Liquidator s fees Issues that arise. holder. Presenter: James Nolen Principal of Lowndes Associates

Transcription

1 Liquidator s fees Issues that arise where there is a shortfall to the GSA holder Presenter: James Nolen Principal of Lowndes Associates

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3 Overview Companies Act 1993 Schedule 7 Secured creditor rights Accounts receivable and inventory Liquidator control of secured assets salvage work Voidable Dispositions Claims against Directors

4 Companies Act Schedule 7 S 278: expenses and remuneration of the Liquidator are payable out of the assets of the Company S 312: the Liquidator must pay out of the assets of the Company the expenses, fees and claims in the order of priorities specified in Schedule 7 Schedule 7: clause 1(1)(a) provides that the Liquidator must first pay: The fees and expenses properly incurred by the Liquidator in carrying out the duties and exercising the powers of the Liquidator, and the remuneration of the Liquidator S 312(2): Assets (of the Company) does not include assets subject to a charge unless the charge is surrendered or redeemed under s 305

5 Secured Creditors rights Scheme of Part 16 of the Act Secured Creditor will operate independently of the Liquidation : S 240: Creditor only includes a Secured Creditor for limited purposes S 248: Commencement of Liquidation does not effect a Secured Creditor s right to deal with charged assets S 253: Principal duty of Liquidator to realise and distribute the assets to (unsecured) Creditors S 254: Liquidator not required to act in relation to secured assets except in limited circumstances So, where there is a shortfall to the GSAholder, where can a Liquidator realise assets in priority to the charge holder?

6 Accounts receivable and inventory Special status afforded to accounts receivable and inventory Schedule 7, clause 2:... In so far as the assets of the company available for payment of [the preferential] claims are insufficient to meet them, [those claims] have priority over the claims of any person under a security interest to the extent that the security interest is over all or any part of either of them* and... Must be paid accordingly out of any accounts receivable or inventory subject to that security interest (or their proceeds) [* with limited exceptions]

7 Accounts receivable and inventory Continued The priority of payments from realisation by a receiver is as follows: Payment of receiver's reimbursements and expenses Claims of holders of perfected PMSIsand perfected transfers of accounts receivable for new value Preferential claims in order of priority specified in Schedule 7 The general security holder Where a receiver is appointed after a Liquidator: S 30 of the Receivership Act does not apply Priorities governed by Schedule 7 of the Companies Act 1993 Obligation on Liquidator

8 Accounts receivable and inventory How does this effect the Liquidator s ability to get paid? Whether a receiver is appointed or not, the general cost of liquidation will not be available to be repaid from the realisation of accounts receivable and inventory where there is a shortfall to the GSAholder Schedule 7, clause 2 (which provides for the special status of priority to accounts receivable and inventory) states: The claims listed in each of subclauses(2), (3), (4 )and (5) of clause 1... Liquidators fees and remuneration is provided for in subclause(1) so the only preferential creditors who have a priority to accounts receivable and inventory are: Employee claims Other statutory preferences Crown priorities

9 Accounts receivable and inventory Rationale - Buchler v Talbot Talbot was the receiver (and Appellant) of Leyland DafLimited appointed pursuant to a fixed and floating debenture in 1993 Talbot had paid out 8m to preferential creditors and 110min interim distributions to the Charge Holder A further 72m was held pending the outcome of litigation and there was going to be a shortfall to the Charge Holder Buchler appointed as Liquidator in 1996 and estimated unsecured creditors of 125m Buchler had recovered 1.5m but had incurred costs and expenses exceeding 10m Issue on appeal: whether the Liquidator s costs should be paid out of amounts realised by the charged assets in priority to the claims of the debenture holder

10 Accounts receivable and inventory Rationale - Buchler v Talbot The House of Lords found that the purpose of the amendments to the legislation was: To provide a secondary fund for the payment of preferential debts, not to relieve Liquidators by making new provision for the payment of the costs of winding up at the expense of the Holder of a floating charge

11 Accounts receivable and inventory Position in New Zealand PPSAremoved the concept of a floating charge As a result Schedule 7 of the Companies Act amended to its current form Priority over accounts receivable and inventory excludesthe cost of the liquidation Specific costs in indentifying and paying preferential creditors: -Buchler v Talbot: the specific costs of Liquidators should be paid from the realisation of accounts receivable and inventory

12 Taking control of secured assets - salvage work Section 305 Rights and duties of secured creditor S 305(1): A secured creditor may: Realise property subject to a charge, if entitled to do so; or Value the property and claim as an unsecured creditor for any shortfall; or Surrender the charge to the liquidator and claim as an unsecured crediotrfor the whole of the debt.

13 Taking control of secured assets salvage work It has long been recognised that where someone has been properly appointed does salvage work which benefits those with prior claim on the assets in respect of which the work is done, then the salvor has priority for the reasonable cost and expenses incurred in doing the necessary work A Liquidator must ensure that he or she is properly appointed to undertake the salvage work. It appears salvage costs will only be claimable from a Liquidator where: the Liquidator acts with proper authority the work is necessary the work results in an indisputable benefit to the Secured Creditor Buchlerv Talbot also confirmed that the costs in preserving an asset are also claimable salvage costs

14 Taking control of secured assets Section 305 Section 305(8): The liquidator may at any time, by notice in writing, require a secured creditor, within 20 working days after receipt of the notice to elect which of the powers referred to in subsection (1) [realise, value, or surrender the charge] the creditor wishes to exercise. Section 305(9): A secured creditor who fails to comply with the notice is taken to have surrendered the charge to the liquidator for the general benefit of creditors and may claim in the liquidation as an unsecured creditor. If surrendered, secured creditor can only rely on the charge with leave of the Court.

15 Voidable Transactions Companies Act does not expressly state which parties should receive the benefit of preferential recoveries. Generally accepted that recoveries from voidable transaction should be for the benefit of creditors generally because: Power to pursue voidable transactions only afforded to a Liquidator Distinct from claims brought in the name of the company Was not a right that existed to the secured creditor pre-liquidation The right to recovery only exists as a result of the liquidation

16 Voidable Transactions Re Yagerphone[1935] 1 Ch 392

17 Voidable Transactions Re Yagerphone[1935] 1 Ch 392 Liquidator appointed after Receiver Liquidator recovered 240 from a voidable transaction Receiver argued the recovery should be paid to debenture holder Court found in favour of Liquidator: When payment made by Yagerphone, funds ceased to be property of the company and so the security did not attach The right to recover preferences is a statutory right given to the Liquidator for the general body of creditors.

18 Voidable Transactions Current position in NZ Courts have followed Re Yagerphonebut with some criticism of the first reason given. Preferred the rationale that the money paid out by the company was different from that recovered by the Liquidator. Effect of PPSA?

19 Voidable Transactions Procedure Section 294 requirements include: describe the property orstate the amount the liquidator wishes to recover Section 295 Orders includes: An order that a person pay to the company an amount that, in the Court s opinion, fairly represents some or all of the benefits that the person has received because of the transaction

20 Voidable Transactions Other Voidable Dispositions Only a Liquidator can bring the claims for any of the voidable dispositions: Transactions at undervalue (s 297) Transactions for inadequate or excessive consideration (s 298) Setting aside certain securities (s 299) Liability for improper accounting records (s 300)

21 Claims against Directors S 301 Power for Court to require persons to repay money or return property If, in the course of the liquidation of the Company it appears to the court that a person who has taken part in the formation or promotion of the Company, or a past or present Director, manager, administrator, liquidator, or receiver of the Company, has misapplied or retained, or become liable or accountable for money or property of the Company, or being guilty of negligence, default or breach of duty or trust in relation to the Company, the court may, on the application of the liquidator, creditor or shareholder,... (a) inquire into the conduct of the person and (b) order that person... to contribute such sum to the assets of the Company by way of compensation as the court thinks fit

22 Claims against Directors Reckless trading claims under s 135 and 136 A GSAholder facing a shortfall will have priority to any recovery under s 301: S 169(3): duties are owed to the Company Therefore, the cause of action belongs to the Company Is an asset of the Company subject to the GSA This is a change from the position under the 1955 Act and the position in the UK where only a liquidator can bring a wrongful trading claim

23 Claims against Directors Reckless trading claims under s 135 and 136 Practical Implications Value of claim vsvalue of shortfall to GSAholder Quantification of loss -Mason v Lewis [2006] 3 NZLR225 at [109]: The standard approach has been to begin by looking to the deterioration in the company s financial position between the date inadequate corporate governance became evident (really the breach date) and the date of liquidation. Costs of salvage work should be available to Liquidator

24 Claims against Directors Reckless trading claims under s 135 and 136 Delegat& Anorv Norman

25 Claims against Directors Reckless trading claims under s 135 and 136 Delegat& Boat 93 v Norman Salthouse Marine Ltd built luxury yachts Subsidiary incorporated to build each yacht Delegatlast purchaser before Receivership had paid $1.2mtowards build of a $4.5m yacht Norman one of two directors Plaintiffs alleged Norman breached a number of duties including s 135 & 136 as director of SMLand a defactoor shadow director of Boat 93. Norman also secured financier who had invested $4m.

26 Conclusion Where there is a shortfall to a GSAholder: Schedule 7 provides for Liquidators to be paid from the free assets only Accounts receivable and inventory will not assist in payment of liquidator s fees Liquidator is entitled to be paid for salvage work which benefits the GSAholder Recoveries from voidable transactions will be available for payment of Liquidators Fees (except potentially where specific property is returned) Recoveries from claims against directors will need to be paid in priority to the GSA holder but the Liquidator should be entitled to costs.