Liquidator exposed to personal liability after half-built boat left exposed to the elements

In Reel Action Sports Fishing Pty Ltd v Marine Engineering Consultants Pty Ltd, [1] the Court offered a timely warning to liquidators of the dangers of adopting and acting on an incorrect understanding of the ownership of contested property. The Court ordered damages against the liquidator personally, despite his position as agent for the company in liquidation.

Background

The plaintiff (Reel) operated a commercial fishing business. It entered into a Vessel Construction Agreement (the VCA) with the first defendant (Marine) for the construction of a commercial fishing vessel (the Vessel).

Reel lodged several registrations on the Personal Property Securities Register (the PPSR) in regard to its claimed interest in the Vessel.

After a dispute arose about the progress of construction, the parties entered into a Deed of Settlement (the Deed), under which:

1. the Vessel was to be sold to a third party
2. Reel was to provide releases of its PPSR registrations and transfer ownership of the Vessel to the third party on receipt of payment
3. Marine was to pay around $1.7M to the plaintiff.

The Vessel was partially-completed when Marine went into liquidation, with the second defendant appointed liquidator (the Liquidator).

Reel informed the Liquidator of its view that the VCA provided for the ownership of the Vessel to pass to it after the first instalment payment made under the VCA. Reel argued the arrangement between the parties was a bailment and demanded possession of the Vessel.

The Liquidator’s view was that the Deed had extinguished all rights under the VCA, that Reel’s PPSR registrations were ineffective and had vested in Marine, and that Marine therefore owned the Vessel.

The Liquidator decided to have the Vessel moved out of the shed it was stored in. Reel opposed this course on the basis that the Vessel would be damaged by water. The Vessel was moved out of the shed onto a hardstand where it was exposed to the elements, with only a poorly-secured tarpaulin as protection. The Vessel was damaged as Reel predicted.

Reel sued the Liquidator and Marine for the tort of conversion – treating another’s goods as if they are your own. It also claimed the Liquidator was negligent in moving the Vessel out of the shed and into the open air.

Judgment

Justice Brown reviewed the VCA and Deed in detail and held that the Deed did not extinguish existing rights. Her Honour held that Reel had become the owner of the Vessel following its first payment under the VCA and that the Deed accepted that fact by providing for Reel to transfer ownership to the third party purchaser.

Her Honour held that, because Reel owned the Vessel, moving it when warned not to do so by its true owner was an act of conversion. Although the Liquidator had to decide between competing claims of ownership between Reel and Marine, and a reasonable time must be allowed for that decision to be made, the Liquidator had taken reasonable time and reached the wrong conclusion. The Liquidator had obtained legal advice, but this did not prevent the Court from finding that the Liquidator was liable for conversion.

Her Honour was critical of the Liquidator’s actions in moving the Vessel outside after being asked not to do so, and to protect it only with a tarpaulin that did not prevent water damage to the Vessel. She did not accept the Liquidator’s evidence that he moved the Vessel to save rental because there were little funds in the liquidation, because when the Vessel was moved, significant funds were shortly to be received from the sale of another vessel Marine had constructed.

However, her Honour did not think that the Liquidator owed a duty of care to prevent damage to the Vessel because of the competing duties of the Liquidator under the Corporations Act 2001 (Cth) and dismissed the negligence claim.

The Court decided that damages should be ordered against the Liquidator personally because asserting ownership of the Vessel and moving it outside were both his decisions. The Liquidator was ordered to pay the amount of the reduction in value of the Vessel caused by the water damage.

Key takeaway

Liquidators can be held personally liable for decisions they make on behalf of a company to which they are appointed. They must be careful in weighing up competing ownership claims and in acting to ensure that goods the subject of such claims are not damaged. If they fail to act prudently, personal liability may arise.

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Authored by:
Scott Couper, Partner
Craig Melrose, Senior Associate

[1] [2022] QSC 271, delivered 13 December 2022