Creditors of a hydroponics company will be paid more than $56,000 after liquidators charged fees which the High Court deemed were “not reasonably incurred” and hard to justify.
One of the court-appointed liquidators, Damien Grant, who is well-known in his industry and frequently writes media commentary, told the Herald: “We probably went too far down some judicial rabbit holes … and the court pulled us up on that; which is their role.”
The case centred around Quantum Grow Limited (Quantum), which was placed in liquidation in 2012 and Grant and Steven Khov of Waterstone Insolvency were appointed liquidators.
Grant, who 12 months ago won a court battle to have his insolvency licence reconsidered after it was initially rejected because of his criminal history (he served prison time for fraud and credit card offences), applied for approval of their fees in July last year.
An associate High Court judge said of the Quantum case: “Given the large sum claimed, the extensive litigation undertaken and the lack of recovery for the creditors this is not a straightforward application.”
Khov resigned as a liquidator in 2018 when he left Waterstone and was not involved in the application and was not a liquidator on record at the time. He did not wish to comment when approached by the Herald.
Last month, another associate judge ruled the liquidators must pay creditors a total of $56,386.50.
The claims of unsecured creditors totalled just over $111,000 and preferential creditors of $74,998.42. Total cash received from the liquidation was $201,126.83 and of that $154,140.28 was claimed as fees and $35,065.32 as disbursements.
“Expenses such as wages, asset storage costs, a miscellaneous item of expenses and a small staff wages account appear unremarkable,” Associate Judge Dale Lester of the High Court at Christchurch said.
“What warrants remark are the disbursements and fees which meant that, despite there being enough money recovered to make a distribution to unsecured creditors, nothing was paid to them.”
Judge Lester’s decision noted some of the expenses claimed by Grant remained unexplained.
“Narrations such as ‘staff Expense claim’ and ‘acronym IT support’ disclose nothing about what the expense relates to. Items narrated only as ‘liquidators disbursement’ are equally unhelpful.
“One can make assumptions about what ‘Hilton Haulage’ invoices relate to and assumptions about what is covered by the investigation costs and the MWIS legal claim is likely to be an agent’s fee or the like. Similarly, I expect the Air New Zealand expenses will be airfares, but what they relate to is not explained.”
Liquidators have a fiduciary obligation to be able to explain the disbursements, the judge said.
“I accept it is not for the Court to second-guess the reasonableness of out-of-pocket costs such as freight, airfares, legal agency fees or service costs. However, the liquidator must demonstrate the disbursements claimed are in fact out-of-pocket expenses incurred in the liquidation,” he said.
In total 2,162 hours of work were recorded with a total time cost recorded of $493,599.25, the judgment reads, while the liquidator sought approval of only $153,140.28 in fees.
This equates to an average hourly rate of $71.36 per hour and which is well below the rates normally charged.
“The liquidator says the directors and promoters of the business went to some lengths to obstruct the liquidation, resulting in considerable litigation,” the judgment reads.
“The liquidators discovered that the trading business had been shifted to a new enterprise without any consideration being paid by the transferee. The liquidators had to undertake considerable work to obtain accounting records and locate stock.”
The liquidators also obtained search warrants on three separate sites, one in Auckland and two in Christchurch, which were executed under the supervision of police.
“These searches provided considerable information as to the company’s accounting records and enable them to recover a considerable amount of stock, although only a fraction of what they believed had been transferred,” the judgment reads.
Judge Lester said he was satisfied the liquidators were faced with a difficult initial period in the liquidation, including the search warrants and a significant number of interviews.
“I accept that initial investigations would have been required to generate the information necessary to achieve the voidable transaction recoveries,” he said.
“However, the further litigation work is harder to justify.”
The ill-fated proceedings against Lotus Gardens Ltd, which the liquidators believed
significant assets had been transferred to, were commenced in early 2013. Ajudgment in the unsuccessful application to liquidate the company was released in May 2013.
“Because the time recorded against each recovery action is not separately recorded, an exact breakdown of the costs thrown away on the Lotus Gardens litigation is not possible,” Judge Lester said. “This is not to criticise the liquidators with the benefit of hindsight. Extensive litigation over $25,000 was never going to be economic.”
Because of the absence of justification for the litigation, Judge Lester said Grant did not demonstrate the fees incurred on the Lotus Garden proceedings were reasonably incurred. He added it appeared there was no cost-benefit analysis or at least not to one that can now be produced or explained.
Judge Lester ordered the creditors be paid the disallowed disbursements of $28,886.50, the $7500 for clerical work and the unexplained category for “other/internal”, and disallowed fees of $20,000 – a total of $56,386.50.
Grant said court-appointed liquidators are required to seek approval for their fees and the judiciary’s oversight of liquidators is an important feature of the insolvency regime.
“It is what keeps us on our toes and provides some objectivity. Obviously, it is uneconomic for creditors to be chasing up what insolvency practitioners are charging, and getting some judicial feedback is a useful part of the process,” he said.
“In hindsight, we probably went too far down some judicial rabbit holes and didn’t have all of our paperwork going back that far and the court pulled us up on that; which is their role.”
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