If in doubt, take stock and seek directions

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By Ariel Borland, Partner, Jennifer O’Farrell, Senior Associate and Danielle El-Hajj, Law Graduate

We recently wrote about the Federal Court’s decision in White, in the matter of Mossgreen Pty Ltd (Administrators Appointed) [2018] FCA 471 (White). That decision was appealed and the Full Court has made a number of important observations about the administrators’ role, their incurred expenditure, and whether their conduct attracted the benefit of an equitable lien.

Although the Full Court of the Federal Court dismissed the appeal, it declined to find an equitable lien in favour of the administrators for different reasons than the trial judge. Importantly, it appears that the Court considered the administrators were ‘too late’ in seeking the Court’s directions retrospectively about the large quantum of costs they had incurred. Had they sought the Court’s directions from the outset and acted reasonably and proportionately in accordance with those directions, they may have had the benefit of a lien to secure their costs.

The Full Court’s Decision

The relevant facts for the case can be found in our previous alert.

Contrary to the trial judge’s findings, the Full Court found that the administrators were acting within the scope of their statutory duties in seeking to deal with and returning the artworks to their rightful owners, notwithstanding that they were not property of Mossgreen. The Court found ‘[t]hese are functions which Mossgreen and its officers would be expected to perform if the company was not under administration…

In light of this, the Court stated a lien – whether statutory under section 443F of the Corporations Act 2001 (Cth) (Act), or equitable lien – may arise over Mossgreen’s property or the property owned by third parties. The Court noted the categories of cases in which an equitable lien will arise are not closed, and an equitable lien can attach to third party property which does not belong to the company in question.

However, there were three principal reasons why the Court declined to find a lien in this case:

  1. much of the costs incurred in the stocktake to purportedly identify the owners of the artworks were unnecessary, and this should have been apparent to the administrators;
  2. even if such a stocktake were necessary, it would have been because Mossgreen had breached its obligations to the third party consignors and bailors as the bailee of the artworks. The Court said in these circumstances an equitable lien would at best only arise in this situation if the statutory lien against the property of Mossgreen had been exhausted; and
  3. many of the costs incurred in the stocktake had been incurred for the general body of creditors who appeared to have an interest in preserving the engagement of employees, exploring the possibility of a DOCA and being able to demonstrate to potential purchasers the quantity of stock held on consignment. These steps benefited the general body of creditors, and not the third party consignors and bailors against whom the administrators proposed to impose a levy secured by the equitable lien.

In addition, the Court was critical of the steps taken by the administrators who had incurred over $1 million in fees and costs for undertaking the stocktake of the artworks. The Court considered that the costs incurred were disproportionate. In many cases, the levy that the administrators sought to impose on the consignors for the return of the artworks would ‘dwarf’ the value of the works themselves. The Court made a number of strong statements to the effect that the administrators should have sought the Court’s direction as to the proper conduct of the stocktake from the outset. Had they done so, the Court could have fashioned appropriate directions as to how the administrators should perform a stocktake (including the appointment of a receiver to undertake the work under the Court’s supervision).

The Court declined to make any orders with respect to the administrators’ entitlement to a statutory lien because such orders had not been sought before the primary judge. In relation to the equitable lien sought, the Court stated:

There may be a lien in some amount that might arise in the circumstances of this case.  However, the Court is now faced with an application for directions blessing conduct of a kind that is not justified on the basis on the nature and extent of the lien advanced to support the judicial directions sought…’

The Court declined to assess what might be a reasonable amount to be secured by the lien, concluding:

Owners have been held out of their consigned items for a considerable period and we question whether the administrators would be justified in delaying further the release of the consigned items while there is some form of retrospective assessment of the amount of a lien that may be required to be paid as a condition of release of property to the owners.’

Conclusion

The decision confirms that the circumstances in which an equitable lien will arise are broad, and it can attach to property which is not property of the company, in circumstances where administrators are performing statutory duties.

However, in this case, the Court found that the tasks performed and the costs incurred were out of all proportion to the outcome. The administrators ought to have sought the Court’s direction as to the stocktake prior to commencing the task. The Court could have provided adequate guidance as to what was necessary and proportionate for them to have complied with their statutory duties.

Re Mossgreen is therefore a salient reminder that if an insolvency practitioner apprehends that the tasks they need to undertake will involve dealing with third party property, or may otherwise be outside of the normal tasks undertaken in such an appointment, the practitioner should always seek directions before undertaking the task.

For further information, please do not hesitate to contact us.

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Restructuring & Insolvency

If in doubt, take stock and seek directions