Australia: An order worth its weight in rare bank notes: Deed Administrators obtain order protecting their potential personal liability

There are not too many insolvency matters that involve more than $5 million in rare bank notes. So, when Deed Administrators have to make a court application¹ regarding such unique "assets" in order to protect their potential personal liability, then that's worth a read.

The problem

Mr Fraser and Mr McGrath of McGrathNicol are the Deed Administrators of John Pettit Pty Ltd (the Company). The Company used to trade in rare bank notes, where customers would buy them from the Company, or consign them with the Company for further sale, or the Company simply acted as a "custodian" of the notes for its customers. The problem for the Deed Administrators was that, when they were appointed Administrators on 11 October 2012, the Company held a large quantity of rare bank notes, but had very poor records of who truly owned them.

Try as they might, and after extensive advertising over a number of years, the Deed Administrators were not able to determine whether most of the notes were the property of the Company or legitimate third parties. According to Mr Fraser, the books and records of the Company regarding consignments and custody arrangements were "non-existent or substantially incomplete". Ultimately the Deed Administrators were holding some 2,400 rare bank notes.² The big question was: if they sold them on the open market, and a legitimate third party came out of the woodwork afterwards, would they be personally liable for the true owner's loss? Answer: Ask a judge.

Section 447A to the rescue

An application was brought by the Deed Administrators pursuant to s447D of the Corporations Act 2001 (the Act) for an order in the nature of judicial advice. Section 447D(2) permits Deed Administrators to apply to the Court for directions about a matter arising in connection with the operation of, or giving effect to, the deed. They then relied upon s447A, ie the Court's general power to make orders as to how Part 5.3A was to operate in relation to this particular company, to seek to vary the operation of s444F of the Act.

Ordinarily, the interests of an owner have to be "adequately protected" where a Court makes an order under s444F against an owner of property that is subject to a Deed of Company Arrangement.³ The Deed Administrators in this case however, wanted the Court to limit their personal liability against any owner of any of the rare bank notes who had not notified them of any claim in respect of that property, by one business day prior to the proposed sale date of the notes.

Justice Lindsay held that the Deed Administrators "have taken substantial, reasonable steps to identify potential third party claims on property in the possession of the Company by persons unknown, and ostensibly unknowable, by them."⁴ His Honour ordered that the Deed Administrators publish one last advertisement in The Australian Financial Review for the sale proposed five days following the advertisement. As for the proceeds of the sale of the unclaimed notes, that was ordered to be applied as follows:

• To the costs in connection with realising the unclaimed notes, then
• Towards satisfying any valid claim against the Company in respect of the unclaimed notes, and then,
• After waiting three months, to distribute the balance in accordance with the Deed of Company Arrangement.

Show me the money!

The most important order, of course, was the variation to the potential personal liability of the Deed Administrators. Potential third party claimants were given until the day before the proposed sale to make a valid claim on the notes. Justice Lindsay ordered that any liability to any other owner who had not given the adequate notice was limited to the amount of the Deed Fund established under the Deed of Company Arrangement. There would, therefore, be no personal liability upon the Deed Administrators if they sold someone else's rare bank notes, if that owner had not notified them by the day prior to the sale. Imagine if a rare bank note's value subsequently went through the roof? That's some major personal liability avoided.

Would the PPSA have anything to say about this?

Some of you may be asking: Hang on! If these were consigned goods, then why didn't they just vest in the Company under the PPSA when the Company went into Administration?

Under section 12 of the Personal Property Securities Act (PPSA), the interest of a consignor who delivers goods to a consignee under a commercial consignment is a security interest, and that interest ought to be registered under section 21(2) in order to be perfected.

If a company goes into administration, generally any unperfected security interests over the company vest in the company immediately before the commencement of the administration.⁵ The rare bank notes were certainly "goods". They were not strictly "currency" as that is defined, or some other form of "financial property" – which would otherwise be excluded from the definition of goods. However, "commercial consignments" are not covered by the vesting provisions of section 267.⁶

The John Pettit judgment is silent on the point, so we cannot comment on whether it was even raised as an issue in the proceedings. The serious lack of company records also did not assist. It is hardly surprising that the Deed Administrators could not conclude whether the Company held the notes on consignment, or as custodian, or otherwise. An analysis of the potential "true" owners illustrate the futility of the exercise anyway, because for any third party owners who had likely supplied their notes to the Company under consignment or custodial arrangements, those notes would not have vested in the administrators under s.267 of the PPSA. Therefore, the Deed Administrators had a legitimate concern to avoid personal liability from any third party claims.

Where a company's records are seriously lacking, or where there are creditors who may hold security interests but choose not to enforce those interests, the Court will usually provide protection to Administrators against potential third party claims. Another example of this assistance was the case of Carson, in the matter of Hastie Group Limited (No 3).⁷ In that case the Administrators were aware of 3,684 items of plant and equipment, worth more than $6 million, spread across the country. 80% of creditors who actually held various PPSR interests over those assets had failed to respond to various letters and advertisements issued by the Administrators. The Federal Court made similar orders regarding the advertising, sale and application of the proceeds as in this latest case. The Court did not, however, make an order regarding the limitation of any personal liability of the Administrators.

The lessons

When in doubt, seek direction from the Court. The Court has very wide powers designed to assist Administrators who often feel caught between the proverbial "rock and a hard place", ie between their obligations under the Corporations Act and their personal liabilities arising from their duties. This "hard place" can seem all the more solid and threatening when a company's books and records are seriously deficient.

It is also important to carefully read the PPSA before making any Court application. The devil is in the detail.

Lastly, if you collect rare bank notes you might want to keep your eyes on The AFR for upcoming sales!

Footnotes

¹Re John Pettit Pty Ltd (Subject to Deed of Company Arrangement) [2014] NSWSC 728, 3 June 2014. ²With an assessed market value of $5.47million! This was not disclosed in the judgment but is thankfully available in Mr Fraser's affidavit filed in the proceedings and publicly available on his firm's website.
³s444F(5).
⁴At [25].
⁵s267 PPSA.
⁶s268(1)(iii) PPSA.
⁷[2012] FCA 719.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.