Liquidators - How Do They Get Paid?

by Lavinia Kumaraendran ~ 5 November 2019

Liquidators - How Do They Get Paid?

The remuneration of a liquidator is collectively governed by the Companies Act 2016 (“CA 2016”) and the Companies (Winding Up) Rules 1972 (“CWUR 1972”). Essentially, the methods of remunerating liquidators are divided into two:

  • First, in the instance of voluntary winding up; and
  • Second, in the circumstances of a windup up by the Court, also known as compulsory winding up.

Remuneration of Liquidator in Voluntary Winding Up

The governing law would be Section 454 of the CA 2016. Section 454 directs that a liquidator shall be entitled to receive a salary as prescribed under the CWUR 1972. However, although one method of determination of the liquidator’s remuneration can be found in the CWUR 1972, any member, creditor or liquidator may, before the dissolution of the company, apply to the Court to review and determine the remuneration amount (section 454(2)). Here, there exists multiple methods that have derived by case law to determine a liquidator’s remuneration. This will be discussed in further depth below.

Remuneration of Liquidator in Compulsory Winding Up

Section 479 would operate as the first point of reference in determining the remuneration for a liquidator in compulsory winding ups. Under this section, there exists four (4) main ways in which a liquidator can be remunerated. Simplified, the three ways are as follows:

  1. By way of percentage; OR
  2. An agreement between the liquidator and the committee of inspection; OR
  3. A resolution passed at a creditor’s meeting obtaining a majority of more than three – fourths in value and one – half in the number of creditor’s present to vote in person or by proxy, whose debts have been admitted to vote; OR
  4. The Courts.

Methods of Remunerating Liquidators

Essentially, apart from the method of paying liquidator’s a percentage or a commission, or by way of an agreement specifying a liquidator’s salary with the committee of inspection and/or by way of a resolution by the creditors, there exists the more controversial areas; that is when the Courts are left to determine a liquidator’s remuneration.

The recent case of Ong Kwong Yew and others v Ong Ching Chee and others [2018] 1 LNS 2247 explains some issues. This case concerned the compulsory winding up by the Court of multiple companies. The Court of Appeal clarified that the methods of paying the liquidators remuneration. Apart from those stated above, the determination by Courts will be left to the Courts discretion on a:

  1. Time costing basis; OR
  2. A realisation basis, also known as the percentage basis; OR
  3. An all-encompassing basis where (i) and (ii) are considered.

Such factors are also in accordance with Rule 142 of the CWUR 1972 which states that unless otherwise ordered by the Courts, the remuneration of the liquidator shall be fixed by the scale of fees and percentages for the time being payable on realization and distribution by the Official Receiver as liquidator. Such scale of fees and percentages are located in the Second Schedule of the CWUR 1972.

The case of Perumahan NCK Sdn Bhd v. Mega Sakti Sdn Bhd (WINDING UP) NO. D5-28-526-2000 considered in depth the scale of remunerations for liquidators. The Court here was tasked with determining if the time scale basis was the appropriate method of quantifying the liquidator’s remuneration. Here, the Court ultimately held that regardless of whether the time – costing basis or the percentage basis is used, the appropriate measure would be one characterised by fairness and reasonableness. That is to say that the Court would have to be satisfied that there would be no issue of over – servicing should the time – costing basis be used. The Court went on to explain that both these methods of calculating a liquidator’s remuneration (the time – costing basis & the percentage basis) have their own merits and are regarded as proper concepts in multiple jurisdictions like Australia and United Kingdom.

It was held that while the time – costing basis was more common In Australia, the percentage basis seemed to be preferred in England on the basis that, “- a small estate pays a small sum and a large estate a large sum, depending on the amount of divisible assets, whereas the time spent by the liquidator and his clerks has been regarded as affording a most unreliable test which is to be used only where the assets realized are so small that assessment on a percentage basis would not operate to give a fair remuneration for the work involved." In Contrast, the Supreme Court of Victoria in Re Trustees Executors & Agency Co. Ltd 9 ACLR 49, held that the time – costing scale is one that has, through case law, been regarded as reasonable and appropriate in determining the remuneration of liquidators.

Ultimately, it is clear from the aforesaid, that the main concern of the Courts when determining the remuneration of a liquidator is to ensure that a fair and reasonable quantification is reached. This notion was reinforced in the Court of Appeal in Ong Kwong Yew which referred to Perumahan NSK holding that the determination of the remuneration is one that is within the discretion of the Courts to decide in the optimum mode of assessing a fair and reasonable remuneration. Albeit the fact that case law exists on both sides to support the time – costing basis and the percentage basis, the quantification of remuneration would ultimately be subjective in every case, depending on the facts at hand and the way it which the Court deems fit to achieve a fair and reasonable quantification.

When Do Liquidators Get Paid?

The contextual framework in answering the above question would be in circumstances of a compulsory winding up. This would be for the main reason that in voluntary winding ups, the initial agreement between the company would typically set out the parameters and terms surrounding the liquidator’s remuneration. Thus, the issue of when and how a liquidator would get paid in compulsory winding ups is not of significance.

The more contested area of the law would be in the circumstance of a compulsory winding up. Rule 142(1) of the CWUR 1972 clarifies that part of the liquidator’s fees shall be payable in portions where one part is paid after deducting sums paid to secured creditors and the other would be on the amount distributed in dividends. Essentially, this would clarify that liquidators would stand somewhere between secured creditors and unsecured creditors in terms of priority of payment when the assets of the company have been liquidated and subsequently distributed.

Although a certain method of payment of liquidator’s fees is prescribed in the CWUR 1972, the reality of it is, in most winding ups, the assets of a company are rather limited. Due to this, the possibility exists that not all creditors may receive the amount owed to them. Additionally, given that a liquidator is to be paid out of the funds of the company, the same possibility applies, that is, upon distribution of the company’s assets, the company may ultimately have insufficient funds to pay the liquidator. Therefore, what liquidators sometimes choose to do would be to retain a sum of out of the company’s assets towards payment of their remuneration. Note that this would have to be done after the amount owed to secured creditors is settled in accordance with Rule 142 of the CWUR 1972. After the aforesaid retention, said liquidator would then have to seek ratification from the Courts of the amount retained by the liquidators on account of their remuneration.

In the case of Perumahan NCK, the Courts were tasked with the ratification of the retention sum by the liquidators. Here, the Court held that the Courts would be entitled to entertain an application of a liquidator seeking ratification of the retention sum. The Court referred to the case of Re North Australian Properties Pty Ltd. [1983] 8 ACLR 436 which held that liquidators were entitled to retain all costs, charges and expenses properly incurred by them, out of the assets of the company. Consequently, in line with Re Bridal Central Co. Pty Ltd. [1985] 9 ACLR 481, liquidators could then apply to the courts for ratification of the payments made by him. Additionally, it was clarified in Goh Swee Oh & Ors v Heng Ji Keng & Anor [Notice of Motion No: D9(D6)-25-7-2007 & D3-28-168-2003], that a liquidator need not approach the court for approval before retaining sums from the company as their remuneration. This was on the basis that such conditions would result in delay and additional work and expenses on part of the liquidator, which could not have been the intention of the legislature in regulating liquidation processes. The court then went on to ratify the retention sum by the liquidators.

In summary, it is the Courts that will determine what is reasonable and fair to be paid to liquidators taking into consideration the extent and value of work done.