High Court: Liquidator ordered to repay more than €860k in overcharged fees
The High Court has ruled that a liquidator overcharged a company by more than €860,000 for services in a members’ voluntary liquidation and ordered him to repay the money.
The judge, Ms Justice Nuala Butler, described the fees as “vastly disproportionate” to the work that had been carried out in what should have been a straightforward winding up of the company.
The company, Chempro Investments Limited, had sold a pharmaceutical trademark in 2011 for €1.2 million and subsequently decided to voluntarily liquidate the business and distribute the assets among the shareholders. Following a members’ resolution to wind up in 2012, Mr. Gary Lennon was appointed as liquidator of Chempro. At the time, the company had assets in excess of €1.3 million and debts of just €30,000. In light of the fact that the liquidation was not complicated, the liquidator gave an initial costs estimate of €9,533 for the entire service.
However, the liquidation continued for more than seven years, during which time the liquidator had continued to charge the significant fees to Chempro. One shareholder, Unione Fiduciaria S.p.A, eventually brought an application under s.638 of the Companies Act 2014 to remove Mr Lennon and appoint a new liquidator. It was only during this application that the shareholders became aware of the extent of the withdrawals by Mr Lennon.
It transpired that Mr Lennon had paid his own company, Lennon Corporate Recovery Limited, €125,276 in the first year of the liquidation and continued to make substantial payments despite no progress in the liquidation at all. Mr Lennon had even withdrawn more than €17,000 from Chempro’s bank account after he had been replaced as liquidator by court order.
High Court application
Against this background, Eamon Richardson, the newly-appointed liquidator, brought an application in the High Court seeking a declaration that Mr Lennon was guilty of misfeasance and an order compelling him to repay the sum of €871,017 to the company’s accounts.
In making the application, the applicant claimed that Mr Lennon’s payment of €410,851 to a shareholder, Malko Investments SA, in the first year of the liquidation was in breach of the liquidator’s duty in that any distribution should have been made to all shareholders at the time. Second, it was claimed that the liquidator had failed to make any distribution in respect of Unione’s shares, who was the only other shareholder in the company. Further, it was claimed that Mr Lennon had failed to file returns to the CRO or convene members’ meetings.
In defending the proceedings, the liquidator pointed to the uncertainty created by the transfer of beneficial ownership of the shares between Unione and private individuals. The liquidator argued that Unione was an Italian company and that difficulties arose in the distribution of the shares due to the nature of Italian trust law. In particular, Mr Lennon argued that he felt he was precluded from transferring the shares to s.255 of the Companies Act 1963.
Ms Justice Butler rejected this line of argument, stating that at all times a liquidator has the power to apply to the High Court for the determination of any question arising from the course of a liquidation. The court held that “it can never be appropriate for the liquidator to allow an issue to drag on indefinitely to the point where the liquidation effectively stalls”. The court also noted that the liquidator had received legal advice that he should bring an application to the High Court to resolve these issues.
The court stated that the “elephant in the room” regarding Mr Lennon’s explanation of the delayed liquidation was that he continued to make significant withdrawals, amounting to almost the entire of Chempro’s assets.
In considering the law, Ms Justice Butler cited Re Mont Clare Hotels Limited (In Liquidation), Jackson v Mortell (unreported, 1986), and determined that the conduct in this case went well beyond mere carelessness or error of judgment. While the court accepted that the liquidation became more complex for Mr Lennon due to Italian trust law and disagreements with the shareholders, there was no justification for him to stall the liquidation indefinitely when these issues could not be resolved.
The court also rejected a submission made by Mr Lennon that he was justified in withdrawing the fees from the company’s accounts due to the nature of the liquidation. In Re Custom House Capital Limited (In Liquidation)  IEHC 625, Ms Justice Finlay Geoghegan had held that the onus was on the liquidator to prove that the remuneration sought was reasonable for the work done. It was “virtually impossible to see how fees at the levels paid by the respondent to himself could ever be justified” in a liquidation in the present case. If the hourly rate for a liquidator was €350, the fees which had been charged would reflect almost 2,500 hours of work. It was “simply not credible” that a single-issue liquidation could take this amount of work.
Ms Justice Butler stated that clear pecuniary loss had been caused to the company. The court held that some costs were necessarily going to arise from the liquidation and deducted the original estimate of fees from the overall fees charged to reflect this. The court ordered the liquidator to repay €861,484.87 to the company.
© Irish Legal News Ltd 2021