In the recent decision of Macks & Anor v Maka & Anor [2015] SASC 200 (Macks) the Supreme Court of South Australia has provided some helpful guidance for liquidators (and indeed appointees under other types of appointment) concerning the impact of questions of proportionality when the Court is asked to consider the approval of an appointee’s remuneration.

Whilst Macks concerned an application for Court approval of liquidators’ remuneration,  the Court pointed to the commonality of the relevant provisions of the Corporations Act 2001 (Cth) (the Act) and the application of the corresponding principles with equal force to other types of appointments.

It has long been the case that in considering applications for liquidators’ remuneration, the Court will look at a number of factors including what has been described as proportionality.

While the relevant sections of the Act dealing with the approval of an appointee’s remuneration do not specifically say that the Court is required to consider proportionality, Courts have for some time considered that the overall quantum of remuneration being claimed relative to the quantum of returns received by creditors is a relevant factor for consideration in the context of an application for the approval of that remuneration. This factor is what has come to be known as “proportionality”.

In Macks, the Court was asked to consider an objection to the remuneration sought by the liquidators and former deed administrators of a company (which totalled approximately $1 million) in circumstances where the return to creditors totalled approximately $1.7 million. The objectors to the liquidator’s application argued the claimed remuneration was unreasonable given the quantum of the proposed return to creditors.

The Court undertook a careful analysis of a number of authorities which had previously dealt with the issue of proportionality and concluded that it was by no means appropriate to consider the question in isolation. Rather, it was necessary to consider the proportionality of the claim for remuneration in light of other relevant factors. The Court pointed out that:

1. it was not always possible to know what the outcome of particular action taken by a liquidator would be before taking the action;
2. it might in such circumstances be inappropriate to use a hindsight analysis (i.e. comparing the cost of the action to the actual return) and may be more appropriate to compare the cost to the realistically anticipated return at the time the action was determined to be taken (even if it was not ultimately achieved);
3. some tasks are so intrinsically complex and labour intensive that they per force justify a relatively high cost to benefit ratio;
4.  it may be necessary to consider the circumstances and conditions under which the work was required to be performed in order to properly assess its reasonableness;
5. proportionality is only one issue to be considered and it must be considered as a part of the overall circumstances.

In Macks the court pointed out that in part the work performed by the liquidator was required to be undertaken as a result of the actions of one of the parties (and his advisors) who in turn were were objecting to the remuneration claimed. The court commented that it would be “unseemly“ for a party to object to a liquidator being paid for performing work which was in part necessitated by the actions of that party.

Macks contains a useful analysis of the way in which the Court will apply principles of proportionality in considering remuneration applications and serves as a useful reminder that the overall circumstances in which an appointee’s remuneration is incurred or in which work is required to be undertaken should always be taken into account. Questions concerning what the court termed “value for money” should not be considered in isolation or purely by reference to the end result of the work undertaken.

For more information please contact ERA Legal.