The entitlement to recover remuneration and costs for work performed in conducting an external administration is an ever-present fundamental concern for insolvency practitioners.
The administrators of Mossgreen, a failed auction house and art gallery, asserted the existence of an equitable lien1 to recover approximately $1 million of expenses incurred in dealing with consigned goods. On 9 April 2018, Perram J of the Federal Court2 held that the equitable lien did not arise, leaving the administrators unable to recover their expenses. The administrators’ subsequent appeal to the Full Court of the Federal Court was dismissed on 19 April 2018.
Both decisions highlight the perils for administrators embarking on a course of action which will result in the incurring of significant costs without full consideration of all options available, and the identification of an efficient process proportional to the nature of the goods in question.
- Equitable liens are not guaranteed, even where the costs are incurred in the performance of statutory duties. The Courts will take into account the particular circumstances of the case.
- When dealing with third party property, administrators must give careful consideration to an efficient process proportional to the nature and value of the goods in question.
- Insolvency practitioners should also consider at an early stage whether it is appropriate to approach the Court for advice,3 particularly where expenses incurred in dealing with the property are likely to be significant.
- Both judgments are also a useful reminder to administrators of the utility of s 443B notices as a means of protecting them from personal liability for third party property, as well as the good sense in seeking directions from the Court at an early stage of an administration, particularly where there is uncertainty about the status of the property in question and in turn, the administrator’s entitlement to deal with that property.
First instance decision
Mossgreen’s line of business meant that it held a large quantity of goods belonging to other people, yet a number of problems with its inventory control system were identified. At a cost of approximately $1,048,072, the administrators undertook a full inventory stocktake with the assistance of staff and a specialist inventory management firm. To recover these costs, the administrators asserted an equitable lien and sought to charge a levy of $353.20 on each lot, payment of which was required as a condition of release of the property to the consignors.
Perram J held that the asserted equitable lien did not exist because the administrators were “intermeddling” by dealing with other people’s goods in circumstances where they had not been invited to do so, were not performing their statutory functions and had not been appointed receivers over the consigned goods. Perram J noted that a number of other options were available to the administrators, including approaching the Court for advice.4
On 19 April 2018, the administrators’ appeal against the first instance decision was dismissed,5 although the Full Court found that an equitable lien did not arise based on different reasons.
The Full Court disagreed that the work undertaken by the administrators was outside the scope of the administration of the company’s affairs, because it would be expected that Mossgreen and its officers would have undertaken that work if Mossgreen was not in administration.6 This affirmed that a lien7 may arise over property of the company or consignors if administrators’ costs have truly been incurred in performing statutory duties necessary to identify, preserve and facilitate the return of property to their owners.8
However, whether an equitable lien exists will depend on the particular circumstances of the case. Of particular importance is the administrators’ conduct in securing and protecting the property under an efficient process proportional to the nature of the goods in question.9 The Full Court was not satisfied that an equitable lien arose in this case because:
- the stocktake and associated costs were unnecessary for many abandoned and low value items;10
- where the stocktake was necessary, it was due to a breach of Mossgreen’s obligations, and the costs incurred should not fall on the consignors ahead of the general creditors;11 and
- a large proportion of the costs were incurred for the benefit of the general body of creditors, including in relation to the eventual sale of Mossgreen’s business relating to stamps and coins, such that the owners of the consigned goods took no benefit from this work of the administrators.12
A telling factor against the asserted lien was that the administrators had sought no guidance from the Court, and acted without consideration of the fact that the stocktake costs were likely to be higher than the actual value of the goods.13 The Full Court was not willing to “retrospectively bless” the administrators’ conduct when the administrators had not proven their chosen course of action was justified.14
This decision emphasises the importance of seeking directions at an early stage when consideration can be given to all common-sense options.15