In brief:

In a recent decision, the Federal Court[1] has held that the Administrators of well-known auction house Mossgreen Pty Ltd (in administration) (Mossgreen), were not entitled to charge the owners of the goods $353.20 per item to retrieve their unsold item from the auction house.

What you need to know:

  •  If you’re an insolvency practitioner and have doubts about the correct course of action, seek directions from the Court.
  • Insolvency practitioners need to consider their statutory duties when making decisions and, when acting as an Administrator, consider whether their actions are achieving an outcome for the company and its creditors.

The facts:

  • Mossgreen was a well-known auction house and held a large quantity of goods (not owned by Mossgreen) that were due to be auctioned or waiting to be collected an auction.
  • It has come to light that Mossgreen did not have a competent inventory control system in place. Despite there being 34,000 lots held by Mossgreen, staff were under the impression that there was only between 8,000 and 12,000 lots! This meant that it wasn’t clear to the Administrators in many cases which lots belonged to who without further investigation. It was clear, however, that none of the goods belonged to Mossgreen.

The problem facing the Administrators:

 Mossgreen had no interest in the goods it held, yet what should they do with the goods?

The options:

 The Court set out the options as perceived by the Administrators:

  • Option 1: Giving notice under section 443B of the Corporations Act to the consignors of the goods giving notice that Mossgreen has no interest in the goods and outlining the location of the goods.
    • Under this option, the Administrators were concerned that they would be abandoning the goods to the lessor of the premises in which they were held. Whilst Mossgreen would have been potentially liable for the goods, the administrators would have no personal liability.
  • Option 2: The Administrators could have applied to the Court to be appointed receivers over the goods. The appointment of receivers is a flexible one and the process would have been under the supervision of the Court.
  • Option 3: The Administrators could take charge of the goods with a view to returning them. This is the option they chose despite there being no requirement to deal with the goods for the purpose of administering Mossgreen’s property.
  • Option 4: The Administrators could approach the Court for advice as to which option was appropriate in the circumstances.

The Administrators’ solution (Option 3):

 The Administrators’ opted for option 3 as follows:

  • They decided to take a full stocktake of the goods at a cost in excess of $1 million.
  • They sought to recover this cost by charging the owner of each lot $353.20 upon collection of the item.

The Court’s decision:

The practicality of the approach taken by the Administrators meant that some people were required to pay more than their goods were worth to retrieve them.

For example, one person had goods worth between $52,180 and $89,170 held by Mossgreen and was being required to pay $104,194 for their goods to be released!

The Court found:

  • By demanding a payment of $353.20 per lot, the Administrators were asserting an equitable lien over the goods. They were not entitled to do so.
  • In dealing with the goods, the Administrators were not attempting to achieve any outcome for the company. It is the Administrators’ role to manage Mossgreen’s business, property or affairs – it is not their role to ensure the equal treatment of the disposition of the goods in an orderly fashion.
  • A stranger is not entitled to compensation when they carry out work or confer a benefit on another without a request to do so.
  • The Administrators are entitled to a lien for disposing of goods which ultimately turn out to be unclaimed and they should be entitled to realise those goods and, subject to any claim, apply the proceeds for the purposes of the administration.”

Comment

Insolvency practitioners are often faced with unique factual situations and difficult scenarios with many competing interests of different stakeholders.

In this case, the Administrators may have believed that their actions sat within the Universal Distributing[2] principles.  The Court held, however, that this case could be distinguished from those where administrators, properly performing their statutory duties, identify property owned by a third party in the process of ascertaining which goods held by the company belonged to the company. In this case, it was always clear that the property did not belong to Mossgreen and there was no outcome sought for Mossgreen.

This case is a timely reminder that seeking directions from the Court is often a prudent course of action. There is often reluctance from insolvency practitioners to seek directions from the Court. Practitioners are often concerned with the cost of the application or that the Court will see the question as a commercial decision and therefore not assist. As this case demonstrates, having the benefit of a Court order can save a lot of problems and costs in the long run.

If you wish to discuss this case or the duties of Administrators further, please do not hesitate to contact Catherine Ballantyne on 03 9242 4766 or Catherine.Ballantyne@madgwicks.com.au.

 

[1] White, in the matter of Mossgreen Pty Ltd (Administrators Appointed) [2018] FCA 471

[2] Re Universal Distributing Co Ltd (In Liq) [1933] HCA 2(1933) 48 CLR 171