Crouch v Adams

1. The Plaintiffs are to bring in short minutes of order giving effect to these reasons within seven days. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

PERRAM J: 1 The Plaintiffs are the administrators of Mossgreen Pty Ltd (Administrators Appointed) ('Mossgreen'). Until the administrators were appointed to it on 21 December 2017, Mossgreen had conducted a high-profile auction house and gallery. In the conduct of its business as an auctioneer it held a large quantity of goods belonging to other people. These consisted of: (a) goods delivered to it to be auctioned but which had not yet been auctioned at the time the administrators were appointed; (b) goods delivered for auction but which had failed to sell and which were awaiting collection by their owners; and (c) goods which, although successfully sold at auction, had not yet been collected by the successful bidder. 2 In none of these cases is there any suggestion that Mossgreen itself had title to the goods and it is accepted on all sides that it held the goods as a bailee for each relevant person. 3 The appointment of administrators has revealed that Mossgreen is insolvent to a significant extent. One of the administrators, Mr White, gave evidence that as at 5 March 2018 his investigations had revealed that it had $2.8 million of assets and $14.8 million of creditors including a secured creditor to the value of $6 million. In addition, a number of persons whose goods were successfully sold at auction by Mossgreen now claim that the money received by it from their respective purchasers is held on trust for them and is not, therefore, available for general creditors. The three-cornered contest between the administrators, the trust-asserting consignors and the secured creditor is to be determined later this year. If the outcome of that contest is that the secured creditor is entitled to rely upon his security, the return to general creditors will be nil. Even if it is not, the return to them will be no more than 18.9 cents in the dollar (i.e. $2.8 million divided by $14.8 million) and even that is on the assumption that the trust claims fail. 4 The present difficulty arises because Mossgreen did not conduct its inventory control systems competently despite the holding of other people's goods being a central part of its business. When the administrators were appointed there was uncertainty as to the status of some of the stock which was on hand. The inventory system suggested that there were as many as 34,000 lots being held, but the staff (who were kept on for this purpose) thought there were between 8,000 and 12,000 lots. There were other difficulties of a similar kind. 5 When the administrators came into the company and perceived this problem they had a number of options. The first was that they could have given notice to the consignors under s 443B of the Corporations Act 2001 (Cth) ('the Act'). The existence of this as an available alternative was sworn to by Mr White. So far as is relevant, s 443B provides: 443B Payments for property used or occupied by, or in the possession of, the company Scope (1) This section applies if, under an agreement made before the administration of a company began, the company continues to use or occupy, or to be in possession of, property of which someone else is the owner or lessor, including property consisting of goods that is subject to a lease that gives rise to a PPSA security interest in the goods. General rule (2) Subject to this section, the administrator is liable for so much of the rent or other amounts payable by the company under the agreement as is attributable to a period: (a) that begins more than 5 business days after the administration began; and (b) throughout which: (i) the company continues to use or occupy, or to be in possession of, the property; and (ii) the administration continues. (3) Within 5 business days after the beginning of the administration, the administrator may give to the owner or lessor a notice that: (a) specifies the property; and (b) states that the company does not propose to exercise rights in relation to the property; and (c) if the administrator: (i) knows the location of the property; or (ii) could, by the exercise of reasonable diligence, know the location of the property; specifies the location of the property. (4) Despite subsection (2), the administrator is not liable for so much of the rent or other amounts payable by the company under the agreement as is attributable to a period during which a notice under subsection (3) is in force, but such a notice does not affect a liability of the company. …' 6 As I understood it, what Mr White was endeavouring to say was that by giving notice under this provision the administrators could have washed their hands of the problem of the consignors' goods implicitly by abandoning them to their fate at the hands of the lessors of the premises in which they were held. Whilst Mossgreen would have been potentially liable for what happened to the goods thereafter, the administrators themselves would have had no personal liability under s 443B. 7 A second option would have been for the administrators to have applied to the Court to be appointed receivers of the consigned goods. The classes of case where the Court may appoint receivers is not closed and the remedy is a flexible one: University of Western Australia v Gray (No 6) [2006] FCA 1825 at [71]-[72] per French J. Had that been done the ensuing process would have been under the supervision of the Court. 8 A third option was for the administrators, having no claim on the consignors' goods and no need to deal with them for the purposes of administering the company's property, in effect, to appoint themselves as receivers de son tort of the consigned goods. Under this option, the administrators would take charge of the consigned goods with a view to returning the consigned goods to the consignors. 9 A fourth option would have been to approach the Court for advice on which of these courses should be taken under s 90-15 of Schedule 2 to the Act (Insolvency Practice Schedule). 10 The administrators decided to take the third option. The first option of abandoning the goods was not pursued because, as Mr White explained, it posed 'the risk of unequal treatment of consignors and of damage and loss to consigned goods in an uncontrolled process'. In subsequent written submission delivered after the hearing at the invitation of the Court, the administrators backed away from this to an extent. Whilst they accepted that there was some risk that the lessors might dump the goods, it was suggested in view of the liability that might accrue to them in doing so, that it was more likely that the lessors might have applied to the Court for the appointment of receivers. 11 In any event, to facilitate the orderly return of the consignors' goods to the consignors, the administrators decided to undertake a full stocktake of Mossgreen's inventory to overcome the shortcomings in inventory control which they perceived to exist. This involved retaining a number of staff and the engagement of a specialist inventory management firm, Tiger Asset Management. The final costs of this process are yet precisely to be determined but they appear likely to be in the vicinity of $1,048,072.93 plus GST. The Court's views have never until now - after the event - been sought on the appropriateness of this process. 12 The administrators now seek to recover this cost from the consignors by means of a levy of $353.20 per lot. There are thought to be 4,663 lots (excluding the philatelic and numismatic lots which have been separately sold to a third party) of which 30% are expected not to be collected. Hence, the figure has been derived on the basis of 3,264 lots. To illustrate the problem which now arises, one of the largest lot owners is Mr Robertson who consigned his collection of antique furniture, drawings, prints, pottery and other objets d'art to Mossgreen in September 2017. The value of his collection is estimated at between $52,180 and $89,170. The levy which the administrators are now seeking from him for the return of his property amounts to $104,194.00. Other persons, apart from Mr Robertson, are in a similar situation. 13 The administrators have two alternate interests in recovering the cost of the stocktake and related expenses from the consignors. On the one hand, if the secured creditor's claim for $6 million and the trust claims are unsuccessful then the administrators will be entitled to recover the stocktake expense under their indemnity out of the company's assets conferred by s 443D of the Act. However, this will significantly dilute the return to unsecured creditors as Mr White acknowledged. On the other hand, if the secured creditor is successful in asserting his security (or the trust claims succeed), then the administrators will bear the costs themselves since there will be no company property available from which their indemnity may be acquitted. In either case, the administrators have a motive to seek to have the consignors meet the cost of the stocktake. 14 By demanding the payment of $353.20 for each lot as the condition for releasing it to the relevant consignor the administrators are asserting the existence of an equitable lien. The central question raised by the administrators' application to the Court is whether they are correct that such a lien exists. 15 In my opinion, it does not. It is useful to recall some basic principles. First, in the performance of their statutory functions administrators have a statutory lien to secure their rights of indemnity against the company's property: s 443F of the Act. 16 Secondly, where in the performance of their statutory duties administrators bring into existence a fund of property not belonging to the company but instead to third parties, they are entitled to an equitable lien over that fund for their reasonable expenses in bringing it into existence: Re Universal Distributing Co Ltd (In Liq) (1933) 48 CLR 171 at 174 per Dixon J. That case was concerned with a liquidator but there is no reason in principle to distinguish the two offices. 17 Thirdly, subsequent decisions have, of course, put flesh on the bones of this dictum. These later authorities were collected by Ward J in International Art Holdings Pty Ltd (admin apptd) v Adams [2011] NSWSC 164; 85 ACSR 1 ('International Art Holdings') at [74] and usefully summarised: the equitable lien does not depend for its vitality upon either contract or possession but derives instead only by operation of law as part of a scheme of equitable adjustment of mutual rights and obligations. It is inherently a right against property that arises automatically by implication in equity as security for the discharge of an actual or even potential indebtedness. It arises in any circumstance where equity considers that fairness dictates that it should 18 Fourthly, this principle has been extended to cases where, in the performance of their statutory functions, liquidators or administrators identify by stocktake or other inquiry property belonging to third parties: Crouch v Adams [2006] NSWSC 1029 ('Crouch') at [20]-[23] per White J; In the matter of Renovation Boys Pty Ltd (admins apptd) [2014] NSWSC 340 ('Renovation Boys') at [29]-[34] per Black J. In both of these cases, it is to be noted that the administrator/liquidator came to be identifying property owned by third parties in the process of ascertaining which elements of a collection of goods held by him belonged to the company and which did not. Such a process for the ascertainment of company property may be seen as being squarely within the functions of an administrator set out in s 437A of the Act: '437A Role of administrator (1) While a company is under administration, the administrator: (a) has control of the company's business, property and affairs; and (b) may carry on that business and manage that property and those affairs; and (c) may terminate or dispose of all or part of that business, and may dispose of any of that property; and (d) may perform any function, and exercise any power, that the company or any of its officers could perform or exercise if the company were not under administration. (2) Nothing in subsection (1) limits the generality of anything else in it. Note: A PPSA security interest in property of a company that is unperfected (within the meaning of the Personal Property Securities Act 2009) immediately before an administrator of the company is appointed vests in the company at the time of appointment, subject to certain exceptions (see section 267 of that Act).' 19 (There are additional functions set out in s 442A but these are not material to the present discussion). As such, even though third-party property is involved rather than the company's own property, the administrator still would be performing a statutory function and would not be in the position of an intermeddler who provides unsought services. 20 Fifthly, it is the fact that the performance of a statutory duty is involved which permits the equitable lien to arise: Stewart v Atco Controls Pty Ltd (In Liquidation) [2014] HCA 15; 252 CLR 307 ('Stewart') at 326-327 [47]-[48]. When an administrator or liquidator creates a fund, or identifies third-party property, but does so other than in the performance of his or her statutory duty then the equitable lien will not arise. This is because the principles in Falcke v Scottish Imperial Insurance Co (1886) 34 Ch D 234 ('Falcke') will then apply: Stewart at [47]-[48]. Falcke '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': Stewart at [47]. In Stewart, the High Court was clear that what made the principle in Falcke inapplicable to the equitable lien in that case was the fact that the principle had 'no application to work undertaken in the realisation of assets as part of a liquidator's statutory duties': Stewart at [48]. 21 These observations tend to suggest that no lien can arise in this case. In dealing with the consignors' goods the administrators were not attempting to achieve any outcome for the company. As Mr White candidly explained in his affidavit, the administrators' motives were these: 'The alternative to conducting the Stocktake would have been form me to issue a notice of intention not to exercise rights in respect of the Premises under section 443B of the Act and taken no action. That alternative was considered by not pursued given the risk of unequal treatment of consignors and of damage and loss to consigned goods in an uncontrolled process.' (errors in original) 22 It was not part of the administrators' statutory functions to ensure the equal treatment of the consignors or the disposition of their goods in an orderly fashion. In particular, the process adopted, however noble in sentiment, did not involve the company's business, property or affairs under s 437A of the Act. A contrary view might be that the abandonment of the goods by the administrators might have exposed Mossgreen to claims in conversion by the consignors. On this view of affairs, it might have been within the statutory remit of the administrators to prevent the ranks of the unsecured creditors being swollen by disgruntled consignors. However, the administrators ultimately did not see this view as realistic for three reasons. First, it was likely the lessors would appoint receivers; secondly, even if they had not, a claim by the consignors against the lessors (who, after all, owned property by definition) was much more likely than a claim against an insolvent Mossgreen; and, thirdly, the existence of the secured creditor made it quite difficult to be clear that there could be any dilution in any event. I accept the administrators' submissions about this. The stocktake process cannot reasonably be seen as directed to reducing the unsecured claims on the company. It follows that the administrators conducted the stocktake process dehors their statutory functions. 23 The position is, therefore, governed by Falcke and no equitable lien arises. 24 The decisions in Crouch and Renovation Boys are not to the contrary. In both cases, third-party property was identified as part of a necessary incident of identifying what was company property and what was not. To discharge their statutory function of realising company property, the external controllers had to ascertain how much of what they held actually belonged to the company. That is not the case here where it has never been in doubt that the consignors own all of the property and, correspondingly, that Mossgreen owns none of it. Unlike Crouch and Renovation Boys the present administrators did not need to ascertain anything about the ownership of the lots to perform their statutory functions. 25 The result in International Art Holdings may be thought to the contrary. That case concerned a collapsed art dealing and rental business and a category of goods also referred to as the 'Levy Artworks'. These were goods whose owners had been identified and in respect of whom the administrators sought to impose a levy for their costs in, inter alia, ascertaining their identity. Ward J upheld the equitable lien sought. However, no argument was advanced to her Honour based on Falcke. In that circumstance, I do not think that this decision is to the contrary; it is merely silent on the issue. 26 In reaching this conclusion I have not disregarded what is sometimes referred to as the 'salvage' nature of the work done by external administrators (Shirlaw v Taylor [1991] FCA 531; 31 FCR 222 at 230-231) or the concomitant need to ensure that persons are not deterred from doing such work in the future. But that well-founded policy consideration cannot provide cover for external administrators who decide to deal in assets of other persons for no reason relating to the administration of which they are seized. 27 I conclude, therefore, that the alleged equitable lien does not arise. The administrators were intermeddling in 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. Accordingly, they are not justified in requiring the consignors to pay a levy for the return of their goods: Falcke. On the other hand, they 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. There was agreement that at this stage the Court should not deal with prayer 6 of the originating process (which concerns the position of the secured creditor and the trust claims) or costs (which is intertwined in that debate). 28 The Plaintiffs are to bring in short minutes of order giving effect to these reasons within seven days. I certify that the preceding twenty-eight (28) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Perram.