The path to Court is paved with good intentions: seeking directions under the Insolvency Practice Schedule

Administrators can seek directions from the Court on how to exercise their duties.This is designed to ensure that an administrator can act with the certainty of the Court’s approval rather than later facing criticism or liability for a step taken in the appointment.

Recently the administrators of Mossgreen Pty Ltd (which ran an auction house) faced criticism for charging fees to return consigned goods in the possession of the company to their rightful owners.

The rationale behind the administrators charging the fee was threefold:

  • Firstly, the administrators had incurred significant costs to preserve and catalogue the consigned goods to determine who the rightful owners of the goods were, due to the deficiency of the company’s record keeping.2   
  • Secondly, there was no dispute that the company did not hold legal title to the goods and were consequently, the goods were not the property of the company capable of realisation for its creditors. Therefore, the costs should not be borne by the creditors of the company.
  • Thirdly, the company had a significant number of creditors, but a limited asset pool.  The administrators thought that it was not appropriate to use the company’s assets otherwise capable of realisation for its creditors to facilitate the return of the goods to the consignors and rightful owners.

Although the administrators subsequently sought the Court’s guidance as to whether they were entitled to charge fees for returning the goods to the consignors, the administrators were criticised because they had already informed consignors that a fee would be payable for the return of goods, and had already charged some consignors a fee including, on one occasion, a fee which exceeded the value of the goods consigned.

In the first instance, Justice Perram of the Federal Court of Australia held that the administrators were not justified in requiring the consignors to pay a levy for the return of their goods when they (the administrators) had not been invited to ‘intermeddle’ with the goods, were not performing their statutory functions for the benefit of unsecured creditors and were therefore not entitled to assert an equitable lien over the goods.3

Importantly, Justice Perram held that the administrators may have had other options available to them to deal or dispose of the goods, such as (among other things) issuing a notice to the consignors under section 443B of the Corporations Act,4 applying to Court to be appointed as receivers of the goods or applying to Court under the IPS ahead of taking the steps for directions as to the appropriate course to be taken.

On appeal,5 the Full Court of the Federal Court of Australia upheld Justice Perram’s decision, and whilst commenting that the approach taken was not free from error, it was not satisfied that there was a lien covering the type of costs and in the amount claimed by the administrators arguing that ‘at best… a lien in respect of such costs would only arise if the administrator’s statutory lien against the assets of the company was insufficient’ but that this was not supported by the evidence in this case.

Ultimately, although the administrators’ acted with noble intentions by cataloguing and preserving the goods for their rightful owners, the Courts were not prepared to sanction the administrator’s fees for the exercise given that it did not involve the company’s business, properties or affairs.6  As the fees were not incurred in the discharge of the administrators’ statutory functions, it appears they could not be recovered by the administrators (at least from the consignors).

Ultimately, although the administrators’ acted with noble intentions by cataloguing and preserving the goods for their rightful owners, the Courts were not prepared to sanction the administrator’s fees for the exercise given that it did not involve the company’s business, properties or affairs.6  As the fees were not incurred in the discharge of the administrators’ statutory functions, it appears they could not be recovered by the administrators (at least from the consignors).

Lavan comment

This case is an important reminder to insolvency practitioners that if a company over which they are appointed is in possession of goods that are owned by third parties, they should not assume that they are entitled to an equitable lien to secure their costs to deal with those goods.  Where there is uncertainty about the ownership of goods in a company’s possession, section 447A of the Act and the IPS provide a route under which insolvency practitioners can seek guidance from the Court on how to exercise and discharge their duties.  Otherwise, even with the best of intentions, insolvency practitioners may find themselves unable to recover their costs from third parties.

Disclaimer – the information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.
AUTHOR
Joseph Abberton
Partner
SERVICES
Restructuring & Insolvency


FOOTNOTES

[1] See Corporations Act 2001 (Cth) Sch 2, Insolvency Practice Schedule, 90-20.

 

[2] The goods were being held on behalf of owners who had bought the goods at auction, or of those whose goods had either not yet been auctioned or sold and were awaiting collection from their owners.

 

[3] White, in the matter of Mossgreen Pty Ltd (Administrators Appointed) [2018] FCA 471 [27].

[4] 2001 (Cth).

[5] White, in the matter of Mossgreen Pty Ltd (Administrators Appointed) v Robertson [2018] FCAFC 63.

[6] See section 437A of the Corporations Act 2001 (Cth).