The Australian Financial Review recently reported the collapse of Mossgreen Auction House, which has left the Australian art market reeling and industry insiders calling for reform. The auction house is now being wound down after failed attempts to restructure the company.
Founded in 2004 by British-born Paul Sumner, Mossgreen Auction House and Gallery quickly grew to become the third largest art auction house in Australia, with luxury showrooms in Sydney and Melbourne. But beyond the luxe veneer, all was not well and by December last year Mossgreen had called in the administrators with debts of $12 million and only $3 million in cash and receivables.
Sumners gained experience in senior roles at the Australian auction houses Sotheby’s, Christies and Lawson Menzies and was an ambitious businessman employing 55 staff, almost double that employed by Sotheby’s Australia which auctioned three times as much art.
Single-vendor auctions were at the heart of the Mossgreen enterprise and the catalogues would detail the stories of those who had collected the items up for sale.
Sumner had a reputation for pulling in big vendors: the auction of the Alan and Margaret Hickinbotham Collection raised $4.3 million, but the Hickinbothams, who were due to be paid in August, were asked to accept a deferred-payment plan. Whilst many auctions broke the $1 million-mark industry experts say is needed for an auction to turn a profit, many others raised only a few thousand dollars.
Unlike real estate or car auctions, Australian art auctions do not require a licence and beyond general consumer protection laws, the market is entirely unregulated. Mossgreen therefore got away with not holding auction proceeds in a trust account and frivolously used the client account as another credit stream. The shortfall went back as far as December 2013.
Jack Gringlas, a Melburnian who had a track record of buying stakes in auction houses, bought into Mossgreen in 2013, taking a 40% share for $1.6 million. He also invested $5 million to buy the showroom in Melbourne and lent Mossgreen $6 million at 8% interest. His investment funded five years of rapid growth. However, by mid-2017 Gringlas wanted out and in July he sold his share to Sumner who hadn’t the funds to pay upfront. Gringlas agreed he could pay in 2021 and gave Sumner two years to find new backers to pay back the $6 million loan. He also sold the Melbourne showroom for $10 million and in July 2017, he left the board. Mossgreen collapsed only five months after Gringlas turned off the cash flow.
Sumner has been vocal in blaming Gringlas, claiming he resisted his attempts to cut costs. This is categorically rejected by Gringlas who has run a number of successful engineering and manufacturing businesses.
‘A Contemporary Vision’, an auction of contemporary work owned by a British entrepreneur and freighted at considerable expense from Britain to Melbourne, was the final straw. The auction raised only $400,000, far below the lower estimate of $6 million and less than the cost of the transport and insurance of shipping the works from the UK.
In December, Sumner called in the administrators, BDO Australia, and sought to cut a deal with Gringlas who remarkably forgave the $6 million debt on the proviso that Sumner would rescue the company. However, on 17th January administrators announced Sumner was unable to restructure his debt and Mossgreen would be wound up. The 400 or so creditors are now waiting to vote on whether Mossgreen can be restructured or whether it should go into liquidation.
BDO told clients, who consigned artworks and other collectables which were not sold, that the items were not part of Mossgreen’s assets and would be returned. However, BDO were explicit in saying that the clients must pay almost $1.8 million in fees before they can have their goods returned. Clients are being charged a fee, levied at $353 per lot, to have their own property returned. The Australian Securities and Investments Commission are now investigating BDO after a number of complaints from clients. On 2nd March, the administrators sent a letter to Mossgreen’s clients saying it would file an action in the Federal Court by 6th March to justify its $353 collection levy and it would continue to hold onto the collectibles subject to court orders.
For many vendors, the levy exceeds the value of the lot themselves. The toy collector Antony Davies, for example, has more than 78 lots held by Mossgreen worth a total of $17,000. He has been told he needs to pay $27,549.60 in fees if he wants his goods returned.
Under the insolvency rules, any official receiver must take reasonable measures to ensure that any property in possession of the company forms part of the bankruptcy estate and has a statutory duty to protect all property held by the company, for example by insuring it until such time third party ownership has been established. Arguably, the collection levy may go towards safe storage and insurance costs, but for many of the items in Mossgreen’s possession, the question of ownership is not at issue. A number of clients have requested their property be returned only to be told that they cannot have it back until a full inventory has been carried out.
BDO has given clients until 29th March to pay the levy and collect their goods. It is not clear however, what will happen to any uncollected items – will BDO seek to include them in the bankruptcy estate? Under insolvency rules, if the official receiver believes that third party property belongs to the company, and comprises part of the estate, and the official receiver takes possession or sells the property, the receiver may be justified if his or her belief that the items are part of the estate is found to be reasonable. However, BDO will not be able to rely on this protection if the receiver has had notice of a claim by a third party, unless there are reasonable grounds for rejecting the claim.
If BDO is held to have acted negligently, for example by selling the property after receiving notification from a third party, the receiver may be personally liable for any loss or damage resulting from the seizure or sale of the property. BDO should therefore seek to avoid claims for damages by wrongfully taking actual or constructive possession of property to which the company has no title.
Are Sumner and Gringlas liable? Any director has a duty to act in the interests of creditors when a company is insolvent with a view to minimising loss to the creditors of the company. Both may be guilty of misfeasance or breach of fiduciary duty, but the extent to which this may be the case remains to be seen.