Bicheno Investments Pty Ltd v David John Winterbottom  NSWSC 536 has confirmed that the completion of a stocktake does not necessarily require a full physical stocktake. Rather insolvency practitioners may satisfactorily complete a stocktake by reviewing a business’ records, provided they are satisfied that those records are accurate and complete. On this basis, Justice McDougall of the Supreme Court of New South Wales confirmed that the Receivers were entitled to retain a $2 million incentive fee. The decision also serves as a reminder of the impact the definition of a ‘stock take’ has in retention of title matters.
- The decision serves as a welcome relief for insolvency practitioners, as it confirms that practitioners are not required to undertake a physical stock count, at least where the company’s books and records are accurate.
- This is a matter of fact that will turn on the stringency of the recording process of each business.
Since 2013, DSG Holdings Australia Pty Ltd (DSG) owned and operated 143 discount variety stores across Australia. Bicheno Investments Pty Ltd (Bicheno) and DSG were related entities and Bicheno loaned funds to DSG. In order to secure the loaned amount, Bicheno took a charge over the assets of DSG. On 30 June 2014, it was announced that DSG had been placed into receivership. Bicheno appointed receivers and managers of the assets secured by the charge. At this time, evidence showed that DSG held over 15 million individual stock items across its stores.
The terms of the receivers’ appointment was governed by a fee agreement, entered into between Bicheno (as the secured creditor) and the receivers (Deed). Under the Deed, the receivers’ remuneration was to be calculated by a combination of capped time-based fees and an incentive fee. Pertinent to determination of the amount of the incentive fee was the value of the stock on hand “as at the Appointment Date as at the Appointment Date as determined by a stock take undertaken by the Receivers.”
Issues for consideration
The receivers claimed that as they satisfied the preconditions set out in the Deed, they were entitled to claim the incentive fee. On this basis, the receivers deducted the incentive fee from the proceeds of the receivership that they returned to Bicheno as the secured creditor. The receivers considered that although they had not undertaken a physical stocktake, in reviewing DSG’s stock listing as at 30 June 2014 they had sufficiently determined DSG’s stock on hand as at their appointment date.
In contrast, Bicheno rejected the receiver’s claim to the incentive fee on the grounds that the receivers had misinterpreted the terms of the Deed and their entitlements. Bicheno argued that the definitions under the Deed required that, in order for the receivers to be eligible to receive an incentive payment, they had to conduct a physical stock take as at the date of their appointment. Bicheno alleged that as the receivers had failed to complete a physical stocktake, they were not entitled to claim the incentive fee. In order to recover the amount alleged to have been improperly retained, Bicheno commenced proceedings against the receivers.
The dispute concerned the proper construction and interpretation of the terms of the Deed. In particular, the question posed to the Court asked whether a reference to a “stock take undertaken by the Receivers”, within the definition of “Appointment Stock”, required that on appointment the Receivers:
- actually conducted a physical count of DSG’s stock on hand or
- could review inventory records and use this information as the basis on which the relevant levels of stock were determined.
The meaning of the term ‘stock take’
The Court dismissed Bicheno’s application and found that the receivers were entitled to retain the incentive fee. The Court concluded that the receivers satisfied their obligations under the Deed by completing a ‘stock take’ which was based on inventory records provided by DSG. On the facts, the Court held that the receivers, in satisfying themselves as to the material accuracy of DSG’s stock records, acted properly and could rely upon DSG’s stock records to form the basis of the stock take. The Court concluded that the receivers did make the requisite determination required under the terms of the Deed, thereby entitling the receivers to the incentive fee.
In order to determine what constituted a ‘stock take’, Justice McDougall referred to the ordinary dictionary definition of the term. This suggested that the stock take process involves an examination of the relevant business’ stock and the preparation of an inventory of stock. The Court expressly noted that these definitions do not require that a physical examination of stock is required in order to complete a stock take.
The Court highlighted that in the context of the Deed, the inclusion of the word ‘stock take’ required that the receivers determined the level of stock at hand at the time of their appointment as so they could ascertain the book value of that stock on that date. This did not prescribe any one method by which the receivers could achieve this task. As part of its determination, the Court commented on the need for parties to avoid absurdity as part of the construction process. Noting that the arguments put forward by Bicheno unduly elevated a “machinery provision in a subordinate definition to a condition of entitlement”.
In making its decision, the Court referenced the detailed stock listing which was submitted by the receivers as evidence. This list spanned 770 pages and listed the items of stock by number, value, description and unit quantity. Further, there was substantial evidence to verify that the stocktaking procedures undertaken by DSG were rigorous, including that they were supervised by internal and external auditors and that they were accurate within a 2% variance.
The Court’s interpretation of the term ‘stock take’ promoted commercial common sense, as it would be time consuming, inefficient and costly for the receivers to conduct physical stocktakes upon each and every appointment, especially where the company’s books and records contain an accurate stock listing. These delays would be exacerbated by the fact that any stocktake would require the closure of DSG’s stores throughout the process. In conclusion, the Court found that there was no reason for the receivers to undertake a physical count of DSG’s stock, nor were there any additional benefits of doing so.
In making its decision, the Court emphasised that what a receiver is required to do, on any receivership appointment, must reflect both the instructions given to the receiver and the particular circumstances of the receivership.