The Court of Appeal has overturned a High Court decision that discounted a liquidator’s remuneration by over 70 per cent. In Toon v Quinn [2021] NZCA 696, the Court of Appeal confirmed that, while liquidators’ remuneration will be scrutinised, liquidators are able to rely on legal advice and will be given some leeway to investigate courses of action. The Court also warned that care must be taken when assessing liquidators’ actions with the benefit of hindsight.

Background

Victoria Toon was appointed as liquidator of Investacorp Holdings Limited. Ms Toon provided an estimate for her fees of NZ$5,000 to NZ$7,000. She ultimately claimed NZ$101,729 plus GST and expenses. Ms Toon sought approval by the High Court of her fees and costs. One of the shareholders claimed that Ms Toon had breached her professional duties to the company. The main point of controversy was Ms Toon’s investigation of complaints from another shareholder.

The High Court criticised Ms Toon for spending time on unnecessary work

The High Court was extremely critical of Ms Toon. Associate Judge Bell held that Ms Toon breached her duties to collect and distribute the company’s assets reasonably and efficiently. He fixed remuneration at NZ$28,000 plus GST and some expenses.

The Judge concluded that Ms Toon spent time on unnecessary work–namely investigating complaints that were the subject of a settlement agreement. His Honour considered that Ms Toon had taken a “wrong turn” early in the liquidation by investigating the complaints, and this investigation led to the pursuit of fruitless claims, increased correspondence, and other unnecessary actions. The result was delays and increased costs, which did not give value to the shareholders. Ms Toon appealed the High Court decision.

The Court of Appeal concluded the High Court erred in its approach

Ms Toon was completely vindicated in the Court of Appeal, which allowed her appeal and approved remuneration of NZ$101,729 plus expenses, together with costs in both courts.

The Court of Appeal concluded that the High Court had erred in undertaking an extensive legal analysis of the effect of the settlement agreement. The High Court was not required to do this, rather it was required to determine whether the steps the liquidator had taken were those that a reasonably competent liquidator would have taken. Expert evidence suggested a reasonably competent liquidator would have taken legal advice, which Ms Toon did.

It was reasonable for Toon to act on the advice she received and investigate the complaints until she had sufficient information to satisfy herself that it would not be cost effective to pursue claims. Although there was a short delay (six weeks) in Ms Toon reaching her conclusion on the complaints, the Court of Appeal decided that did not materially add to the cost of the liquidation. Contrary to the High Court’s conclusion, Ms Toon did not take a “wrong turn” at the outset of the liquidation.

The Court of Appeal warned that care must be taken to ensure that what is learned from the eventual outcome of an investigation does not affect the assessment of the liquidator’s actions. The High Court wrongly assessed Ms Toon’s conduct with the benefit of hindsight and, as a result, came to unwarranted conclusions.

Takeaways for liquidators

The Court of Appeal’s decision should offer liquidators some relief. While liquidators’ actions and remuneration will always be scrutinised by courts, liquidators will be given some leeway to investigate courses of action.

Our key takeaways from the Court of Appeal decision are:

• In assessing a liquidator’s compensation, the Court must consider whether the steps taken by the liquidator were steps that a reasonably competent liquidator would have taken. 
• The Court must take care when assessing a liquidator’s actions with the benefit of hindsight.  The Court should consider what was known or ought to be known to the liquidator at the time.  
• A liquidator will be given some leeway to investigate courses of action in order to determine whether they ought to be pursued.
• It is important for a liquidator to regularly re-evaluate any course of action and consider whether she or he should continue pursuing that course of action.  We recommend that liquidators keep records of their decision-making and a close eye on costs.
• A liquidator should seek legal advice at an early stage on issues that arise in the course of the liquidation.