![Paul Sumner, chief executive of Mossgreen, in the company's Sydney auction rooms following its opening in 2016.](http://web.archive.org./web/20180401175345im_/http://www.afr.com/content/dam/images/h/0/v/t/b/d/image.related.afrWideArticleLead.940x529.h0wac7.png/1519358971262.jpg)
The heads of Australia's four largest art auction houses want client trust accounts to be made compulsory following the collapse of Mossgreen, which left 4000 clients facing steep losses.
An investigation by The Australian Financial Review Magazine has discovered that Mossgreen ran at a loss for each of the five years before administrators from BDO Australia were called in on December 2017.
It used money in its client account – money received for auctioned artworks that had not yet been disbursed to vendors – to fund its own operating costs.
A shortfall first emerged in December 2013 and continued to grow until the company went under with debts of $12 million and just $3 million in assets.
![Mossgreen's Paul Sumner. The company went under in December 2017 with debts of $12 million and $3 million in assets.](http://web.archive.org./web/20180401175345im_/http://www.afr.com/content/dam/images/h/0/d/z/q/h/image.imgtype.afrArticleInline.620x0.png/1516273268249.jpg)
In a separate development in the Mossgreen collapse, BDO has softened its demand that owners of unsold goods pay $353 per lot to recover their property, advising that the administrators would now seek directions from the Federal Court about the proposal and reimburse clients for any fees that are not reasonable.
The levy – which totals $1.5 million for a three week stocktake – means some clients are being asked to pay more in fees than their property is worth.
A key reason for Mossgreen's demise was that it did not separate sale proceeds from its own general trading accounts.
The regulation of art auction houses is state-based and in most states, including NSW and Victoria, auction houses are not obliged to keep clients funds on trust. The position is in contrast to real estate agents, solicitors and stockbrokers.
Merryn Schriever, director of Bonhams Australia, says the law should be changed. "Most people simply presume money goes into a trust account," she said.
![A lavish renovation of its rented premises in Sydney contributed to Mossgreen's demise.](http://web.archive.org./web/20180401175345im_/http://www.afr.com/content/dam/images/h/0/a/4/0/9/image.imgtype.afrArticleInline.620x0.png/1519103633694.jpg)
"It doesn't appear to be as important a topic in client conversations as how big the catalogue will be or what champagne will be served."
She said the issue had been discussed in Australia, but the comparative small size of the art auction industry had led to inaction.
Her peers at major auctions houses agreed that client trust accounts should be mandatory – including Gary Singer of Sotheby's Australia, Chris Deutscher of Deutscher & Hackett and Justin Turner of Menzies.
All four CEOs and managing directors said they kept money owed to clients in a trust account, however not all are audited annually. John Albrecht, managing director of Leonard Joel, the fifth largest in terms of art auctions, said there may be grounds for compulsory trust accounts for large auctions of single vendor collections.
But such a reform might not be practical for auctions with many lots of lower value that are consigned by different owners.
Melbourne-based Mossgreen, which was run by Paul Sumner, grew rapidly in the five years before its demise and was at times one of Australia's top three auctions houses by revenue. Over-expenditure on its push into Sydney contributed to its collapse.
After each auction, Mossgreen gave itself 60 days to pay the proceeds to its clients. Some 4000 clients, whose artworks, cars and other collectibles were auctioned in the company's final months had not been paid by the time administrator were called in on Christmas Eve.
Administrators are yet to advise how much, if anything, will be paid to client creditors. The company has just $3 million of assets and owes $6 million to its main financial backer, Jack Gringlas. His debt is secured ahead of a further $5.5 million owed to clients.
Meanwhile the owners of between 4322 lots consigned to Mossgreen, but not auctioned and hence still in the company's possession, were told last week they must pay $353 per lot to BDO before reclaiming their items.
But in a further communication to clients sent this week, BDO has said it intends to seek direction from the Federal Court regarding the levy, which totals $1.5 million. This follows threats of legal action by some clients saying the levy is unlawful.
In a statement, BDO denied it had changed strategy and reiterated that the levy was needed because Mossgreen's stock keeping systems were inadequate.
"The administrators appreciate that the imposition of a levy is frustrating for consignors," the statement said.
"The administrators will reconcile the levies paid against the reasonable and properly incurred cost and expenses. Any leftover funds will be returned pro rate to those who have paid the levy."
BDO has until the end of April to hold the second creditors meeting.