Lien on me – administrators criticised for seeking directions after the fact

This week’s TGIF considers the case of White, in the matter of Mossgreen Pty Ltd (Administrators Appointed) v Robertson in which administrators sought directions on whether they hold a lien over consignor property to secure an alleged levy.

Background

In late 2017, administrators were appointed to a company which operated an auction house and gallery business. As part of that business consigned items were entrusted to the company for their sale by auction (Goods). The company did not claim any title or interest in the Goods other than as bailee.

On 6 March 2018, the administrators sought directions from the Court to approve the course already adopted by them. That course involved undertaking an extensive stocktake sale of the Goods and then demanding payment of $353.20 for each lot as the condition for releasing the Goods to the relevant consignor/owner.

The administrators contended that the amount demanded was payable pursuant to an equitable lien to secure the costs incurred by them in identifying, preserving and distributing the Goods, which amounted to over $1 million.

For some consignors, the value of the levy was equal to or exceeded the value of the Goods.

Administrators’ contentions

The administrators deposed to the fact that the stock records of the company were not kept up to date and could not be relied upon to determine stock holdings. For that reason, the administrators determined that a comprehensive stocktake needed to be completed (at a comparatively high cost).

Decision at first instance

The primary judge found that by demanding payment for each lot as a condition of its release to the relevant consignor, the administrators were seeking to assert the existence of an equitable lien which did not arise.

That was the case because in the judge’s view, the work undertaken by the administrators was not related to the property of the company and did not fall within the administration of its affairs.

Decision on appeal

The Court of Appeal did not agree with the primary judge that the work undertaken by the administrators was outside the scope of the administration of the company’s affairs. It held that it was within the statutory functions of the administrators to continue to perform the function of holding the Goods and as part of doing so, take steps in respect of managing and returning the Goods.

The Court of Appeal further held that if costs had truly been incurred in identifying, preserving and facilitating the return to the consignors of their property, a lien may arise over the Goods in respect of those costs – even where there is no claim to ownership of the Goods by the company.

However, this was not enough to establish the existence of an equitable lien of the kind and in the amount contended for by the administrators, for the following reasons:

1. The stocktake was not necessary, and this would have been apparent from an early stage. Many of the Goods were understood by the administrators from the outset to be either abandoned or of little value. In addition, the company’s staff had significant knowledge of the Goods and would have been able to verify the title of consignors without the need for the stocktake.
2. If there was a need for the stocktake, it arose from a breach by the company of its obligations as a bailee. That is, the company had a duty to maintain an adequate inventory system. If costs were incurred in discharging this duty, they should not be charged to the consignors ahead of the general creditors.
3. Much of the costs incurred were incurred for the benefit of the general body of creditors (and not solely the consignors), who had an interest in undertaking a stocktake for the purpose of determining the extent of items a purchaser of the business might take on in exploring the possibility that the company would enter into a deed of company arrangement.

The Court went on to say that there was no evidence that the administrators considered the extent to which the Goods may have been of little value, whether the stocktake was necessary to deal with claims by consignors or whether the costs involved in the stocktake were proportional to the value of the Goods.

The Court criticised the administrators for not seeking directions at an early stage, but rather embarking on a course of action which demonstrated that alternative options had not been considered, and in respect of which the Court’s blessing was sought after the fact.

What this means for administrators

This case highlights the importance of seeking directions at an early stage, rather than seeking for a course of action to be ratified by the Court after the fact. It also serves as a reminder to administrators to consider proportionality when weighing up different options for dealing with a company’s affairs.