The High Court has provided useful guidance as to how receivers should apportion their fees to accounts receivable and inventory.
This Brief Counsel draws out some key messages from the judgment.
In July 2011, receivers were appointed over the assets of Hurlstone Earthmoving Limited. The Court appointed a liquidator two months later. By the time the liquidator was appointed, the receivers had investigated at length the nature and collectable value of accounts receivable, inventory and other property of companies within the Hurlstone group and begun realising that property.
A number of issues arose, including whether the receivers were entitled to claim remuneration and other expenses incurred during the realisation of the accounts receivable and other inventory, and, if so, from which assets those costs were to be paid. The receivers and the liquidator went to the Court for guidance.
Section 30(2) of the Receiverships Act 1993 (the equivalent of Schedule 7 and sections 312 and 313 in a liquidation) specifies the order in which a receiver is to apply the accounts receivable and inventory (or their proceeds). The section requires that, before a receiver is entitled to distribute funds to secured creditors:
- first, the receiver’s expenses and remuneration be paid
- secondly, claims of any person who has a PMSI over all or any of the accounts receivable and inventory be paid, and
- thirdly, preferential claims (such as employees’ wages or salary, and certain taxes owed to the IRD) be paid.
The Act does not state exactly what remuneration and expenses receivers can claim. However, section 30(2B) of the Receiverships Act qualifies how receivers’ expenses and remuneration are to be paid. When calculating remuneration and expenses for the purposes of section 30, the receivers are required to apportion those costs “fairly and equitably” between the accounts receivable or inventory and the other property secured by charge. The Court therefore was asked to clarify (among other things) two important questions.
- Could the receivers claim costs beyond salvage costs incurred in relation to the accounts receivable and inventory?
- How were the receivers to apportion their costs “fairly and equitably” between the secured assets and the preferential fund in practice?
A receiver is entitled to claim more than salvage costs
The Court found that the words “in relation to” in section 30(2B) enable a receiver to claim expenses and remuneration for more than just the salvage costs involved in realising a debt or part of the company’s inventory. Rather, in relation to accounts receivable the receiver is entitled to claim for:
- investigating what debts are owing
- assessing their collectability
- the steps involved with collecting accounts receivable, and
- distributing the proceeds.
In terms of inventory, the receivers can claim expenses and remuneration for the following:
- ascertaining what inventory exists
- securing the property
- marketing the goods for sale in a manner consistent with the receivers’ duties to obtain the best price reasonably obtainable, and
- distributing the proceeds of sale.
What is a fair and equitable apportionment of general costs?
Section 30(2B) requires that “general administration costs” be apportioned on a “fair and equitable basis”. The Court pointed out that the underlying principle of this section is that the costs should be borne by the party for whose benefit the work is undertaken.
The Court favoured a practical approach and held that it was unnecessary for a receiver to perform a minute analysis of remuneration and expenses incurred in dealing with individual debts or items of inventory. Instead, a broad-brush assessment of remuneration and expenses was sufficient.
There was a general expectation that receivers and liquidators would readily be able to reach agreement on apportionment, in the interest of efficiently conducting receiverships and liquidations (rather than bring bringing proceedings to determine apportionment requiring extensive affidavit evidence or cross examination). The goal of efficient administration of receiverships and liquidations would be frustrated if a more adversarial approach was taken.
The receivers proposed an apportionment of 90% of general costs be borne by the secured creditor and the balance of 10% by the preferential creditors. That split mirrored the proportion of realisations of the assets of the Hurlstone companies from the “fixed assets” (90%) and the realisation of assets from the accounts receivable and inventory (10%). The Court accepted the receivers’ apportionment.
However, the Court stressed that there was no requirement that apportionment always be made on a pro rata basis.
The Court also held that general administration tasks could include dealing with the company records and accounting information, completing statutory obligations (e.g. reporting to creditors), supervision and co ordination of staff working on the administration as well as dealing with unsecured creditors. They do not include, however, costs involved with the receivers’ dealings with employees.
The High Court commended the receivers’ practice of itemising the work undertaken and the amounts charged in realising the accounts receivable and inventory. The process helped the Court to find that the allocation of costs to each of the statutory funds was responsibly undertaken. It is therefore prudent for receivers and their professional advisers to:
- follow a clear system of task and cost allocation when engaging in the realisation of accounts receivable and inventory, and
- take a broad practical approach in determining what costs can be claimed for the realisation of accounts receivable and inventory. Preparatory work undertaken in relation to ascertaining accounts receivable or inventory can be included, andapportion the general administration costs of the receivership in a fair and equitable way between the accounts receivable or inventory and other secured property.