FEDERAL COURT OF AUSTRALIA

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

ORDERS

THE COURT ORDERS THAT:

1.    The appeal be dismissed.

2.    The matter be remitted to the primary judge to deal with the balance of the application and any other matter raised by the parties.

3.    Reasons to be published in due course.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

THE COURT:

Introduction

1    Shortly prior to Christmas 2017, administrators were appointed to the well-known auction house Mossgreen.

2    The administrators came to the Court by Originating Process filed 6 March 2018 for directions under s 90-15 of the Insolvency Practice Schedule in Schedule 2 of the Corporations Act 2001 (Cth). Section 90-15(1) is in the following terms: “The Court may make such orders as it thinks fit in relation to the external administration of a company.”

3    The administrators sought directions in substance approving the course of action that they had adopted, in particular about the return of goods owned by parties who had either bought them at auction or consigned them for auction. In respect of all relevant goods, there was no issue that Mossgreen had no title or interest in the goods other than as a bailee.

4    The directions were opposed by consigning owners. Mr Neil Robertson was made a contradicting party to the proceedings. Evidence was filed. The primary judge heard the matter on 29 March 2018, received final submissions on 5 April, delivered reasons on 9 April and made orders on 13 April, giving limited directions but dismissing the substantive claim for directions.

5    The dispute as to directions arose in the circumstances that by March the expenses sought to be sheeted home by an equitable lien to the consigning owners of goods were over $1 million. The administrator informed all consigning owners that to be given back their goods they must pay $353.20 per lot and that no negotiation would be entered into.

6    The consequence of this position is that some consignors will have the total value of their property destroyed by the lien for expenses that had been made supposedly for the preservation and return of the goods.

7    An appeal was heard on 17 April. The Court made orders on 19 April dismissing the appeal. These are the reasons for those orders.

Facts and background

8    The appellants were appointed as joint and several administrators of Mossgreen Pty Ltd on 21 December 2017. At the time of the appointment, Mossgreen operated an auction house and gallery business out of Woollahra in New South Wales as well as Armadale and Clayton in Victoria. Mossgreen also utilised the services of Grace Fine Arts for storage of some of the goods consigned to it for auction.

9    The inventory for Mossgreen’s auction business was provided on a consignment basis. As consignee, Mossgreen had both contractual obligations and legal duties as a bailee for work and labour.

10    Consignors delivering items to Mossgreen authorised Mossgreen to sell those items at auction and thereby effect a transfer of ownership.

11    Mossgreen was responsible for delivering items sold at auction to the successful bidder (upon payment of the purchase price plus buyer’s commission). Mossgreen also held items pending their presentation for sale.

12    The consigned items were entrusted to Mossgreen solely for the purpose of their sale by auction. The appointment of the administrators brought to an end the future performance by Mossgreen of contracts to auction the consigned items. Mossgreen became obliged to return them to their owners.

13    As to claims by the owners to consigned items, the position of the administrators is that subject to costs incurred “in identifying, preserving and facilitating the return of these items”, neither Mossgreen nor the administrators “propose to assert any rights in respect of consigned property in the possession of [Mossgreen]”.

14    One of the administrators, Mr James White has deposed to the following problems with the systems used by Mossgreen to keep track of consigned items:

(a)    Mossgreen had electronic systems for stock management (Systems);

(b)    the stock records of Mossgreen were not kept up to date and could not be relied upon to determine stock holdings. For example, the records showed 34,000 lots as “active” or “unsold”, but staff of Mossgreen estimated that actual stock held amounted to between 8,000 and 12,000 lots;

(c)    the records did not record the location of stock;

(d)    some records were kept manually;

(e)    he formed the view that the Systems could not be relied upon to provide an accurate listing of consigned goods on hand.

15    Mr White undertook a complete stocktake. He described the reasons for doing so as being in order to:

(1)    assess and verify inventory holdings;

(2)    determine ownership of items that remained in Mossgreen’s possession; and

(3)    enable him to:

(a)    settle sales where goods had been sold by Mossgreen but not yet collected;

(b)    conduct a formal returns process in respect of consigned goods to ensure items were preserved and returned to their rightful owners.

16    After the stocktake was undertaken, the administrators sent circulars to persons who had been identified as owners stating that their goods would be returned on payment of a levy of $353.20 per lot being an amount that was not negotiable. They claimed a lien to support this position. As we have said, this represented over a million dollars of expenditure.

17    The directions sought in the originating application concerned the items held on consignment as well as items described as Unknown Consignor Property which had been included in the stocktake report but for which no owner had been identified. As to items held on consignment where an owner had been identified, the directions sought were to the effect that the administrators are justified in acting on the basis that they are entitled to a lien for expenses incurred in the identification, preservation and distribution of those consigned items as outlined in the affidavit of Mr White. Further, the directions sought were to the effect that the administrators are justified in requiring the payment of a levy of $353.20 per lot representing what were said to be the reasonable costs incurred in the identification, preservation and distribution of the consigned items, with such lots to be released to consignors who have paid the levy. Those directions, effectively seeking to sanction the conduct of the administrators after the event, were set out in paras 1 to 5 of the application (as to items where the owners had been identified) and paras 8 to 14 (as to items where the administrators could not identify the owners).

18    On the hearing of the application, orders were made for some directions, but paras 1 to 5 were dismissed and no orders were made as to paras 8 to 14. The primary judge concluded that the administrators, by demanding the payment of $353.20 for each lot as the condition for releasing it to the relevant consignor, were asserting the existence of an equitable lien which did not arise. The primary judge reached this view because he found that the work undertaken by the administrators did not relate to the property of Mossgreen and did not fall within the administration of its affairs. His Honour distinguished the position from that in other cases which recognised a lien in circumstances where an administrator was obliged to deal with comingled property, where at least some property was owned by the company.

19    The Court heard an expedited appeal in respect of that decision.

20    For the following reasons which are different to those of the primary judge, his Honour was correct to dismiss paras 1 to 5 of the application and to decline to grant directions of the kind sought.

Summary

21    We do 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 was within the statutory functions of the administrators to continue to perform the function of holding the consigned items and, as part of doing so, to take steps in respect of the systems for the management and return of the consigned items. These are functions which Mossgreen and its officers would be expected to perform if the company was not under administration and were therefore activities that formed part of the administration: s 437A(1)(d).

22    Further, if costs have truly been incurred by an administrator in performing statutory responsibilities necessary to identify, preserve and facilitate the return to the owners of their property then a lien (whether statutory under s 443F or in equity) may arise over the company’s property or the property owned by the consignors in respect of those costs. What was claimed here was an equitable lien over the property of the consignors.

23    There is no general principle which covers the diversity of cases in which an equitable lien has been held to be created: Stewart v Atco Controls Pty Ltd (in liq) [2014] HCA 15; 252 CLR 307 at 318 [14] approving Gibbs CJ in Hewett v Court [1983] HCA 7; 149 CLR 639 at 645. In our view, there can be such a lien in favour of administrators in respect of costs incurred in dealing with claims for the return of items even where there is no claim to ownership by the company under administration, including costs in holding them and keeping them secure in the meantime. This is but a small step from the circumstances in which a lien has been recognised in other cases.

24    However, that is not enough to establish a sufficient basis for the existence of an equitable lien of the kind and in the amount contended for by the administrators in this case.

25    There are three reasons why we are not satisfied that there is a lien in the respects claimed by the administrators in this case.

26    First, on the evidence, much of the costs alleged to be the subject of the lien have been incurred in respect of consigned items that the administrators understood from the outset had been abandoned and were of little value. The costs of undertaking a stocktake to identify those items and, where possible, their owners are not referable to the smaller class of persons who were in a position readily to demonstrate their claim without the need for any stocktake of the kind undertaken by the administrators or the associated delay in doing so. The evidence before the court establishes that for a significant number of the consigned items the staff, applying their knowledge and expertise of the systems already in place, would have been able to verify the title of owners and return the goods to those who owned them without the inventory record produced by the stocktake. Further, this would have been apparent to a person in the position of the administrators from an early stage.

27    Second, if (contrary to the first point) there was a need to undertake a stocktake in order to identify the ownership of consigned property then that need arose from a breach by Mossgreen of its obligations as bailee. An auctioneer is a bailee of work and labour: Palmer on Bailment 3rd Edition at [15-004]. Therefore, Mossgreen had a duty to exercise such care as is reasonable in the circumstances and restore the property bailed to its lawful owner: Tottenham Investments Pty Ltd v Carburettor Services Pty Ltd (1994) Aust Torts Rep 81-292 (Kirby P, Gleeson CJ and Priestley JA agreeing). It is difficult to see how an auction house that fails to maintain an adequate inventory system so as to be able promptly to identify the location of consigned items and return them to the owner has properly discharged this duty. To the extent that costs are incurred in order to redress this liability, those costs should not fall on the consignors ahead of the general creditors. At best (and this may be arguable), a lien in respect of such costs would only arise if the administrator’s statutory lien against the assets of the company was insufficient and the evidence does not establish that to be the case.

28    Third, on the evidence, much of the costs has been incurred for the benefit of the general body of creditors who had an interest in preserving the engagement of employees, exploring the possibility of a deed of company arrangement and undertaking a stocktake for the purpose of being able to demonstrate the extent of consigned items that a purchaser of the business might take on for sale by auction. This outcome was secured in respect of the part of the business of Mossgreen that related to stamps and coins. It was an outcome in which the owners of consigned items had no interest because they would not benefit at all from such a sale.

29    These three matters arise from a consideration of the evidence before the primary judge.

The ability of Mossgreen to return consigned items

30    The administrators presented no evidence of difficulties, prior to the commencement of the administration, in Mossgreen employees fulfilling the responsibilities of delivering items to buyers and returning unsold items to owners such that an inventory and consequent cost and delay is required in order to deal with claims to ownership. Significantly, Mr White deposed that “it was possible for Company staff to trace most items through utilising various search functions across each of the Systems, given the inadequate and inconsistent labelling their specialist knowledge was required in order to accurately define search parameters”. He also deposed that “[t]he location of the various items was not specified in the System, and despite this function being available, this meant that staff knowledge, background and expertise was required to locate and identify items” and that because the Systems could not be relied upon “a significant level of personal knowledge of key staff would be required in order to locate items and confirm inventory holdings”.

31    Rather, the evidence was that Mossgreen held many items where owners had taken no steps to recover consigned items after they were not sold or where a buyer had purchased and paid for a lot but had only taken part of the lot. As to these items, Mr White deposed that “a high amount of legacy, predominantly low value items have been allowed to accumulate within the Company’s Premises following their abandonment by either consignors or buyers”.

32    When the administration commenced, Mossgreen ceased conducting auctions and came under an obligation to return consigned items that it would otherwise have presented for sale at auction. Mr White deposed to his belief that consignors retain ownership of items consigned to Mossgreen and that at all times “I have proceeded on the basis that the Company’s possession of these goods is as bailee only”.

33    Shortly after the appointment of the administrators Mr White “started to receive requests for the return of consigned items”.

34    Instead of seeking directions at that point from the Court about how the employees could be put to work using their specialist knowledge to deal with those requests and return the items to which Mossgreen made no claim, and any other competing considerations in the administration, the administrators took steps to pursue a deed of company arrangement, a possible sale and then a stocktake of all consigned items irrespective of their value and whether they had been abandoned. There seems to be no reason why such requests for returns could not have been dealt with even while those other options were pursued by the administrators.

35    A different course would have been to allow consignors to immediately make claims. Directions could have been sought as to the process to be followed. It may have involved the presentation by owners of statutory declarations, receipts, references to catalogues, descriptions of the items claimed (many of which, due to the nature of Mossgreen’s business, were unique in character and were amenable to ready description by identifying features) and release of items in accordance with usual processes followed by Mossgreen employees. Other steps could be taken to deal with items that were identified as having little value or had not been the subject of any claim for an extended period. These steps, if presented to the court, could have been approved by way of directions or as part of a supervised process by which the administrators were appointed as receivers to the goods and many items could have been promptly released at much less cost. No satisfactory explanation was provided as to why such a common-sense approach was not followed, or why it was not possible or not desirable or practicable.

36    Instead, owners have been held out of claiming their items for a considerable period and now face claims which, in some instances, will dwarf the value of their property interest. As a result, the steps that have been followed by the administrators without any guidance from the Court go a long way to extinguishing the property rights of a number of owners without regard to the proportionality as between the value of the right and the costs being incurred in order to recognise and give effect to that right. If the latter exceeds the former there is little point in undertaking the steps and the possibility of different steps must be considered.

37    In the above circumstances, the submission advanced in support of the appeal that the same outcome would have ensued and the same levy would have to be charged if a receiver had been appointed to the goods is not supported by the evidence.

The decision to undertake a stocktake

38    Mr White deposed that one of his first priorities upon appointment was to investigate the inventory management systems operated by Mossgreen. He says he engaged Tiger Asset Group Pty Limited to “assist me in the task”. Mr Hallowell, a director of Tiger, says he was engaged on about 21 December 2017 to investigate the inventory management systems of Mossgreen, ascertain the status of consigned goods and verify the records concerning those goods. He said that the administrators also requested Tiger to provide recommendations on an appropriate regime for collection of consigned goods, assessing possible methods for imposing a levy and the treatment of the coins and stamps division and whether to realise it as a separate business unit.

39    Tiger issued an initial report to the administrators on 27 December 2017. The report identified deficiencies in the stocktake records. There were 3 main issues identified. First, although it was possible to trace items using search functionality and individual items were photographed at the time of receipt and uploaded to the various systems, success of the function was limited by the need for specialist knowledge from employees to accurately describe the item. Second, there had been no clearance of the stockholding and there was a significant level of “legacy” items that had not been collected and were generally low value items. Many were stored as “no known vendor” and most were held in a warehouse in Clayton. Third, a significant number of items had been received but not processed. Generally these were well sorted and labelled, but some had been received unannounced without vendor documentation and some had been received and were deemed not suitable for sale and were to be returned to vendors.

40    Tiger reported that there were sold items on site awaiting buyer collection but did not refer to any problems in identifying the relevant buyer for these items.

41    Tiger concluded that in order to obtain an accurate understanding of the inventory on hand a detailed physical inventory would need to be undertaken.

42    The stocktake commenced on 15 January 2018 and involved a “ground up” physical stocktake of all stock by preparing an entirely new stock listing. It took two weeks and was undertaken by Mossgreen employees supervised by Tiger.

43    Tiger provided a further report on 8 February dealing with various methods of attributing the cost involved in stocktaking, storing and returning individual items to their owners.

44    The detailed affidavits provided by Mr White provided no evidence that he turned his mind to the extent to which the stocktake was needed in order to return most items to their owners (as distinct from providing the administrators with a complete list of all of the items held). There is no evidence of any thought process by which he considered the significance of the extent to which the items held were legacy items of little value, the extent to which the stocktake was necessary in order to deal with claims by owners, the extent to which the costs involved were proportional to the value of goods involved, and the likely cost to individual owners if the stocktake was undertaken.

45    The affidavits and the terms of the reports from Tiger do not contain any description of the consideration of any alternatives to the stocktake that might have been appropriate in the circumstances to return consigned items, or many of them, to their owners. It is one thing to investigate the inventory management systems. It is a different thing to consider how most efficiently to return the property of third parties to them. The administrators were dealing with property to which the company had no claim. The question was not whether Mossgreen had good inventory management systems but whether its existing systems could be used to promptly and cost-effectively return the consigned items to their owners.

46    As noted, Mr White said “at all times” he proceeded on the basis that Mossgreen’s possession of the items was as bailee only. Where the acknowledged obligation was to return the consigned items to the owners, the steps to be taken had to be viewed through the lens of what was best to give effect to that obligation.

47    If there was evidence that such matters had been considered at the time then the court would need to exercise care in applying hindsight in reaching a different conclusion to that reached by the administrators at that time. However, in this case, there is no evidence of a consideration of the relevant matters at the time. Nor was there an application brought explaining the alternatives and directions sought before embarking upon one of the alternatives. The only way to evaluate the claim for directions now sought after the event is to look back and consider what might have been considered if the correct questions had been raised.

48    Given that the administrators seek directions after the event, in effect to approve the course that they have already undertaken, they must be able to demonstrate that they were justified in what they did. It is difficult to provide judicial advice to that effect in circumstances where the administrators offer no evidence of a consideration of the alternatives that were available to them to arrange a prompt and orderly return of consigned items. Further, there is no evidence of any difficulty that the state of records posed for identifying particular items to be returned to many of the owners.

Chronology of steps taken by Administrators

49    When first appointed, the administrators held a series of discussions with the director of Mossgreen and his advisors regarding a proposal to ensure that all Consignor Creditors would be paid in full (the term Consignor Creditors being used by the administrators to describe those persons whose items had been sold at auction, but who had not been remitted any proceeds from the sale). Those discussions came to an end on 16 January 2018 when Mr White was informed by the director that he was “not able to move forward with a proposal”.

50    Then, on 15 January 2018, the administrators commenced a full stocktake of all items in the possession of Mossgreen. This stocktake included legacy items which, due to the known circumstances, were effectively abandoned.

51    On 17 January 2018, the administrators issued a circular. As to the consigned items it said:

At the date of our appointment, it is estimated that the Company held in excess of 10,000 items on consignment. These items are held across three premises in Victoria, a site in NSW and a third party warehouse in Victoria.

Based on our investigations to date, these goods can be classified into the following categories:

1.    Items sold at auction prior to our appointment and not yet collected by purchasers;

2.    Unsold items of recent auctions held on consignment on behalf of vendors;

3.    Items held on consignment for future auctions;

4.    Items abandoned by purchasers and vendors;

5.    Items stored at the Company’s warehouse awaiting collection by vendors; and

6.    Artwork consigned to the Company to hang in the gallery.

We understand that a number of purchasers and vendors wish to arrange the collection of items from the Company and the Administrators wish to thank these parties for their patience.

In order to allow for the orderly return of goods to the correct owner, the Administrators are working with their chattel agent and the Company’s employees in order to urgently complete a full stocktake of all items held by the Company.

Given the large quantity of items, we estimate that this process will take one to two weeks to complete.

Following completion of the stocktake, the Administrators will notify vendors of the process to collect items owned by them.

This short delay in allowing vendors to collect items owned by them is necessary to ensure that all claims in respect of the relevant items can be properly assessed and the collection of items conducted in a co-ordinated and efficient manner. Again, we greatly appreciate relevant stakeholders’ continued patience whilst this process is completed.

The Company’s premises remain secured, with security patrols, back to base alarms and CCTV cameras as well as an open cover insurance policy taken out by the Administrators.

52    Then the administrators sought expressions of interest on 19 January 2018 for the purchase of the business of Mossgreen.

53    On 9 February 2018, the administrators settled the sale of the coins and stamps division of Mossgreen (which operated as a largely separate and individual business unit).

54    Also on 9 February 2018, Mr White issued a circular to consignors setting out a returns process. It stated that the administrators “are now in a position to commence the orderly return of consigned goods”. It claimed that it was “not consistent with applicable law for the costs of identifying, preserving, maintaining and facilitating the return of the consigned goods to be charged to [Mossgreen]. Accordingly, a levy must be imposed …”. It then stated that the total levy payable per lot was $353.20 to be paid before goods are released. It said “The amount of the levy is not negotiable”. There was no reference to any intention to seek court approval.

55    In the circular, Mr White expressed his justification for this course in the following terms

(a)    these costs were incurred exclusively in the identification, preservation and facilitation of the return of Consignor Property;

(b)    these expenses have substantially increased the costs that have been incurred in the administration of the Company;

(c)    the Stocktake and Returns process did not benefit the Company’s estate; and

(d)    if these expenses were required to be met from resources held by the Company at the time of my appointment, it would materially prejudice the interests of the Company’s general body of creditors.

56    On 21 February 2018, the administrators issued a further circular to consignors to provide an update, outline the next steps and remind those who had not arranged collection to do so as soon as possible. In the body of the circular it referred to an intention in the near future to apply to the court for directions in relation to, among other issues, certain matters including “the imposition of the levy”. It repeated the statement that payment of the levy was required before goods would be released.

57    The Circular sent to consignors on 21 February 2018 included the following explanation for the levy:

We are aware that there have been media reports suggesting that the imposition of a levy for the collection of consignor lots is inappropriate. We have addressed the reasons for the need to impose a levy in our previous circulars. In summary:

1.    A levy must be imposed to meet the reasonable and properly incurred costs of identifying, preserving, maintaining and facilitating the return of the consigned goods. These costs include wages, rent, security, insurance, legal fees and the Administrators’ reasonable and properly incurred time costs and disbursements in that exercise; and

2.    Charging a levy on consigned goods is consistent with applicable law and has been applied in previous situations similar to this. The reason for this is that if a levy were not imposed, the result would be that the Company’s estate would be required to meet these expenses, which would diminish the return to ordinary unsecured creditors where they have derived no benefit from work that has been required to be undertaken for the benefit of consignors. Examples of where a levy has been imposed include the International Art Holdings liquidation in 2011 and the Renovation Boys administration in 2014.

We appreciate that the levy is frustrating for Consignors. We are only charging the levy to ensure we can meet the reasonably and properly incurred expenses of dealing with this exercise for the benefit of all consignors. We confirm that:

We will ensure that any costs and expenses claimed against the goods and funds held by the Company are reasonable and properly incurred;

We have appropriate documentary evidence of the basis on which all costs and expenses have been incurred and that all costs and expenses being claimed are reasonable and properly incurred; and

We will reconcile the levies paid to us against our reasonable and properly incurred costs and expenses - any leftover funds will be returned pro rata to those that have paid the levy.

58    By further circular dated 2 March 2018 the administrators extended the date for collection until 29 March 2018.

Outcome of the stocktake

59    The stocktake identified that Mossgreen retained 6,935 lots (or 4,663 lots excluding stamps and coins) on behalf of in excess of 800 consignors (or in excess 600 consignors excluding stamps and coins). However, as noted above, the stocktake was in respect of all consigned items held by Mossgreen, including “abandoned” items. Allowing for the prospect that owners of such items were unlikely to make claims, it can be seen that the extent of claims by individual owners to the return of individual items was not as overwhelming a task as the absolute numbers of items might suggest. The number of owners likely to make claims was much less than the number of items might be thought to indicate.

The nature of consigned items

60    The respondent, Mr Robertson, is a consignor. He provided by affidavit a schedule of his items in Mosswood’s possession that he said was prepared by Mosswood. The descriptions in the schedule suggest that many of the items are distinctive and would be readily identifiable by their owners or by employees of Mosswood. For example, there are items described as “a taxidermy mounted foxes head titled Findon Harriers 23/7/37” and “Morgan Zinnias 1941 oil on canvas on board signed and dated lower right: Morgan Nov 1941”. A letter from Mosswood to Mr Robertson sent prior to the appointment of the administrators listing items sold contained similarly detailed descriptions of items including crockery, artworks and furniture.

61    Other consignors provided evidence to a similar effect, that is that their items and collections were and could be carefully described.

62    Mr White deposed to having estimates of the value of some items but no independent valuations. He formed the view the estimates were unreliable for the purpose of estimating the value of items on consignment. That may well be so for many purposes, but the estimates, although only estimates, may have provided some guidance in the context of the proportionality of the costs being incurred, the value of items and the levy likely to be imposed. There is no evidence Mr White explored such matters.

The costs included in Administrators’ proposed levy

63    Mr White deposed to the costs that had been included in the calculation of the levy. The total estimate of those costs to 31 March 2017 is $1,048,072.93. It comprises the following.

64    First, it includes wages of $240,747.07. Prior to the appointment of the administrators all employees had been directed to take paid annual leave between 22 December 2017 and 15 January 2018. For a variety of reasons identified by Mr White including (a) the prospect of a deed of company arrangement being put forward by the director; (b) staff would be key to any future restructure; (c) allowing the leave ensured the return to work of key personnel; and (d) employees were critical to general information gathering, the administrators left these arrangements in place. These reasons appear to be principally in the interests of the general creditors, not the consignors.

65    Nevertheless, of the company’s 36 employees, 19 were terminated on 17 January 2018. The remainder were kept on, amongst other things, to undertake the stocktake and facilitate the returns process to consignors, described by Mr White as “Consignor Tasks”.

66    Mr White has included in the levy 30% of costs of employees terminated on 17 January 2018 (who did nothing relating to the return of the consigned items) on the basis that they were holding costs. As we have noted, the holding costs of these terminated employees were principally in the interests of general creditors and, on Mr White’s own evidence, those employees were not needed for the Consignor Tasks.

67    Mr White deposed that after 17 January 2018, 13 full time staff and two casual staff were allocated to work exclusively on Consignor Tasks. He has included in the levy these costs and further forecast employee costs to complete the return process. After completion of the stocktake, consignors must still make their claims and were given four weeks to do so. These employee costs have now been incurred for more than three months when claims could have been initiated early in the administration and steps could have been taken at least from 17 January 2018 and in all likelihood much earlier for employees with specialist knowledge of the systems at Mossgreen to deal with claims by consignors (as they would have done prior to the administration).

68    On top of these costs a further amount for superannuation of $35,970.01 for these employees has been included in the levy.

69    Second, an amount of $180,075.04 has been included for rent. This relates to the costs of premises used for the storage of consigned goods. This amount appears to include rent of premises for storage of all items held by Mossgreen, including all those described by Mr White as “abandoned” but still held due to poor practices by Mossgreen. Certainly, there is no evidence of any apportionment in respect of these items compared to those for which there is likely to be a claim for return by a consignee. Rather, this is dealt with by the whole levy being allocated to 70% of the items held on the basis that 30% of the items stored will not be collected.

70    Third, an amount of $54,000 is included for insurance. This is based on 90% of estimated insurance costs for the administration. This includes risks other than loss or damage to the consigned goods. It covers workers compensation, public liability, motor vehicle insurance and fidelity cover.

71    Fourth, an amount of $45,849.16 is included for security. Again this cost is allocated on the basis of a percentage of area used for storage of goods.

72    Fifth, there is a contingency of $16,250.

73    Sixth, there is a storage cost for Grace Fine Arts of $15,208 all of which are allocated to the levy.

74    Seventh, there is $122,605 allocated for the costs of engaging Tiger to undertake a complete stocktake of all consigned goods. On the evidence this work was undertaken in respect of every item irrespective of value or how long it had been held by Mossgreen and whether it might be within the “abandoned” category.

75    Eighth, $72,500 has been included for legal costs for obtaining advice as to Consignor Tasks and seeking directions from the Court.

76    Ninth, fees for the administrators of $126,551 and disbursements of $11,033 to 31 January 2018 have been included. There is an estimate of a further $70,000 and disbursements of $6,304.57 to 31 March 2018. Mr White says actual administrator’s costs from 1 February 2018 to 16 March 2018 have been $200,715.50, an amount that exceeds the estimate to a considerable degree.

77    Tenth, there has been an adjustment for costs said to relate to the stamps and coins lots which were also the subject of the stocktake of $116,512.15.

78    All of the above are based on estimates to 31 March 2018. Mr White says that the ongoing cost of following the process that the administrators have adopted is $109,532 per week.

79    To put the above estimates in context, Mr White says that he has estimated that Mossgreen held Consignor Property (being all of the property listed after the stocktake) in excess of $5 million in value. So, the steps that have been taken by the administrators have resulted in costs, which if charged to consignors, will substantially deplete the value of property to which the administrators lay no claim to at all.

80    There is also an anomaly that arises from the proposed levy being applied to each consigned item. The primary judge described it in this way:

To illustrate the problem which now arises, one of the largest lot owners is Mr Robertson who consigned his collection of antique furniture, drawings, prints, pottery and other objets d’art to Mossgreen in September 2017. The value of his collection is estimated at between $52,180 and $89,170. The levy which the administrators are now seeking from him for the return of his property amounts to $104,194.00. Other persons, apart from Mr Robertson, are in a similar situation.

81    It is in such circumstances that the Court is asked, in effect, to approve the costs by endorsing the quantum of the levy to be imposed and the manner in which it is imposed.

Authorities as to nature and extent of equitable lien

82    An equitable lien arises in a diverse range of circumstances and where the general principles of justice support such a lien: Hewett v Court as confirmed more recently in Stewart v Atco Controls. It arises by operation of law and does not depend either upon contract or upon possession. There are many examples where such a lien will arise when a person uses their time and energy for the care, preservation and realisation of property of others. Examples were collected by Ward J in International Art Holdings Pty Ltd (admin apptd) v Adams [2011] NSWSC 164; 85 ACSR 1 at 20 [82]. The appellant relies in particular on Crouch v Adams [2006] NSWSC 1029; In the matter of Renovation Boys Pty Ltd (admins apptd) [2014] NSWSC 340 and International Art Holdings. Each is an example of establishment of a lien in favour of a liquidator or administrator over goods owned by third parties. In Crouch v Adams and Renovation Boys Pty Ltd, the liquidator or administrator was left with the task of ascertaining which of a collection of goods belonged to the company. In International Art Holdings, Ward J held that an equitable lien (of the nature of that described in Re Universal Distributing Co Ltd (in liq) [1933] HCA 2; 48 CLR 171) arose on the facts of the case even in circumstances where there was not necessarily an interest in property that satisfied the definition of the “company’s property” for the purpose of the statutory lien.

83    There are factual distinctions. The primary judge was influenced by the fact that some of the property in Crouch v Adams and Renovation Boys Pty Ltd belonged to the company and accordingly the liquidator or administrator undertook a role that involved identifying company property and property of third parties.

84    Whilst those cases provide examples where an administrator has been entitled to an equitable lien over property of third parties, they proceed on the basis that the court was satisfied that the lien arose in the particular circumstances. They do not stand for any broader proposition that an administrator dealing with property owned by third parties will always have a right to a lien over such property for expenses so incurred. Nor do they limit the potential for a lien to arise to cases where there is comingled company property or disputes as to ownership. In circumstances such as this where the very business of a company includes receiving goods on consignment, the obligation on the part of an administrator to do what is reasonable to at least secure and protect those assets pending their return is conduct that can be seen to benefit the consignors. We see no reason in principle why a lien may not arise to protect the proper expenses of work done that benefits a party such as a consignor of property in accordance with the principles in Hewett v Court. The threshold questions as to whether equity ought to recognise a lien and the costs to be protected by such lien must be answered in the particular circumstances of each case.

85    It follows that we do not accept the respondent’s overarching contention that the costs in redressing breach by a bailee company of its obligations can fall only on the general creditors and not consignors. We consider the potential for a lien over a consignor’s goods remains in appropriate circumstances. The respondent referred to Re Arcabi [2014] WASC 310; 288 FLR 1443 in support of his proposition. It is true that in that case (in which there was comingled property) a receiver’s lien was sought and granted over only company property and not that of consignors, but a lien over the consignors’ property was not sought. The decision does not suggest there can never be a lien over a consignor’s property.

86    In this case, we consider that there is potentially an entitlement to an equitable lien with respect to work properly done and expenses properly incurred that benefit a consignor by securing and protecting their property that is deposited at the company’s premises until it is returned under an efficient process proportional to the nature of the goods in question. Whether equity would grant such lien and its extent may depend upon the value of the statutory lien and the particular circumstances of the administrators’ conduct.

Appeal grounds and Notice of Contention

87    The amended notice of appeal contains six grounds. Grounds 1 and 2 contend in effect that the trial judge erred in holding that the process undertaken by the administrators in relation to consignor goods did not involve the company’s business, property or affairs under s 437A of the Act. We accept that the primary judge erred in that regard but the error does not affect the outcome.

88    Grounds 3, 4 and 6 (ground 5 was abandoned) relate to the refusal by the primary judge to make directions that endorse the existence of the lien, the collection of the specified levy and associated directions and as sought in paras 1 to 5 and 8 to 16 of the application. For the reasons we have given, we do not consider the administrators established a right to a lien as claimed and accordingly the grounds are dismissed (paras 15 and 16 of the application related only to service and liberty to apply).

89    Ground 7 contends that the primary judge erred by failing to make a direction that to the extent there are company assets available, the administrators are entitled to recover the relevant stocktake expenses out of the company’s assets under their s 443D statutory indemnity. As such direction was not sought in the application, it is not appropriate that it be dealt with here, particularly as it involves issues of substantive property rights as to which secured and other creditors may wish to be heard. Ground 7 is dismissed.

90    By his notice of contention, the respondent contended in effect that the primary judge’s orders should be affirmed on the basis that the relevant work fell within the work required of a bailee of goods and the work undertaken by the administrators to the extent it was required was required because the company failed in its obligations as bailee. We have rejected the proposition that the costs of redressing such breaches must in principle lie only against the assets of the company. Accordingly the contention is rejected.

91    The second contention is to the effect that no levy ought to be imposed on bailed goods that were readily identifiable as any work in relation to them was not necessary. That statement is too broad a contention and in light of our reasons is dismissed.

92    The third and fourth contentions again direct attention to the issue of whether a lien would only arise as to property of the company and work undertaken with respect to that property, and so overlap with the first contention. They are similarly dismissed in light of our reasons.

Conclusion and Orders

93    The administrators have not demonstrated that they are entitled to a lien covering the type of costs and in the amount that they have asserted in their dealings with owners of the consigned items. There may be a lien in some amount that might arise in the circumstances of this case. However, the Court is now faced with an application for directions blessing conduct of a kind that is not justified on the basis of the nature and extent of the lien advanced to support the judicial directions sought.

94    Further, by reason of the conduct of the administrators in not seeking directions at an early stage when consideration might be given to all options, including issues of proportionality, the extent of any actual difficulties in dealing with the consigned items that might be redressed by the stocktake, the possibility of an appointment as receiver to the goods to implement a plan approved by the Court and an assessment of the likely costs before they are incurred, the Court is not now in a position to make that determination on the evidence presented to support the present application. Owners have been held out of their consigned items for a considerable period and we question whether the administrators would be justified in delaying further the release of consigned items while there is some form of retrospective assessment of the amount of a lien that may be required to be paid as a condition of release of property to the owners.

95    In the above circumstances, it was appropriate for the primary judge to dismiss the directions sought in paras 1 to 5 and 8 to 16 of the application before him. The appeal should be dismissed.

96    The respondent’s costs have been dealt with as part of the orders granting the appellants leave to appeal. Accordingly, there will be no order as to costs.

Associate:

Dated:    20 April 2018