26/11/2014

The NSW Supreme Court case highlights the problem of liquidators taking the lion's share of the assets of the company just to handle the liquidation, leaving precious little for the people who are supposed to benefit from the liquidation – the company's creditors.

In a case called In the matter of On Q Group Limited (In Liquidation) (Subject to Deed of Company Arrangement) [2014] an application was made pursuant to s482(1A)(c) of the Corporations Act that the winding up of the company be terminated.

The liquidators recovered $726,687 in circumstances where there were priority creditors of $111,371 and unsecured creditors of $76,161,112. There was no dividend issued to creditors at the date of the application to terminate the winding up and all of the receipts were expended mostly on the liquidators’ remuneration and legal costs.

Justice Brereton was concerned that the explanation to the creditors of the effect of the deed of company arrangement was inadequate and did not convey the illusory nature of the apparent benefit to ordinary unsecured creditors.

Justice Brereton also noted that the administrator accepted without examination or further scrutiny the situation presented by the liquidators where the receipts of the liquidation, in excess of $725,000 was consumed entirely by their remuneration and expenses. There was $441,008 spent on the liquidators remuneration, $159,258 spent on legal costs and disbursements, $55,457 spent on printing, stationery and postage, $55,832 on "sundry expense" and $29,243 on GST. The balance of the recovered funds was spent on miscellaneous expense of the liquidation.

The Court found it disturbing that the practical effect of the liquidation was to recover funds in excess of $725,000 of assets and transfer it to the liquidators, their agents and advisors while the parties for whose benefit the liquidation was conducted received no benefit at all.

There was also the question of proportionality on the expenditure of the remuneration as even if every dollar could be supported as being on the basis of time spent at usual rates it would be difficult to justify that remuneration in all of the circumstances.

Justice Brereton was concerned that to order a review of the liquidators costs would incur further costs and as there was doubt as to whether the creditors would embark on or fund an application to review the liquidator's remuneration the matter was adjourned to enable proper disclosure to be made in accordance with the Corporations Act to the creditors of the Deed of Company Arrangement.

The matter was finally settled on the basis that money was raised to pay the creditors. But the end result is hardly satisfactory.

It is a major failing of our commercial system that the creditors of companies that fail often get only a small fraction of the amount owed, not so much because the company has no money but because whatever assets it has are used to pay the liquidators.  When creditors can’t recover their money by lawful means they only have the option to use unlawful means and our system should not promote that.

For more information regarding this article, please call Philippa Clingan at Townsends Business & Corporate Lawyers on (02) 8296 6222.