Crouch v Adams

[2024] FCA 838

Federal Court of Australia|2024-07-26|Before: Ms J, Goodman J

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Source facts

Court

Federal Court of Australia

Decision date

2024-07-26

Before

Ms J, Goodman J

Source

Original judgment source is linked above.

Judgment (19 paragraphs)

[1]

THE COURT DIRECTS PURSUANT TO 90-15(1) OF INSOLVENCY PRACTICE SCHEDULE (CORPORATIONS), BEING SCHEDULE 2 TO THE CORPORATIONS ACT 2001 (CTH) THAT:

The plaintiff is justified in causing Johnny's Furniture Group Pty Ltd (In Liquidation) ACN 625 871 570 (Company) to proceed, including to completion, with the 'Asset Sale Deed' with the purchaser, 'East Roze' as those terms are defined in the plaintiff's affidavit affirmed 15 July 2024 (Supporting Affidavit) and taking the steps outlined in the Asset Sale Deed.
The plaintiff is justified in acting on the basis that in respect of any stock item, the stock item has been allocated or appropriated to a customer if the stock item meets the criteria stated at paragraph 33 of the Supporting Affidavit.
The plaintiff is justified in acting on the basis that, in respect of the Category A Stock items and customers listed in Annexure A of the Supporting Affidavit, title to such items has passed to those customers subject to the orders below, including in respect of the payment of associated delivery fees.
The plaintiff is justified in acting on the basis that, in respect of the Category B Stock items and customers listed in Annexure B of the Supporting Affidavit, title to such items has passed to those customers (but in respect of which there are now insufficient items in stock to satisfy the stock order in full) and in selling those remaining items in stock and making a distribution of the proceeds of relevant stock sold (including during the course of the administration) pari passu to those customers, in the manner set out at paragraph 50 of the Supporting Affidavit, subject to the orders below, including in respect of the payment of a levy.
The plaintiff is justified in acting on the basis that, in respect of the Category C Stock items and customers listed in Annexure C of the Supporting Affidavit, title to such items has passed to those customers (but in respect of which there was, as at the commencement of the voluntary administration insufficient items in stock to satisfy the stock order in full) and in selling those remaining items in stock and making a distribution of the proceeds pari passu to those customers, in the manner set out at paragraph 52 of the Supporting Affidavit, subject to the orders below, including in respect of the payment of a levy.

[5]

B.1 The Company 5 The Company operated a business as a furniture retailer in 14 locations in New South Wales, Queensland and Victoria, as well as online, and traded under the business names "Johnny's Furniture" and "Ashley Homestores". 6 The terms and conditions that were stipulated on tax invoices and physical receipts issued by the Company included: All pre-ordered items must be collected or delivered within 4 weeks of their arrival. If you are ordering more than 14 weeks in advance, please let us know the date desired so that we can order accordingly. If you do not collect or have the items delivered after 4 weeks of arrival you will be charged $100 per week in storage fees. By signing this contract you are stating you have read and understood our Ts and Cs and agreed to any additional notes made by the salesperson. ... 7 The Company did not allocate, by way of its inventory management system, stock on hand against particular customer orders which had been paid in full. Instead, it was the Company's practice to send an automated email each day to each of its stores. These daily emails listed any items due for delivery from previous days, such that each daily email was a cumulative and current list of each store's orders ready for fulfilment by delivery or collection on the given day. The daily emails had a pro forma introductory paragraph which included: "... here's a list of all the orders that're showing as 100% ready to despatch, but don't have any delivery or collection date ...". That "list" was in the form of a table with columns headed: (1) "Order Number"; (2) "Customer Name"; (3) "Customer Ph#"; (4) "SKU"; and (5) "Description". 8 "SKU" appears to be a reference to a "stock keeping unit". Each entry in this column is an alphanumeric code. The "Description" is a description of the item(s) of furniture the subject of the order identified by the number in the first column which had been placed by the customer identified in the second and third columns. 9 On 5 June 2024, the plaintiff was appointed as administrator of the Company pursuant to s 436A(1) of the Corporations Act. As at that date, the Company had: (1) current assets in the order of $2.1 million and current liabilities in the order of $6.8 million; (2) incurred a loss in the order of $9.8 million for the 2023/2024 financial year up to 5 June 2024; and (3) approximately $28,000 in cash at bank. 10 Following his appointment as administrator of the Company, the plaintiff determined that it was in the best interests of the Company and of its creditors to continue trading the business in order to conduct a sale of the business and/or an assets marketing campaign and to allow sufficient time for any party to submit a Deed of Company Arrangement (DOCA) proposal. 11 On 26 June 2024, and following consideration of various matters including the absence of any DOCA proposal or offer of purchase, and the Company's financial performance, the plaintiff formally ceased all trading operations of the Company's business. 12 The plaintiff then engaged Slattery Asset Advisory to undertake an advertising campaign for the sale of all of the stock owned by the Company, which stock had been identified by Slattery in a stock-take that Slattery had conducted on 24 and 25 June 2024. Slattery undertook an expressions of interest sale process through which offers were received for the purchase of the stock. The plaintiff considered the offers received by Slattery and formed the view that an offer received from East Roze was the most favourable to the Company for reasons including: (1) that offer was the highest offer received and the price was favourable when compared with a valuation obtained by the plaintiff from Slattery for the stock; (2) the offer provided for the collection of all stock within 72 hours of the signing of a mutually agreed sale contract which meant that the Company could thereafter immediately disclaim the leases of the premises it was occupying, thus relieving the Company from continuing to incur such costs, which were substantial; and (3) East Roze did not require any due diligence period or additional time and was able to immediately sign a contract for sale which meant that the Company could immediately disclaim the leases. 13 On 10 July 2024, at the second creditors' meeting for the Company, the creditors resolved pursuant to s 439C(c) of the Corporations Act, that the Company be wound up and that the plaintiff be the liquidator of the Company. 14 On 11 July 2024, the plaintiff entered into the deed of sale with East Roze. On the same day, a deed of guarantee was executed by Ms Nadia Maisano and the Company, by which Ms Maisano guaranteed the obligations of East Roze under the deed of sale. 15 The circumstances in which the Company entered into the deed of sale include its lack of sufficient funds to meet leasing costs or to otherwise provide for the storage of its stock.

[10]

C.2 Legal framework 26 The principles relevant to making judicial directions and orders pursuant to s 90-15(1) were recently summarised by Button J in Morgan, in the matter Traditional Values Management Limited (in liq) [2024] FCA 74 at [26] to [31], in which her Honour drew from the decisions of Stewart J in Krejci, In the matter of Union Standard International Group Pty Ltd (Administrators Appointed) (No 2) [2020] FCA 1111 at [7] to [11] and Banks-Smith J in Woodhouse (Liquidator), in the matter of Forex Capital Trading Pty Ltd (in liq) [2022] FCA 600 at [51] to [54]. Of particular relevance are the following principles: (1) the Court's power to make judicial directions under s 90-15(1) is very broad; (2) when the Court gives a judicial direction under s 90-15(1), it is not determining the rights of those concerned. Rather the function of such a direction is to confer a level of protection upon the plaintiff; (3) whether or not the direction should be given depends on whether there is a reasonable basis for the plaintiff's proposal, sufficient to persuade the Court that it is proper to exonerate the plaintiff from liability for implementing the proposal or, conversely, whether there is a good reason why the plaintiff should not proceed as proposed; (4) the Court will not give a direction on a purely commercial decision, but may do so when there is, inter alia, a particular legal issue raised for consideration in respect of which the directions are sought; and (5) the power to make judicial directions under s 90-15(1) should be exercised where it is just and beneficial to do so. 27 The present application requires consideration as to whether property in particular stock of the Company has passed to the customers of the Company. The question of whether the customers or the Company hold title to such stock is an important issue in the liquidation. 28 Sections 21 to 23 of the Sale of Goods Act 1923 (NSW) provide in so far as is presently relevant: 21 Goods must be ascertained Subject to section 25A, where there is a contract for the sale of unascertained goods, no property in the goods is transferred to the buyer unless and until the goods are ascertained. 22 Property passes when intended to pass (1) Where there is a contract for the sale of specific or ascertained goods, the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred. (2) For the purpose of ascertaining the intention of the parties regard shall be had to the terms of the contract, the conduct of the parties, and the circumstances of the case. 23 Rules for ascertaining intention Unless a different intention appears, the following are rules for ascertaining the intention of the parties as to the time at which the property in the goods is to pass to the buyer. Rule 1. Where there is an unconditional contract for the sale of specific goods in a deliverable state, the property in the goods passes to the buyer when the contract is made, and it is immaterial whether the time of payment or the time of delivery, or both, be postponed. Rule 2. Where there is a contract for the sale of specific goods, and the seller is bound to do something to the goods for the purpose of putting them in a deliverable state, the property does not pass until such thing be done and the buyer has notice thereof. ... Rule 5. (1) Where there is a contract for the sale of unascertained or future goods by description, and goods of that description and in a deliverable state are unconditionally appropriated to the contract either by the seller with the assent of the buyer or by the buyer with the assent of the seller, the property in the goods thereupon passes to the buyer. Such assent may be express or implied, and may be given either before or after the appropriation is made. ... 29 The Goods Act 1958 (Vic) and the Sale of Goods Act 1896 (Qld) contain provisions in relevantly identical terms.

[11]

C.3 Category A 30 It will be recalled that Category A concerns 289 orders which the Company is able to fully satisfy from its stock. For this category, the plaintiff proposes to operate upon the basis that property has passed in items of stock matching the items the subject of the customers' orders. 31 I am satisfied that the plaintiff is justified in acting on the basis of such an assumption for the following reasons. 32 First, the contracts pursuant to which the orders were made and the payments received are contracts for the sale of unascertained goods by description, within the meaning of s 21 and Rule 5 in s 23, until there has been an allocation of stock against the particular contract. 33 Secondly, there exists goods of that description. Their existence is clear from the evidence of the plaintiff. 34 Thirdly, those goods are in a deliverable state. The expression "deliverable state" is defined in s 5(4) of the Sale of Goods Act, which provides that goods are in a deliverable state when they are in such a state that the buyer would under the contract be bound to take delivery of them. The daily emails suggest that the goods are ready to be delivered. There is no evidence suggesting that any items of furniture are not in a state suitable for delivery. 35 Finally, there has been an "unconditional appropriation" of the goods by the Company qua seller with the implied assent of the customers qua buyers. The appropriation is evident from the daily emails and there is no suggestion that such appropriation was in any way conditional: cf In the matter of Renovation Boys Pty Ltd (admins apptd) [2014] NSWSC 340 at [16] (Black J); Re Plantation Outdoor Kitchens Pty (in liq) [2019] NSWSC 925 at [111] (Ward CJ in Eq.). The proposition that there has been an unconditional appropriation is also consistent with the ability of the Company to impose storage fees (see [6] above). 36 In this regard, it does not follow from the fact that a specific item of stock (as opposed to an item within a pool of stock of the kind ordered) has not been identified that there was no appropriation. As Black J explained in Renovation Boys at [17]: The fact that a specific item could not be identified, at the time of appropriation or now, as having been appropriated to a contract with a particular customer, does not necessarily mean that appropriation did not occur. In Crouch v Adams [2006] NSWSC 1029 at [36], White J distinguished the position between there being no appropriation of goods to a contract and it being impossible to determine what goods were appropriated to an individual contract as follows: "There is an important distinction between there being no appropriation of goods to a contract and its being impossible now to determine what goods were appropriated to an individual contract. It does not follow that because the liquidator cannot now determine which machines were appropriated to which contract, that no appropriation occurred. If there were an appropriation, the property in the machines, both at law and in equity, passed to the individual buyers. If there were not, then, in my view, property in the machines, both at law and in equity, remained with the company." 37 Whilst, as in Renovation Boys, the position in the present case is less clear than in Crouch v Adams [2006] NSWSC 1029 (White J), the present circumstances are sufficient in my view to amount to an unconditional appropriation of stock. The reasoning of Black J in Renovation Boys at [18] is apposite: … there is no evidence in this case that the Company generally acquired items from suppliers for delivery to particular customers, and the Company's practice is better described as allocating a group of items to a group of customers whose orders satisfied the criteria noted above. Nonetheless, it seems to me that the result of that practice was that a particular item (which immediately before had been unallocated) was then allocated to a customer, albeit that item was not then or now distinguishable from other identical items that had previously been allocated to other customers. At the least, it seems to me that there was an unconditional appropriation of a group of items to a group of customers, and those customers at least had property in those items as tenants in common, consistent with the reasoning of White J in Crouch v Adams above. It is, of course, not necessary to a direction to the administrators that that analysis ultimately be correct, but only that it be sufficiently cogent to justify a course of action by the administrators that would be consistent with it. 38 Thus, I am satisfied that the plaintiff would be justified in acting on the basis that property in the Category A stock passed to the Category A customers upon the Company's allocation of goods against the customers' orders in the daily emails.

[14]

C.6 Security interests 46 The stock held by the Company is subject to a series of security interests registered under the Personal Property Securities Act 2009 (Cth) (PPSA). The plaintiff seeks a direction that he is justified in acting on the basis that, in respect of the stock items in Categories A, B and C, title has passed to a customer, notwithstanding the existence of such security interests. 47 The plaintiff relies upon s 46 of the PPSA which provides in so far as is presently relevant: 46 Taking personal property free of security interest in ordinary course of business Main rule (1) A buyer ... of personal property takes the personal property free of a security interest given by the seller ... if the personal property was sold ... in the ordinary course of the seller's ... business of selling ... personal property of that kind. Exceptions (2) Subsection (1) does not apply if: (a) in a case in which personal property of that kind may, or must, be described by serial number - the buyer ... holds the personal property: (i) as inventory; or (ii) on behalf of a person who would hold the collateral as inventory; or (b) in any case - the buyer ... buys ... the personal property with actual knowledge that the sale ... constitutes a breach of the security agreement that provides for the security interest. 48 I infer from the daily emails that any sales of the items of furniture recorded therein occurred in the ordinary course of the Company's business of selling furniture. So much is clear from those emails being records of the business carried on by the Company and from their contents, including the tables therein and the description of the tables as "a list of all the orders that're showing as 100% ready to despatch ...". Thus, s 46(1) of the PPSA is satisfied and - as the exceptions provided for by s 46(2) of the PPSA do not appear to arise on the present facts - the plaintiff is justified in acting on the basis that s 46(1) has the effect that customers to whom there has been a transfer of property in furniture, take such furniture free of any security interest given by the Company. 49 It is thus unnecessary to consider whether s 47 of the PPSA (upon which the plaintiff relied in the alternative) is also satisfied.

[15]

C.7 Lien 50 Prior to the present application, the plaintiff and his staff performed what appears from the plaintiff's first affidavit to have been considerable work in connection with customer orders and stock. If the orders sought by the plaintiff are made, further work will be required. The plaintiff claims to be entitled to an equitable lien over the stock within Categories B and C - such stock being the property of the customers in those categories and not property of the Company - for the costs of the work undertaken and anticipated to be undertaken in connection with the identification, preservation and distribution of stock items. 51 As the Full Court of this Court (Allsop CJ, Banks-Smith and Colvin JJ) explained in White, in the matter of Mossgreen Pty Ltd (Administrators Appointed) v Robertson [2018] FCAFC 63; (2018) 125 ACSR 390 at 403 [84], the question whether equity ought to recognise a lien must be answered by reference to the particular circumstances of each case. 52 I am satisfied that the plaintiff would be justified in acting on the basis that he is entitled to a lien in connection with his reasonable costs incurred in connection with the identification, preservation, and distribution of the proceeds of, the Company's stock with respect to Categories B and C because he has incurred costs to the benefit of the Category B and Category C customers. As Sheppard, Burchett and Gummow JJ explained in Shirlaw v Taylor (1991) 31 FCR 222 at 228 "…equity may raise liens based either upon general considerations of justice or upon the principle that he who seeks the aid of equity in enforcing some claim (eg in an administration of assets) must admit the equitable rights of others directly connected with or arising out of the same subject matter…". See also Crouch v Adams at [20]; International Art Holdings Pty Ltd (administrator appointed) v Adams [2011] NSWSC 164; (2011) 85 ACSR 1 at 18 to 20 ([73] to [81]) per Ward J; Renovation Boys at [30] to [32]; White, in the matter of Mossgreen Pty Ltd (Administrators Appointed) [2018] FCA 471; (2018) 125 ACSR 163 at 167 to 168 ([15] to [20]) (Perram J); White at 403 [82]; Plantation Outdoor Kitchens at [150] to [151]. It was necessary for the plaintiff to conduct reasonable investigations concerning the Company's stock and to incur costs related to that investigation as well as storage costs. Had such costs not been incurred, then on the evidence of the plaintiff, it is likely that the stock would have been abandoned or sold and thus unavailable to the customers who ordered it. It would be inequitable for such customers to take the proceeds of the pro-rata distributions without contributing to the plaintiff's responsible costs relating thereto.

[17]

C.9 Deed of Sale 56 As noted above, on 11 July 2024, the plaintiff entered into the deed of sale with East Roze. The deed of sale includes provisions which are premised upon the plaintiff acting consistently with the directions he seeks from the Court, and is subject to a condition precedent concerning such directions. 57 In the plaintiff's view, entry into the deed of sale is in the best interests of the Company's creditors for reasons including: (1) East Roze's offer was the best offer made both in terms of price and with respect to the commercial arrangements to enable the collection or delivery of stock (see [12] above); (2) the Company's inability to pay for the costs of leasing or other means of storing the stock, which may have had the consequence that stock would have been forfeited and customers otherwise entitled to stock would have become unsecured creditors thereby increasing both the number of unsecured creditors and the total value of unsecured claims; and (3) the deed of sale contemplates that East Roze will collect the stock. 58 In my view, the plaintiff is justified in causing the Company to proceed with the deed of sale in view of the circumstances set out earlier in these reasons including: (1) the deed of sale will enable the plaintiff to give effect to the directions that have been sought and which ought be made; (2) the Company's financial position (see [9] and [15] above); (3) the position with respect to its orders and stock (see [7] to [8] and [15] to [19] above); and (4) the plaintiff's assessment of the benefits of entry into the deed of sale (see [12] and [57] above). 59 I have taken into account the fact that the Category A, B and C customers may need to deal with East Roze rather than the plaintiff with respect to their furniture and that East Roze will not be able to seek judicial direction in the manner that the plaintiff has: see Tucker (Administrator), in the matter of Brosa Design Pty Ltd (Administrators Appointed) [2022] FCA 1588 at [44] (Banks-Smith J). However, this consideration is significantly outweighed by the other considerations described above.