is entitled to be indemnified out of trust assets for his costs and expenses, but only to the extent that they are referable to administering the trust assets [13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (in liq) (1999) 30 ACSR 377, 385; French Caledonia, [211], [213]. This is pursuant to the court's equitable jurisdiction to allow a trustee remuneration costs and expenses out of trust assets, which extends to a person such as a liquidator who is, for practical purposes, controlling a trustee [Berkeley Applegate (Investment Consultants) Ltd; Harris v Conway [1989] Ch 32, 50-51; Re Application of Sutherland [2004] NSWSC 798; (2004) 50 ACSR 297; Trio Capital Ltd (Admin App) v ACT Superannuation Management Pty Ltd [2010] NSWSC 941; (2010) 79 ACSR 425; In re MF Global Australia Ltd (in liq) (No 2) [2012] NSWSC 1426, [55]; Alphena Pty Ltd (in liq) v PS Securities Pty Ltd atf Joseph Family Trust [2013] NSWSC 447; (2013) 94 ACSR 160].

(4) In principle, where the liquidator does work which would entitle him both to remuneration as liquidator by the company, and recovery from the trust assets, there are two funds liable and there should be contribution between them. However, where there are no assets of the company available, it is unnecessary to consider the question of contribution. If a liquidator has done work which is attributable equally to the winding up of the company and the administration of trust assets, and there are no assets of the company at all to meet his expenses in doing so, the expenses are payable solely from the trust assets [French Caledonia, [212]].

(5) Where the liquidator is administering, through the company of which he/she is liquidator, more than one trust, the liquidator is not entitled to charge the beneficiaries of one trust with the costs and expenses incurred in relation to the other, although where allocation is not possible a pari passu allocation may be permitted [Re Suco Gold, ACLR 882-3; 13 Coromandel, 386].

14 In this case, the company did not act solely as a trustee. Prima facie, costs and expenses of the winding up should be borne by its non-trust assets. However, it appears that it has none (although this remains to be proven). Subject to that, the liquidators are entitled to their reasonable and proper costs and expenses from the trust assets, but only in respect of such work as is referable to administration of the trust assets. That result accords with the direction and advice the liquidators seek.

15 As to the second issue, in Re Sutherland; French Caledonia Travel Service Pty Ltd, the company operated a business as a travel agent and maintained a trust account into which it deposited moneys paid to it by travellers in respect of services yet to be received, and paid moneys to service providers from that account. Adequate records of transactions on the account were not maintained and the moneys became mixed. When the company went into liquidation, the moneys remaining in the trust account were insufficient to satisfy the claims on them. In a judgment which comprehensively reviewed the issues and authorities, Campbell J (as he then was) held that where the balance remaining in a bank account containing funds held on more than one trust is insufficient to satisfy the claims of the beneficiaries, the rule in Clayton's Case ought not apply as a matter of principle to allocate the balance amongst the beneficiaries (at [61]-[65], [83]-[86], [127], [151]-[154], [156]-[158], [169]), and alternatively ought not be applied to the facts of the instant case because the presumed intention was that the money deposited by a traveller would be applied to that traveller's expenses, regardless of the order in which it was paid in (at [170]-[172]), and the liquidator would be justified in distributing the balance amongst all the beneficiaries proportionately to their claims as assessed by him (at [193]).

16 The present case is closely analogous and in my judgment the same result should follow. The liquidators would be justified in distributing the remaining balance pari passu amongst the Advisers and Stockbrokers according to their claims as assessed by the liquidators.

17 As to the third issue, the claim for costs and expenses comprises three components: (1) expenses already incurred and paid in respect of the administration of trust assets ($60,000 approximately); (2) costs and expenses of this application (estimated at $54,500); and (3) remuneration for such of the liquidators' work as is referable to administration of the trust assets ($64,000 approximately).

18 In allowing remuneration to a liquidator in these circumstances, the Court treats the work done in administering the trust as an incident of the liquidation and approaches the application for remuneration as if it were one by an official liquidator for approval of remuneration [Alphena v PS Securities, [53], [63]-[64]]. In that context, a liquidator's entitlement is to "reasonable remuneration" for his or her services in winding up the company [Re Wm Rose & Co Ltd (1897) 3 ALR (CN) 65, 66], and the court has a very wide discretion in allowing and fixing the level and the basis of remuneration [Re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171]. There is no longer any scale, but the court has regard to the factors listed in Corporations Act, s 473(10). The remuneration may be fixed as a percentage of the company's assets realised, a percentage of its assets distributed, or a combination of the two; or as a fee calculated by reference to the time spent. The liquidator bears the onus of establishing that the remuneration claimed is fair and reasonable, including that the work was properly performed in the due course of administration and that the amount claimed is a fair and reasonable reward for it [Re Anderson Group Pty Ltd [2002] NSWSC 764; (2002) 20 ACLC 1607]. While liquidators should not be discouraged from taking on difficult liquidations, they must not take steps in a liquidation without considering the likely benefits to creditors; and liquidators should be rewarded for value, rather than indemnified against costs, although this does not mean that they should only be remunerated if they add value to the company's assets [Australian Securities and Investments Commission v Rowena Nominees Pty Ltd (in liq) [2006] WASC 36; (2006) 56 ACSR 673, [10]-[11], [13], [33]-[34]].

19 Although I am not presently engaged in the determination of the liquidators' remuneration, I have referred to the above principles because they illustrate that it simply does not follow that the liquidators will be allowed remuneration at their firm's standard hourly rates for time spent. Questions of proportionality, value and risk loom large. Here, the essential question is whether the work done, expenses incurred and rates charged were proper and reasonable, having regard to the size of the trust fund and the return gained.

20 The liquidators have calculated their remuneration at their firm's standard rates, subject to a cap of $80,000 plus GST, as was approved by the general unsecured creditors at the meeting that appointed them. They have apportioned their work and remuneration claimed for it between work referable to the administration of the trust assets, and general liquidation work, and the present claim concerns only the former. However, as that claim is not against the company's assets but against the trust moneys, and the Advisers/Stockbrokers have (appropriately) not been treated as ordinary creditors, the approval of the general unsecured creditors is of little significance; there is no approval from the beneficiaries whose interest in the trust assets will bear the burden.

21 The following observations are made without the benefit of evidence, which the liquidators might be able to adduce, and before hearing submissions on the matters they raise, and might well prove to be unfounded. However, prima facie, provision of $54,500 for the costs and expenses of the present application, which involves an originating process, an affidavit of 12 pages (plus exhibit), and an hour or so in court, seems generous. Expenses of $60,000 to date for administering the trust assets, plus remuneration of $63,000, seems disproportionate to trust funds of $180,000, of which $104,000 was already in the company's bank accounts when the liquidators were appointed, of which only $120,000 now remains, and of which none will remain available for distribution should remuneration be approved as sought. On the current state of the evidence, it seems to me that questions arise as to the reasonableness of the remuneration and expenses claimed, particularly having regard to the value and nature of the property dealt with, and the circumstance that the liquidators' endeavours appear to have resulted in a net diminution rather than enhancement of the trust funds.

22 I am conscious that further proceedings are liable to reduce even further such amount if any as may be available for distribution, and for that reason the determination of costs and remuneration should take place in a summary way. Thus it seems to me that the Court might well fix the costs of this application, and the liquidators' remuneration and allowable expenses, in a summary way, without reference to an assessor (in the case of costs) or a registrar (in the case of remuneration), and potentially at amounts very considerably reduced from those claimed, on account of the matters to which I have referred.

23 However, the liquidators must be afforded an opportunity to address those matters and to supplement their evidence, if they wish. Moreover, the Advisers/Stockbrokers have a real and substantial interest in the outcome, and the interests of economy and expediency do not authorise their being deprived of an opportunity to be heard, on the first two issues if they wish (although it may be that there is little to be said in respect of them), as well as on the quantum of remuneration. The s 60 notices they have been given required them to notify and prove their claims, but not that they are likely to receive practically nothing as the funds will be almost entirely eroded by costs and expenses of the liquidators. Notice of the application must be given to them to afford them an opportunity to be heard.

24 Subject to any contrary arguments that may be presented after notice has been given, I am inclined to give directions authorising application of the funds first in payment of liquidators' costs expenses and remuneration and then in distribution to claimants pari passu, but I am very concerned at the quantum of remuneration costs and expenses claimed, and that it may totally erode the available funds so that there is nothing available for distribution to claimants, and I am minded summarily to assess the recoverable costs and fix remuneration, not necessarily on the basis claimed. Before advice is given and remuneration fixed, the liquidators should be afforded an opportunity to supplement their evidence, and the beneficiaries should be afforded an opportunity to be heard.

25 The Court orders that:

(1) The proceedings be adjourned to 1 September 2014.

(2) The plaintiffs by 15 August 2014 give notice of the Application by posting or emailing a circular that complies with the Schedule and is approved by the Court to each Adviser/Stockbroker who is known to the plaintiffs to have a claim against the trust funds.

(3) The plaintiffs by 15 August 2014 post on their website a copy of the Originating Process, supporting affidavit and exhibit, these reasons for judgment, and the further evidence referred to below.

(4) The plaintiffs by 15 August 2014 file any further evidence on which they propose to rely, including:

(a) the status of the liquidation, and in particular what assets have been realised, including any report to creditors since March 2013;

(b) particulars of the amounts that the liquidators have recovered for the trust funds by way of clawback, adviser debt and otherwise;

(c) particulars of the costs incurred by the liquidators in the recovery and attempted recovery of trust funds, and the matters and work in respect of which those costs have been incurred;

(d) particulars of the work done by the liquidators in administering the trust assets, including the nature of the work and the time spent;

(e) a statement of receipts and expenditure for the trust funds.

(5) The plaintiffs consult with such Advisers/Stockbrokers who may respond to the Circular in order to facilitate the appointment of a representative defendant for the purposes of these proceedings if so desired by Advisers/Stockbrokers.

SCHEDULE

The Circular is to include:

1 an explanatory statement including a summary of:

a. the essential relevant factual background to the application;

b. the directions sought, their legal and practical effect (including on the entitlements of the Advisers/Stockbrokers), and the reasons for which the liquidators contend they should be made;

c. the basis and quantum of the liquidators' claim for remuneration, costs and expenses;

d. the reasons why the directions sought may not be in the interests of the Advisers/Stockbrokers; and

e. a summary of the conclusion of this judgment to the effect that, subject to any contrary arguments that may be presented, the Court is inclined to give directions authorising application of the funds first in payment of liquidators' costs expenses and remuneration and then in distribution to beneficiary claimants pari passu, but is concerned at the quantum of remuneration costs and expenses claimed and that it may totally erode the available funds so that there is nothing available for distribution to claimants, and is minded summarily to assess the costs of the application and determine the liquidators' remuneration costs and expenses.

2 Notice:

a. of the adjourned date time and place for the hearing of the application;

b. that If the directions are unopposed, the Court may make the directions sought;

c. that claimants who wish to oppose the directions may be joined as defendants, or heard in the proceedings without being formally joined;

d. that the application, the material in support and this judgment are available at the liquidators' website, and the internet address of that website and directions as to how to locate the relevant documents on it;

e. of the point of contact in the liquidators' office for further information and for notification if a claimant wishes to oppose the directions sought.

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Decision last updated: 25 July 2014