In Re John Pettit Pty Limited (Subject to a Deed of Company Arrangement) [2014] NSWSC 728, the Supreme Court of NSW considered an application by the deed administrators of John Pettit Pty Ltd (John Pettit) seeking directions to sell property potentially owned by third parties and orders which limited the Deed Administrators’ personal liability in relation to the sale.

BACKGROUND

Our examination of Re John Pettit starts with some observations on a similar case from 2012. In the matter of Carson, Re Hastie Group Limited (No.3) [2012] FCA 719 (Hastie), the administrators sought to sell of hundreds of pieces of plant and equipment over which ownership was uncertain. They sought comfort by approaching the court for protection by way of directions under section 447D of the Corporations Act.

The directions sought by the administrators required certain steps to be taken, such as public advertisements and notifications to creditors, before the administrators could proceed to sell the property. The orders also provided for a timeline pursuant to which the proceeds of sale had to be held and applied by the administrators before being released to creditors. Ultimately, the relevant orders were provided by the court and the administrators sold the property on the assumption that they were protected.

While this was a sensible step, as David Walter pointed out in an article published in the Australian Insolvency Law Journal in 2013[1], such a precaution may not have been sufficient. In the circumstances of Hastie, it is arguable that it may have been (and still be) open for the true owner of the goods to claim against the administrators in their personal capacity, for instance, for committing the tort of conversion, notwithstanding the directions given by the court.

Similar issues were further explored in the case of John Pettit.

John Pettit was engaged in the business of dealing in rare bank notes. It’s business involved proprietary trading, consignment arrangements and custodial services.

As a result of these functions, some of the bank notes in the possession of John Pettit at the time of its collapse were owned by third parties. More problematic, was the fact that the records of John Pettit were incomplete or non-existent, such that the deed administrators were unable to confirm whether property in their possession was owned by the company or a third party.

Before beginning the process of realising John Pettit’s assets, it became known to the deed administrators that a number of the notes in its possession which appeared to be owned by the company were in fact owned by third parties. The deed administrators took various steps to attempt to verify the ownership of the property in their possession but were ultimately unable to satisfy themselves that they were not holding property owned by third parties.

THE PROTECTION SOUGHT

The deed administrators sought directions of a similar nature to those made in the Hastie decision, together with orders of a broader nature. In summary, those directions and orders were:

  • directions under section 447D of the Corporations Act in the form of judicial advice, that they would be justified in the sale of certain notes and the application of the proceeds in accordance with the Deed of Company Arrangement (DOCA); and
  • an order under section 447A of the Corporations Act, varying section 444F of the Corporations Act so as to limit the personal liability of the deed administrators to any owner of the notes sold, to the amount of funds available in the Deed Fund to meet such liability.

In applying for orders varying section 444F, the deed administrators argued that:

  • the variation is consistent with the objects of part 5.3A;
  • there would otherwise be a material adverse effect on achieving the purposes of the DOCA;
  • it is arguable that the interests of third party owners of the property would be adequately protected, as any third party owner of banknotes which the administration sold will still have a claim against John Pettit.[2]

Recognising the position the deed administrators were in, and the risk of personal liability which they faced, the court made the orders sought by the deed administrators.

In coming to this conclusion, the court noted that it was appropriate in the circumstances because:

  • the deed administrators had taken “substantial, reasonable steps” to identify potential third party claims and the passage of time since the John Pettit entered administration;
  • the orders requested facilitated an orderly realisation of property for the benefit of creditors; and
  • the orders requested provide reasonable protection for both third party claimants and the deed administrators.

COMMENT

This decision is significant because it shows that the Courts are willing to fashion orders using the power under section 447A so as to limit the liability of administrators and deed administrators to third parties notwithstanding that those third parties are not before the court.