The Court of Appeal overturned a High Court decision which had reduced a liquidator’s pay by more than 70%. In Toon vs. Quinn  NZCA 696, the Court of Appeal confirmed that while liquidators’ compensation will be reviewed, liquidators can rely on legal advice and will have some leeway to investigate courses of action. The Court also cautioned that care should be taken when evaluating the actions of liquidators with the benefit of hindsight.
Victoria Toon has been appointed liquidator of Investacorp Holdings Limited. Ms Toon provided an estimate of her fees of NZ$5,000-7,000. She ultimately claimed NZ$101,729 plus GST and expenses. Ms Toon has sought High Court approval of her fees and costs. One of the shareholders claimed that Ms Toon had breached her professional obligations to the company. The main point of contention was Ms Toon’s investigation into another shareholder’s complaints.
The High Court slammed Ms Toon for spending time on unnecessary work
The High Court has been extremely critical of Ms Toon. Associate Judge Bell found that Ms. Toon had failed in her duties to collect and distribute the company’s assets in a reasonable and efficient manner. He set the remuneration at NZ$28,000 plus GST and certain expenses.
The judge found that Ms. Toon was spending time on unnecessary work, namely investigating complaints that were the subject of a settlement agreement. His Honor felt that Ms Toon took a ‘wrong turn’ at the start of the liquidation by investigating the complaints, and this investigation led to the pursuit of unsuccessful claims, an increase in correspondence and other unnecessary actions . This resulted in delays and increased costs, which did not deliver shareholder value. Ms Toon appealed the High Court’s decision.
The Court of Appeal found that the High Court erred in its approach
Ms Toon was fully exonerated in the Court of Appeal, which allowed her appeal and approved compensation of NZ$101,729 plus costs, as well as costs in both courts.
The Court of Appeal found that the High Court erred in carrying out a thorough legal analysis of the effect of the settlement agreement. The High Court was not required to do so, but rather to determine whether the actions taken by the liquidator were those which a reasonably competent liquidator would have taken. Expert testimony suggested that a reasonably competent liquidator would have taken legal advice, which Ms Toon did.
It was reasonable for Toon to act on the advice it received and to investigate the complaints until it had sufficient information to satisfy itself that it would not be cost effective to prosecute the complaints. complaints. Although there was a short delay (six weeks) before Ms Toon reached her conclusion on the complaints, the Court of Appeal decided that this did not significantly increase the cost of liquidation. Contrary to the High Court’s finding, Ms Toon did not take a ‘wrong turn’ at the start of the liquidation.
The Court of Appeal warned that care should be taken that the lessons learned from the possible outcome of an investigation do not affect the assessment of the actions of the liquidator. The High Court wrongly assessed Ms Toon’s conduct in hindsight and therefore reached unjustified conclusions.
Takeaways for liquidators
The Court of Appeal’s decision should offer some relief to liquidators. While the actions and compensation of liquidators will always be controlled by the courts, liquidators will have some leeway to investigate avenues of action.
Here are our key findings from the Court of Appeal’s decision:
- When assessing a liquidator’s compensation, the Court must consider whether the actions taken by the liquidator were actions that a reasonably competent liquidator would have taken.
- The court must be careful when assessing the actions of a liquidator with hindsight. The court must take into account what the liquidator knew or should know at the time.
- A liquidator will have some leeway to investigate courses of action to determine if they should be pursued.
- It is important for a liquidator to regularly reassess any course of action and determine whether to continue to follow that course of action. We recommend that liquidators keep records of their decision-making and monitor costs closely.
- A liquidator should seek legal advice at an early stage on issues that arise during the liquidation.