The recent decision of the Full Federal Court in White, in the matter of Mossgreen Pty Ltd (Administrators Appointed) v Robertson FCAFC 63 (19 April 2018) serves to reinforce the importance of an external administrator of companies (be that an administrator, administrator under a deed of company arrangement, liquidator or provisional liquidator) seeking directions from a court at an early stage, particularly before embarking upon any significant and expensive course of action in the exercise of their functions.
Shortly prior to Christmas 2017 administrators were appointed as joint and several administrators of Mossgreen Pty Ltd, which operated an auction house and gallery business.
Consignors delivered items to Mossgreen and authorised Mossgreen to sell those items at auction and thereby effect a transfer of ownership. Mossgreen was responsible for delivering items sold at auction to the successful bidder (upon payment of the purchase price plus buyer’s commission). Mossgreen had no title or interest in the goods otherwise than as a bailee.
The appointment of the administrators brought to an end the future performance by Mossgreen of contracts to auction the consigned items. The company became obliged to return lots to their owners. Shortly after the appointment of the administrators they started to receive requests for the return of consigned items.
The administrators determined that the stock management system of Mossgreen was not kept up to date and could not be relied upon to provide an accurate listing of consigned goods on hand (estimated to be in excess of 10,000 items). Accordingly, in addition to taking steps to pursue a deed of company arrangement and a possible sale, the administrators undertook a detailed “ground up” stocktake of all consigned items in the possession of Mossgreen. The total cost of the aforementioned steps was over $1 million and included $276k for employee wages and superannuation, $213k for fees and disbursements of the administrators, $122k for the costs of engaging Tiger Asset Group to undertake the full stocktake and $72k for legal costs.
After the stocktake was undertaken, the administrators sent circulars to persons who had been identified as owners stating that their goods would be returned on payment of a levy of $353.20 per lot. The amount of the levy was stated to be not negotiable and had been calculated by reference to the expenditure of over $1 million. The administrators claimed an equitable lien over the property of the consignors to support their position.
In early March 2018, over three months after their appointment, the administrators approached the Federal Court of Australia seeking directions under s 90-15 of the Insolvency Practice Schedule in Schedule 2 of the Corporations Act 2001 (Cth), effectively seeking to approve after the event the course of action they had adopted (including endorsing the existence of the lien and the collection of the specified levy). The directions were opposed by consigning owners. The primary judge, Perram J declined to grant the directions sought. The Full Federal Court heard an expedited appealed in respect of that decision.
Nature and extent of equitable and statutory liens
In Hewett v Court (1983) 149 CLR 639 at 663, Deane J explained that an equitable lien is a right against property which is, in truth, a form of equitable charge over the subject property. Gibbs CJ observed at 645 that it is not possible to state “a general principle which would cover the diversity of cases in which an equitable lien has been held to be created”.
In the present case, at  et seq., the Full Federal Court observed that:
- An equitable lien arises by operation of law and does not depend either upon contract or upon possession; and
- There are many examples in the cases of such a lien arising when a person uses their time and energy for the care, preservation and realisation of property of others.
- The examples where an administrator has been entitled to an equitable lien over property of third parties must be viewed through the lens that the court was satisfied that the lien arose in the particular circumstances. They do not stand for any broader proposition that an administrator dealing with property owned by third parties will always have a right to a lien over such property for expenses so incurred.
There is a statutory lien under s 443F of the Corporations Act, which protects an administrator’s remuneration and debts or liabilities incurred in good faith and without negligence by the administrator in the performance or exercise of his or her functions as administrator. However, that lien is only over the company's property. In the present case, the administrators asserted a lien over the consignors’ property.
In short, the Full Court were critical of the administrators for failing to follow a “common-sense approach” in giving effect to their obligation to return consigned items to the owners, as well as not bringing an application explaining the alternatives and seeking directions “before embarking upon one of the alternatives”.
At , the Full Court observed that the detailed affidavits provided by one of the administrators, Mr White, provides no evidence “of any thought process by which he considered the significance of the extent to which the items held were legacy items of little value, the extent to which the stocktake was necessary in order to deal with claims by owners, the extent to which the costs involved were proportional to the value of goods involved, and the likely cost to individual owners if the stocktake was undertaken”. Indeed, the Full Court stated that it would have been apparent to a person in the position of the administrators from an early stage that for a significant number of the consigned items, Mossgreen employees would have been able to fulfil the responsibilities of delivering items to buyers and return unsold items to owners applying the systems already in place, without the inventory produced by the stocktake.
At , the Full Court observed that (underline added):
“In this case, we consider that there is potentially an entitlement to an equitable lien with respect to work properly done and expenses properly incurred that benefit a consignor by securing and protecting their property that is deposited at the company’s premises until it is returned under an efficient process proportional to the nature of the goods in question. Whether equity would grant such lien and its extent may depend upon the value of the statutory lien and the particular circumstances of the administrators’ conduct”.
The Full Court concluded that the administrators had not demonstrated that they were entitled to a lien over the consigned items of the nature and extent advanced, or covering the type of costs and in the amount contended for. Their appeal was therefore dismissed with costs.
The Full Court also questioned whether, in circumstances where owners had been held out of their consigned items for a considerable period, the administrators would be justified in delaying further the release of consigned items while there was some form of assessment of the amount of a lien that may be required to be paid as a condition of release of property to the owners.
- External administrators are regularly placed in difficult situations where they are required to think and act quickly. The present case was no exception. The ability to seeking directions from the court in relation to an issue of power, propriety or reasonableness of a particular course is there to cater for these types of situations.
- It is far preferable for external administrators to seek directions before embarking upon a particular course of action as opposed to after, to approve a course they have already undertaken. As the Full Court stated at , “The only way to evaluate the claim for directions now sought after the event is to look back and consider what might have been considered if the correct questions had been raised”.
- Although external administrators may be entitled to an equitable lien where they have properly done work and incurred expenses for the care, preservation and/or realisation of property owned by third parties, the lien will only protect costs that are directly referable to, and proportional to the nature of, the property. In the present case, the administrators sought to sheet home to the consignors a significant amount of costs in which the consignors had no interest (as they could only be for the benefit of the general body of creditors).