Administrators liable for breach of section 442C of the Corporations Act 2001 (Cth)

August, 2014

The decision of the New South Wales Supreme Court in THC Holding Pty Ltd v CMA Recycling Pty Ltd [2014] highlights the ways in which administrators can be personally liable for disposing of property not owned by the company (or the subject of a security interest) in breach of section 442C of the Corporations Act 2001 (Cth) (Act).

Stevenson J’s judgment makes clear that administrators should be careful to both (a) identify property of which someone else is the owner (or secured party); and (b) meet the conditions for disposal of such property in section 442C(2). That is, if the administrator is unsure as to whether the disposal would be in the “ordinary course of the company’s business”, the administrator should always obtain the relevant owner’s (or secured party’s) consent or leave of the Court before disposal.

Facts

The first defendant (CMA), entered into a contract to supply 5,800 metric tonnes of scrap metal to the plaintiff (THC) for shipment. CMA was unable to source 1,367MT prior to the shipment, so THC sourced the shortfall from a third party, by way of a “cargo swap”. It was agreed that CMA would accumulate the shortfall to supply to THC at a later date.

CMA accumulated the shortfall (in a separate pile from other stock) at its yard by 22 July 2013 (Shortfall Stock). THC paid for the Shortfall Stock ($371,824) on 29 July 2013. Administrators were appointed to CMA on 2 August 2013. THC notified the administrators that it was the owner of the Shortfall Stock at CMA’s yard. On 19 September 2013, THC applied ex parte for an injunction restraining the sale of the Shortfall Stock, unaware that it had in fact been sold by the administrators eight days earlier.

The Court’s decision

As a preliminary matter, the Court determined that THC became the owner of the goods for the purposes of section 442C of the Act under the relevant sale of goods legislation once the Shortfall Stock was “ascertained” by its accumulation on 22 July 2013. The Court found that THC was not a secured party for the purposes of section 442C of the Act as THC’s interest did not secure the payment or performance of an obligation as required by the definition of “security interest” under the Personal Property Securities Act 2009 (Cth).

The Court also held that:

(a)  on the basis that THC was the owner, the administrators had clearly breached section 442C of the Act by selling the Shortfall Stock without meeting the conditions for disposal in section 442C(2).   Importantly, Stevenson J said that the sale of the Shortfall Stock, as part of the sale of the entirety of CMA’s assets, was not in the “ordinary course of CMA’s business”.   Furthermore, the administrators neither sought THC’s consent to the sale nor leave of the Court to dispose of the Shortfall Stock as required by section 442C(2) of the Act;

(b)  CMA was a “bailee for reward” of the Shortfall Stock. It therefore owed THC a fiduciary duty not to act in a manner that preferred its interests over those of THC.

His Honour noted that there was no “free standing” or “private law”claim outside of the Act for damages for breach of section 442C, and also noted that THC’s claim was not one of conversion, as section 440B of the Act precluded THC having the requisite right to possession for that claim.

Section 442C itself does not set out consequences for its breach. However, the Court considered that the administrators were liable:

(a)  for damages pursuant to section 1324(10) of the Act. Stevenson J interpreted section 1324(10) broadly in this regard. His Honour noted that a claim for damages under section 1324(10) is not available where there is “no prospect” of an injunction being granted. Although there was no prospect on the facts (as the Shortfall Stock was sold prior to the application for injunctive relief), Stevenson J said the damages could be a “substitute remedy, or supplementary remedy for an injunction” which the THC sought but was ultimately unable to obtain;

(b)  to account in equity on the basis that the administrators participated in and procured CMA’s breach of fiduciary duty. Stevenson J held that the administrators’ “robust conduct” in the face of THC’s express notification of its claim to the Shortfall Stock was sufficient to attract accessorial liability in equity.

Stevenson J also flagged that that sections 447A, 447B and 447E are potential avenues for aggrieved persons (including creditors) to approach to the Court for relief in relation to an alleged contravention of section 442C. These sections give the Court wide powers to make orders in relation an administration, including the protection of creditors’ interests.

The Court is yet to make final orders.  It is unclear as to whether the administrators will be indemnified out of the Company’s property for the amounts for which they are liable.  Sections 443D and 443E of the Act allow administrators to be indemnified for “debts or liabilities incurred, or damages or losses sustained, in good faith and without negligence, by the administrator in the performance or exercise, or purported performance or exercise, of any of his or her functions or powers as administrator”.  It is arguable that the administrators’ conduct was not “without negligence” in the face of THC’s express claim to the Shortfall Stock.  Given the circumstances and the value of the Shortfall Stock, it would have been prudent for the administrators to obtain THC’s consent or leave of the Court before disposing of it.

This case emphasises that Administrators should be mindful at all times of potential claims to property in the possession of a company. Claims which are expressly notified should be treated with utmost care. If the disposal of the relevant property is not in the ordinary course of the company’s business, then the administrator should always seek the owner’s (or secured party’s) consent or leave of the Court before disposing of the property.

 Contact Mills Oakley

For more information about this decision please contact:

Ariel Borland |
Partner
T: +61 3 9605 0015
E: aborland@millsoakley.com.au

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