The Full Court of the Federal Court of Australia’s decision in White, in the matter of Mossgreen Pty Ltd (Administrators Appointed) v Robertson [2018] FCAFC 63 (Mossgreen) highlights the need for external administrators to exercise caution when dealing with third party property that comes into their possession or control.
That case concerned the voluntary administrators appointed to Mossgreen Pty Ltd, a well-known auction house and gallery business who, upon their appointment, came into possession of a large quantity of third party property comprised of goods bought at action that were yet to be collected by the successful bidder and goods consigned to the company for auction.
Between their appointment in late December 2017 until March 2018, the administrators undertook a course of action that they claimed was necessary to identify and return third party property to its rightful owners. The costs and expenses incurred by the administrators in doing so exceeded $1 million. A large portion of that cost was attributable to a complete stocktake that the administrators had caused to be undertaken by an external firm.
In March 2018, having completed the stocktake, the administrators wrote to all third party property owners and told them that in order for their goods to be returned to them, they must pay a levy to the administrators of $353.20 per lot and that the amount of the levy, and the fact of its imposition, was not negotiable.
The administrators claimed that they had an equitable lien over the third party property in respect of the costs and expenses incurred by them. The imposition of the levy had the practical effect in a number of cases, of completely eroding the value of the consigned goods.
Unsurprisingly, a number of third party property owners objected to the levy and this ultimately led to the administrators bringing an application for directions under section 90-15 of the Insolvency Practice Schedule (Corporations), Schedule 2 to the Corporations Act 2001 (Cth) essentially seeking retrospective approval of the course of action they had adopted.
At first instance, the primary judge found that the work undertaken by the administrators did not relate to the property of Mossgreen (since it was third party property) and, as such, the activities undertaken by the administrators did not relate to the administration of Mossgreen’s affairs. On that basis, his Honour found that no equitable lien existed and, accordingly, the administrators were not entitled to impose the levy. The administrators appealed to the Full Court.
Although the appeal was ultimately dismissed, the Full Court usefully found that the work undertaken by the administrators was within the statutory function of the administrators to continue to perform the function of holding the consigned items and, as part of doing so, taking steps to manage and return the consigned items.
The Full Court indicated that, as a general proposition, it was possible for an equitable lien in favour of administrators to arise in respect of costs incurred in dealing with claims for the return of items even where there is no claim to ownership by the company under administration, including the costs in holding them and keeping them secure in the meantime.
However, the Full Court was not satisfied that there arose an equitable lien “in the respects claimed by the administrators” of Mossgreen for three reasons:
- Much of the costs had been incurred in respect of consigned items that the administrators knew to be abandoned or of little value;
- The need to perform a stocktake arose from the company’s breach of its duties and obligations of bailee of the consigned goods; and
- Much of the work undertaken was for the benefit of the general body of creditors, including retaining employees in pursuit of a potential sale of the business as a going concern or a proposal for a deed of company arrangement.
The Full Court was also highly critical of the administrators for not having sought the Court’s guidance before embarking on the course of action that they did. The Court noted that it was now faced with an application for directions blessing conduct of a kind that was not justified.
What is clear is that it is certainly not better to beg for forgiveness than ask for permission when it comes to seeking directions under section 90-15 of the IPS!
HWL Ebsworth’s Perth insolvency and securities enforcements team has recently acted for the liquidator of a company that provided safekeeping and storage services, and also traded in gold and silver bullion and numismatics. This included bringing a successful application for directions under section 90-15 of the IPS concerning the third party property that came into his possession and control by virtue of his appointment and specifically regarding:
- The process that the liquidator was justified in undertaking with respect to the identification, preservation and return of the third party property (which was complicated by the poor state of the company’s books and records); and
- Who ought to bear the cost of undertaking that process and how that cost ought to be apportioned, imposed and collected.
The Court accepted that the liquidator was entitled to assert an equitable lien over the third party property for the purposes of recovering his costs and expenses of implementing the court-sanction process and that, further, the liquidator was justified in imposing a levy on the third party property owners as a pre-condition to the collection of their property. Master Sanderson found that the third party property owners stood to “receive the incontrovertible benefit of the work undertaken by the liquidator” and that the costs that formed the levy are “exclusively referable to facilitating the identification and return of the third party goods to their owners“.
The Bullion Bourse case demonstrates how early engagement with the Court on matters relating to third party property provides insolvency practitioners with certainty regarding the recoupment of costs and expenses incurred by them in relation to third party property. The existence of a court-sanctioned process also proves a useful stakeholder management tool that insolvency practitioners can employ to thwart attempts to derail or obstruct external administrations involving third party property.
This article was written by Carmen Boothman, Special Counsel in our Perth office.
Publication Editor: Grant Whatley