BDO failed the "common sense" approach to Mossgreen inventory administration

BDO never provided "any satisfactory explanation" as to why they did not adopt a "common-sense approach" on the issue of the return of $5 million in art and antiques caught in the Mossgreen administration, the Federal Court of Appeal has noted.

The now published judgement that admonished BDO came after BDO was thrawted in its attempt to impose a hefty fee on clients of the collapsed auction house, as they sought to recoup the $1 million in expenses undertaken without reference to the courts.

The initial judgement by Federal Court judge Nye Perram ruled the BDO administrators were "intermeddling" in other people's goods in circumstances "where they had not been invited to do so, were not performing their statuatory functions and had not been appointed receivers."

The BDO appeal indicated that shortly after the appointment of the administrators to Mossgreen, BDO started to receive requests for the return of consigned items.

But instead of seeking directions at that point from the Federal 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, the administrators instead took alternate steps.

These included pursuing a costly stocktake of all consigned items irrespective of their value and whether they had been abandoned. BDO also sought a deed of arrangement or outright sale.

"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," the Federal Court of Appeal noted in today's published judgment.

While not agreeing to the entirety of Justice Perram's ruling, the judgement, signed off by the Honourable Chief Justice Allsop and Justices Banks-Smith and Colvin, reiterated the error in BDO's administration.

"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," the judges ruled.

"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," the judges noted.

The judges noted detailed affidavits provided by BDO administrator James 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."

"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 judges adding 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."

The judges noted given that the BDO administrators sought directions after the event, in effect to approve the course that they have already undertaken, so then they must be able to demonstrate that they were justified in what they did.

It was initially estimated that Mossgreen held in excess of 10,000 items on consignment, held across three premises in Victoria, their High Street, Armidale premises, a site in NSW on Queen Street, Woollahra and a third party warehouse in Clayton, Victoria.

The goods were 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.

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).

After including abandoned items, and allowing for the prospect that owners of such items were unlikely to make claims, the judges noted it could be seen that the extent of claims by individual owners to the return of individual items was not as overwhelming a task as BDO advised.

The total cost of the stocktaking exercise was $1,048,072. It comprised the following: wages of $240,747 as of the company’s 36 employees, after 19 were terminated in January 2018, the remainder were kept on.

An amount of $180,075 had been included for rent. An amount of $54,000 was included for insurance and $45,849 was included for security.

There was $122,605 allocated for the costs of engaging the Tiger stocktake company to undertake a complete stocktake of all consigned goods. 

Some $72,500 had been included for legal costs for obtaining advice as to consignor Tasks and seeking directions from the court.

Fes for the administrators were put at $126,551 and disbursements of $11,033 to 31 January 2018.

Actual administrator’s costs from 1 February 2018 to 16 March 2018 have been $200,715.

All of the above were based on estimates to 31 March 2018.

James White noted that the ongoing cost of following the process that the administrators have adopted is $109,532 per week.

The judges noted that "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."

Tye judges considered that there was 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.

"We do not consider the administrators established a right to a lie as claimed and accordingly the grounds are dismissed

"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. 

"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."

The appeal should be dismissed, the judges ruled, with further aspects of the administration yet to be decided.

DB Studdy SC with RM Foreman, briefed by King & Wood Mallesons represented BDO. Dr O Bigos, briefed by Piper Alderman, represented the aggrieved Mossgreen clients who have yet to be advised just when they will be able to retrieve what is rightfully theirs.