Let the Court decide – administrator and equitable liens

In White, in the matter of Mossgreen Pty Ltd (Administrators Appointed) v Robertson,^[1] the Full Court of the Federal Court of Australia considered whether administrators were entitled to an equitable lien over property owned by a company or a third party to recover fees and costs incurred in an administration. This arose in circumstances where the administrators had undertaken a stocktake and proposed to recover their costs by way of a levy payable by the consignors of goods.

The facts

Mossgreen Pty Ltd (Mossgreen) conducted an auction house and gallery and held a large quantity of goods owned by other people on consignment. As consignee, Mossgreen had both contractual obligations and legal duties as bailee. Following the appointment of administrators to Mossgreen, the administrators were required to return all goods to their rightful owners.

Despite some consignors contacting the administrators, they conducted a stocktake, at a cost of over $1 million, which revealed that Mossgreen held approximately 7,000 lots on consignment for over 800 consignors in addition to items which had been abandoned.

The administrators sought to recover their costs from the consignors of goods by way of a levy of $353.20 per lot for the return of the goods and sought a direction from the Court that they were entitled to recover their costs on the basis that an equitable lien existed over the consigned goods. Significantly, the administrators only did so after the stocktake had been conducted and the costs incurred.

The Courts’ decisions

The Federal Court held at first instance that an equitable lien did not exist.

The administrators appealed the decision.

At both first instance and on appeal, the Court found that no equitable lien existed over the consigned items and the consignors were not required to pay the levy, but for different reasons.

At first instance, the Court considered the Corporations Act 2001 (Cth) and in particular section 437A and section 443F.

The primary Court observed that an equitable lien will exist in circumstances where an administrator is carrying out its statutory duty to identify the company’s property but in the process happens to encounter property owned by a third party. Conversely, an equitable lien will not arise in circumstances where an administrator identifies property owned by a third party but the administrator is not performing their statutory duty.

The primary Court found that the administrators knew that none of the consigned goods were owned by Mossgreen and it was not in the administrators’ statutory functions to ensure the equal treatment of consignors or the return of the goods to their owners in an orderly fashion and as such the stocktake was not necessary. Accordingly, in performing the stocktake the administrators were not exercising their statutory functions and an equitable lien could not and did not arise.

On appeal the Full Court considered that the stocktake was within the statutory functions of the administrators as it was necessary to continue to perform the functions of Mossgreen and its officers and what they would have been expected to perform as if Mossgreen was not in administration. If costs were incurred in this process, then a potential lien (statutory or in equity) may arise over the company’s property or the consigned goods even where no claim to ownership is made by the company.

The Full Court observed that whether equity would grant a lien and the extent of any such lien will turn on the facts of each case and may depend on:

• The value of the statutory lien; and
• The particular circumstances of the administrator’s conduct.

In respect of the administrators’ claim for the levy on the consigned goods held by Mossgreen, the Full Court dismissed the administrators’ appeal.

In reaching that decision the Full Court found:

• On the evidence, the majority of the cost involved with the stocktake was in respect of goods that the administrators understood had been abandoned and were of little value. As such, the cost of undertaking the stocktake of all goods was not proportionate to the value of the items;
• If there was a need for a stocktake it was because of Mossgreen’s breach of its obligation as bailee in failing to keep accurate records. The Court held that if this is the case, the costs of the stocktake should not be borne by the consignors ahead of the general creditors; and

On the evidence, the majority of the cost of the stocktake was also expended to value the business and position it for sale for the benefit of the general body of creditors, that is, it was not for the benefit of the consignors.

Key takeaway

The Courts decision serves as a reminder that administrators ought to approach the Court at an early stage where consideration may be given to all options, including issues of proportionality and the most appropriate way to deal with the consigned goods. This does not mean that an equitable lien does not exist however a delay in obtaining directions sanctioned by the Court may make it more difficult for insolvency practitioners to obtain a direction that an equitable lien exists after they have adopted and implemented certain steps.

Authored by:

Susan Forrest, Partner
Marikki Watego, Solicitor

[1] [2018] FCAFC 63.