The Fine Art of Recovering Costs

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

Recovering fees and costs incurred for work done in any external administration is a key concern for practitioners.  Reliance is often placed by practitioners on an equitable lien, arising under the rule in Re Universal Distributing to secure and recover costs of realising a fund.  The recent the Federal Court of Australia decision of White, in the matter of Mossgreen Pty Ltd (Administrators Appointed) [2018] FCA 471 (White) is a reminder that practitioners should always be conscious of what tasks fall within the scope of their statutory functions, and what tasks do not.  The latter will not give rise to an equitable lien in favour of the practitioner.  In cases of uncertainty, practitioners should approach the Court before incurring significant costs.

Background

Prior to the appointment of administrators on 21 December 2017, Mossgreen Pty Ltd (Mossgreen) was a high-profile auction house and gallery. At the appointment date, Mossgreen held a large inventory of artwork which were at various stages of sale. Some works were awaiting auction; others remained uncollected following sale; and some had failed to sell but remained uncollected.  It was accepted that Mossgreen held the artworks as bailee for the relevant owners.

Mossgreen had poor inventory records. It was only possible to ascertain ownership of the artworks in some cases. Mossgreen’s administrators took it upon themselves to undertake a full stocktake of Mossgreen’s inventory to overcome its shortcomings in inventory control. The cost of the stocktake was in excess of $1 million. The administrators did not seek the court’s direction prior to undertaking the stocktake.

The administrators sought to recover their stocktake costs by imposing a levy of $353.20 for each distributed ‘lot’ to be paid by each owner and sought the Court’s direction to do so. Aside from the legal difficulties of imposing the levy (discussed below), in some cases the number and value of items consigned to Mossgreen by owners meant that the total levy imposed on an owner would exceed the value of the artworks, thereby leading to a perverse outcome.  By demanding payment of the levy, the administrators were asserting the existence of an equitable lien. The Court considered whether there was such a lien in favour of the administrators.

The Decision

Perram J considered the potential bases for a lien in favour of the administrators. First, he noted that administrators are entitled to a lien under section 443F of the Corporations Act 2001 (Cth) (Act) when performing their statutory functions. Second, administrators are entitled to an equitable lien for creating a fund of property not belonging to the company but to third parties under the principle in Re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171. Again, the fund must be brought into existence in the performance of the administrators’ statutory duties.

His Honour noted that the principle has extended to cases like the one at hand, where in the performance of their statutory functions, liquidators or administrators identify by stocktake property which belongs to the company and that which belongs to third parties, see: Crouch v Adams [2006] NSWSC 1029; and Re Renovation Boys Pty Ltd (admins apptd) [2014] NSWSC 230 (and also Re Arcabi [2014] WASC 310 not referred to by his Honour but which we discussed here).  Ascertaining which property belongs to the company and which does not falls squarely within an administrator’s statutory functions set out in section 437A of the Act.  In these circumstances, the administrator is not ‘in the position of an intermeddler who provides unsought services’.

His Honour contrasted this scenario with when an administrator or liquidator creates a fund, or identifies third-party property other than in the performance of his or her statutory duties.  In this case, statutory and equitable liens in favour of the administrator do not arise. His Honour cites Falcke v Scottish Imperial insurance Co (1886) 34 Ch D 234 (referred to by the High Court in the oft-cited case of Stewart v Atco Controls Pty Ltd (in liq) (2014) 252 CLR 307), which ‘stands for the proposition that a stranger who carries out work or services, or otherwise confers a benefit on another, without a request, actual or implied, to do so, is not entitled to payment or compensation’.

Perram J considered that Falcke applied in the circumstances. That is, that in dealing with the consigned artworks, the administrators were not attempting to achieve any outcome for Mossgreen, and their actions ‘however noble in sentiment’ did not involve Mossgreen’s business, property or affairs under section 437A of the Act.

Outcomes

We understand that the decision is being appealed, so it may be overturned.  We will issue an update when the appeal his handed down.  Administrators, receivers and liquidators are often appointed to trading entities which hold inventory and other goods not owned by the company in question. Regardless of the outcome of the appeal, the decision in White reminds appointees to act with some caution and critically consider what steps they need to take when dealing with third party property, particularly when it is not intermingled with the company’s property. In cases like Crouch, Renovation Boys and Re Arcabi, the task of identifying what was company property and what was not was necessary to discharge the appointees’ statutory function.  However, in White, it was never in doubt that various third parties owned the artworks in question, so the administrators did not need to ascertain anything about the ownership of the artworks (and their owners) to perform their statutory functions. Their costs of conducting an inventory of third-party property and returning the works could not be levied against the owners via an equitable lien.

In this regard, the judgment suggests that the administrators could have issued notices under section 443B of the Act so that the administrators were not personally liable for the artworks. It was also suggested that the administrators could have applied for appointment to the artworks as court-appointed receivers. In any event, in cases of uncertainty, the administrators should have approached the court for directions, particularly before incurring such large stocktake costs. If you are appointed to a company which holds a mixture of third-party and company property, consider carefully whether your dealings with third-party property are in discharge of your duties and if you are unsure, seek the Court’s direction.

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

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