The recent appellate decision of the Full Court of the Federal Court on 19 April 2018 in White, in the matter of Mossgreen Pty Ltd (Administrators Appointed) v Robertson [2018] FCAFC 63 (Re Mossgreen) provides guidance regarding equitable liens and a stern warning to insolvency professionals to seek directions from the Court before engaging in conduct which affects property of third parties.

Mossgreen Pty Ltd (Mossgreen) operated a high-profile auction house, and went into voluntary administration on 21 December 2017, holding approximately 4,663 consigned lots in its possession pending sale. The inventory systems of Mossgreen were not adequately maintained. The administrators elected to conduct a full, physical stocktake of all consigned lots, at a total cost exceeding $1 million.

The administrators then purported to impose a levy of $353.20 per lot on consignors as a condition of the return of their goods, on the basis of an alleged entitlement to an equitable lien of the type described in Re Universal Distributing Co Ltd (In Liq) (1933) 48 CLR 171. On 6 March 2018, the administrators of Mossgreen sought directions form the Court to the effect that the administrators were justified in imposing the levy.

At first instance, Justice Nye Perram held that the administrators were not entitled to any equitable lien on the grounds that the administrators had acted outside of their statutory functions, and the stocktake did not involve Mossgreen’s business, property or affairs under s437A of the Act. In making his findings, Perram J noted that it would have been open to the administrators to apply to the Court at an early stage.

The administrators of Mossgreen appealed. The Full Court disagreed with Perram J, but nonetheless dismissed the appeal, and in doing so noted that:

  • In making their application, the administrators were ‘effectively seeking to sanction the conduct of the administrators after the event’.
  • There is no general principle which covers the diversity of cases in which an equitable lien has held to be created: Stewart v Atco Controls Pty Ltd (in liq) [2014] HCA 15. An equitable lien arises in a diverse range of circumstances and where the general principles of justice support such a lien.
  • In this case, the administrators were not entitled to an equitable lien of the kind and in the amount contended for, on the grounds that:
    • It would have been apparent to the administrators at an early stage that a large number of consigned lots could have been identified and returned to owners.
    • Alternatively, to the extent that a stocktake was necessary in order to identify ownership of consigned goods, that need arose from a breach of Mossgreen’s obligations as bailee: Tottenham Investments Pty Ltd v Carburettor Services Pty Ltd (1994) Aust Torts Rep 81-292.
    • Much of the cost incurred by the administrators was incurred for the benefit of the general body of creditors who had an interest in preserving the engagement of employees, exploring a potential Deed of Company Arrangement, and undertaking a stocktake for the purpose of demonstrating the potential value of Mossgreen’s business to a potential purchaser.
  • The administrators should have sought directions from the Court at an early stage about:
    • How key employees of Mossgreen could have been put to work using their specialist knowledge to deal with the return of consigned goods.
    • The process to be adopted for the return of consigned goods, noting that ‘these steps, if presented to the court, could have been approved by way of directions or as part of a supervised process by which the administrators were appointed as receivers to the goods and many items could have been promptly released at much less cost… no satisfactory explanation was provided as to why such a common-sense approach was not followed…’.

In light of the decision of the Full Court in Re Mossgreen, insolvency professionals and their legal advisors faced with a situation where a company is in possession of goods owned by third parties should take the time to consider the most efficient manner in which to return those goods, and cannot assume that they shall be entitled to an equitable lien to secure their costs on the basis of a rigid application of prior authorities. Each case will turn on its own facts, and an equitable lien shall only arise where the interests of justice require it.

Further, and as a matter of general application, it is clear that the costs incurred by practitioners will be best protected by seeking directions from the Court at an early stage, prior to significant costs being incurred or rights of third parties being affected.