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Focus: Scope of receiver's liability for 'other amounts' wound back

6 June 2011

In brief: A recent decision has wound back the scope of a receiver's liability for 'other amounts' and emphasised the need for alleged 'owners' of goods to prove their ownership. Partner Michael Quinlan (view CV) and Lawyer Sally Kirby report.

How does it affect you?

  • This New South Wales Court of Appeal decision1 provides guidance for receivers on the scope of their liability under section 419A of the Corporations Act 2001 (Cth) for use of property by the company under receivership under a pre-existing agreement.
  • Favourably for receivers, the court indicated that the s419A(2) liability for 'rent or other amounts' probably cannot extend to payments that the company owes at the end of a period of hire (such as payment of the value of unreturned goods).
  • Furthermore, in circumstances where similar goods have been hired to the company by multiple suppliers who cannot then identify their goods, a supplier will have difficulty claiming 'rent or other amounts' under s419A(2) in relation to those goods, as it is not clear that their goods have, in fact, remained in the company's possession.
  • However, receivers must remain aware of the dangers of conversion when dealing with goods of which the ownership is contested. These dangers may be avoided if the company is also in voluntary administration.
  • For suppliers of goods, the clear message is to ensure you can identify your goods.

Background

The appellants (the controllers) were appointed in July 2002 as agents of a mortgagee in possession of a company (Rildean) in the business of hiring scaffolding to building sites. The respondent (RMD) had supplied scaffolding to Rildean from September 2001 to March 2002. Rildean was in the practice of hiring scaffolding from a range of suppliers.

At the date of the controllers' appointment, Rildean possessed a large quantity of scaffolding. However, it was difficult to identify which scaffolding belonged to which supplier, due to Rildean's poor recordkeeping and an absence of clear markings on the equipment itself. In addition, Rildean frequently 'returned' scaffolding to suppliers without regard to its true ownership, by simply returning any scaffolding that matched the description of the equipment originally hired.

It was recommended to the controllers that they auction the disputed scaffolding and distribute the proceeds pro rata among the various suppliers. RMD objected to the sale and threatened to commence legal proceedings against the controllers if its scaffolding was not returned. Nonetheless, the sale proceeded in December 2004 and the proceeds were paid to Rildean.

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The decision at first instance

At first instance, RMD sought orders against the controllers on the basis of two causes of action:

  • the controllers were liable to RMD under s419A(2) for 'rent or other amounts' owed by Rildean to RMD under the hire agreement entered into in September 2001. RMD argued that hire charges plus interest, as well as the value of the unreturned goods, were all 'rent or other amounts'; and
  • by selling the scaffolding and previously licensing it without RMD's permission, the controllers had committed acts of conversion relating to the scaffolding in their possession.

We have previously reported on one of the first instance decisions in this case in our Focus: Court expands liability for rent 'or other amounts. This decision addressed the issue of quantum.

Section 419A deals with the liability of a 'controller' (being a receiver or similar) in relation to the use of property by the controlled corporation under a pre-existing agreement. Under s419A(2), the controller is liable for 'so much of the rent or other amounts payable by the corporation' under the pre-existing agreement as is attributable to the period of post-appointment continued use or possession of the third-party property.

RMD claimed that all of the scaffolding hired by it to Rildean was still in Rildean's possession at the date of the controllers' appointment. RMD did not pursue an alternative claim based on only a portion of its scaffolding remaining in Rildean's possession. This proved to be significant on appeal.

RMD succeeded on both grounds at trial and was awarded judgment for $4,873,504 (comprising outstanding hire charges plus interest and the value of the unreturned goods). The finding that the controllers were liable under the hire agreement not just for the hire charges but also for the unreturned goods themselves seemed to be a significant increase in the width of s419A(2). It came about because Rildean was also obligated under the hire agreement to replace all lost or damaged goods at the expiration of the agreement and because damages for conversion appeared in the alternative to equate to that value. The controllers argued on appeal that RMD had not proven that all of its scaffolding remained in Rildean's possession and that the primary judge's finding on conversion should not stand.

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The decision on appeal

Acting Justice Sackville of the Court of Appeal (with Justices Hodgson and Macfarlan agreeing) held that RMD failed to prove on the balance of probabilities that the scaffolding hired by it to Rildean remained in Rildean's possession at the date of the controllers' appointment. Once the primary judge's finding on possession was set aside, the appeal had to succeed in the absence of any alternative claim by RMD regarding possession by the controllers.

Section 419A(2)

As RMD could not establish ownership and possession of its scaffolding, the controllers could not be held liable under s419A(2) for outstanding hire charges owed under the hire agreement. As mentioned previously, RMD had successfully claimed at trial that it was also entitled under s419A(2) to recover the value of the unreturned scaffolding.

In obiter, his Honour stated that the language of s419A(2) was 'not apt' to extend to a liability to make payments at the end of the period of hire. Had RMD succeeded on the possession issue, his Honour would have limited the controllers' liability under s419A(2) to the outstanding hire charges plus interest (thus excluding liability for the value of the unreturned scaffolding).

Conversion

His Honour did demonstrate support in obiter for the primary judge's finding that the controllers had committed an act of conversion by selling the scaffolding.

The sale agreement had provided that Rildean was not selling any scaffolding that belonged to a third party, and that Rildean and the controllers gave no warranties that Rildean owned or was capable of transferring title to the scaffolding to the purchaser. The primary judge found that these provisions did 'not avoid the fact that the agreement purported to transfer ownership to [the purchaser] of scaffolding that actually belonged to RMD'. His Honour held that it was not necessary for RMD to establish physical interference with the scaffolding, as possession of the scaffolding was transferred to the purchaser by the sale agreement.

On appeal, counsel for the controllers argued that sale without physical delivery of the scaffolding did not constitute conversion, particularly where the sale agreement purported to preserve the rights of the true owners of the scaffolding. Further, it was submitted that the sale was the 'only practical way forward' for the controllers.

However, his Honour stated that he had 'some difficulty' with seeing how the controllers' argument could succeed. His Honour found that the sale agreement appeared to deal with the scaffolding in a manner inconsistent with RMD's rights as owners.

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Conclusion

This case provides guidance for receivers and other controllers on their s419A(2) liability for 'rent or other amounts' under pre-existing agreements between the company under their control and third parties. Suppliers of goods must be able to identify their goods in order to prove that they are still in the controlled company's possession and thus to make out a claim under s419A(2).

However, receivers and other controllers must also be mindful of the risk of conversion when dealing with stock of which the ownership is contested.

It should be noted, however, that this risk may not arise where a company is simultaneously in voluntary administration and receivership (or where the mortgagee is in possession). The Supreme Court of Western Australia has previously held that s440C of the Corporations Act operates to effectively protect receivers from conversion claims from owners of goods subject to retention of title clauses.2 Unless and until an owner obtains the administrator's written consent or leave of the court, such an owner has no right to immediate possession of their goods and thus cannot make out a claim in conversion.

Footnotes
  1. De Vries & Anor v Rapid Metal Developments (Australia) Pty Ltd [2011] NSWCA 100.
  2. Barrymores Pty Ltd v Harris Scarfe Ltd (Administrators Appointed) (Receivers & Managers Appointed) & Ors [2001] WASC 210.

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