The recent decision in White, in the matter of Mossgreen Pty Ltd (Administrators Appointed) v Robertson [2018] FCAFC 63 demonstrates the importance of administrators seeking directions from the Court prior to embarking on a course of action.
The Federal Court held that the Administrators did not have a lien against consigned goods securing their claim for $1,000,000 in fees and expenses incurred in conducting a stocktake of those goods.
Facts
On 21 December 2017, Administrators were appointed to Mossgreen Pty Ltd (Mossgreen). Mossgreen is a well known Australian based auction house and gallery, which operated out of Woollahra in New South Wales, as well as Armadale and Clayton in Victoria. Mossgreen established itself as the dominant market player in single vendor auctions and, at that stage, it was Australia’s third largest art auction house.1
Consignors of goods (Consignors) would authorise Mossgreen to sell their goods at auction (Consigned Goods). Prior to auction, the Consigned Goods would be delivered to Mossgreen for the purpose of the sale. Once the particular Consigned Goods were sold, Mossgreen was then responsible for delivering the item/s to the purchaser following the payment of the purchase price and commission. Upon the appointment of the Administrators, Mossgreen was unable to fulfil its obligations.
Following their appointment, the Administrators wrote to the Consignors notifying them that the return of their Consigned Goods was conditional upon payment of a $353.20 fee (the ‘Consignment Fee’). The Consignment Fee was stated to be not negotiable and, in some instances, exceeded the value of the Consigned Goods themselves. The Administrators contended that the Consignment Fee represented their reasonable costs incurred in the identification, preservation and distribution of the Consigned Goods.
On 6 March 2018, the Administrators applied to the Court for directions ratifying the course of conduct adopted in relation to the Consignment Fee. These directions were opposed by Consignors.
The Administrators deposed that the records kept by Mossgreen were not accurate or up to date and did not identify the location of Consigned Goods. Accordingly, the Administrators undertook a complete stocktake to ascertain inventory, ownership of the Consigned Goods and to settle sales where goods were awaiting collection. In undertaking this work the Administrators incurred almost $1,000,000 in costs, which they sought to recover through the Consignment Fees.
At first instance the primary judge held that a lien did not arise in relation to the Consigned Goods. The Primary Judge held that by demanding the payment of the Consignment Fee, the Administrators were claiming the existence of an equitable lien which did not arise because the work undertaken by the Administrators did not relate to the property of Mossgreen and did not fall within the administration of its affairs.2
The Appeal Judgment
On appeal, the Full Court did not accept the primary judge’s reasoning that the work performed by the Administrators did not fall within the administration of Mossgreen’s affairs. Rather they held that the identification and return of the Consigned Goods was a function that would ordinarily be performed by Mossgreen and its officers and therefore were activities that formed a part of the administration.3
The Court accepted that a lien in favour of Administrators could exist in relation to claims arising for the return of goods owned by third parties, including the costs associated with holding and securing the items, however in this instance no such lien arose as:
- The bulk of the costs incurred by the Administrators in relation to the stocktake was in respect of Consigned Goods which the Administrators knew were abandoned and of minimal value. The Court held that these costs “were not referable to the smaller class of persons who were in a position readily to demonstrate their claim without the need of a stocktake of any kind“.4 Further, the Court concluded that the staff of Mossgreen “applying their knowledge and expertise“5 were in a position to identify the owners of the Consigned Goods without incurring the costs and expenses associated with the stocktake;
- Even if the stocktake was required, its necessity was due to Mossgreen’s failure to maintain adequate records of the Consigned Goods. This amounted to a breach of the bailment agreement with the Consignors, and these expenses should not in the circumstances of this case be borne by the Consignors instead of the creditors; and
- Finally, the costs incurred were for the benefit of the general body of creditors who had an interest in preserving the retention of employees, determining the viability of entering into a deed of company arrangement and the value of Consigned Goods to a potential purchaser of Mossgreen. This did not result in any benefit or interest for the Consignors.
Whilst the Court found that the Administrators had not demonstrated an entitlement to a lien covering the type and amount of costs claimed, it did observe that a lien in some amount might arise in the circumstances. However, the difficulty was that the Court was being asked to “bless” conduct of a kind that was not justified based on the nature and extent of the lien claimed.
The Court was critical of the conduct of the Administrators in failing to seek directions from the Court prior to undertaking the stocktake. The Court observed that shortly after appointment, it became apparent to the Administrators that a number of Consignors were seeking the return of the Consigned Goods and, at this point, the Administrators should have sought directions from the court so that consideration could be given to all options and a plan approved by the Court implemented.
This case is an important reminder for Administrators to seek directions from the Court in appropriate circumstances rather than embarking on a course of conduct assuming that it will be ratified after the fact.
This article was prepared by Polat Siva, Partner, and Priya Wakhlu, Associate, in our Melbourne office.
Publication Editor: Grant Whatley.
1 Financial Review, 22 February 2018.
2 White, in the matter of Mossgreen Pty Ltd (Administrators Appointed) v Robertson [2018] FCAFC 63 (the Appeal Judgment), [18].
3 See s 437A(1)(d) of the Corporations Act 2001 (Cth)
4 The Appeal Judgment, [26].
5 The Appeal Judgment, [26].