Don’t get the blues when your gallery is in the red

In late 2011, as she ran a random search of her own name on the World Wide Web, Sydney based painter Camille Masson-Talansier discovered that four of her paintings had been sold through Australian online retail and auction company GraysOnline, at prices approximately 90% lower than their usual price. Camille had consigned those four paintings verbally with art dealer Smith & Hall in the course of 2010. In October 2010 Smith & Hall went into administration with debts possibly exceeding $1 million but unaware of the gallery's financial difficulties, Camille did not react by contacting Jirsch Sutherland, who had been appointed as administrator of the art dealer. Upon discovery of the online sales, Camille immediately sent a letter of protest to the administrator and also contacted the Arts Law Centre of Australia (Arts Law) for legal advice. Essentially, she wanted to know whether she could get her paintings back or obtain compensation. She was also concerned that sales of her works at a price considerably lower than the retail price agreed with the gallery might damage her reputation. Finally, she sought advice as to what measures she could take to protect her rights. When an Arts Law solicitor contacted Camille to give her some legal advice, she had received an answer from Jirsch Sutherland to her letter of protest. The administrator indicated that in the absence of any record of consignment, he was unaware of the artist's ownership claim over the paintings. He asserted that the sale was legitimate under the powers granted to him as receiver by Order of the Supreme Court of NSW, and required evidence of the consignment to consider any claim over the online auction proceeds. Based on preliminary telephone legal advice as well as extended advice under Arts Law's document review service, Camille has written to Jirsch Sutherland in an attempt to settle this matter.

Camille Masson-Talansier's request for legal advice is one among a number of requests Arts Law has received in recent times from visual artists needing legal advice following insolvency of the art dealer representing them. In September 2010, ART + law described the liquidation process following the announcement by Shock Music Publishing that it had gone into liquidation, and explained to artists what they could do if a business they dealt with was in such a situation (see Aaron Taranto and Nic Giannantonio, “The Death of Shock and its Impact on Australian Artists“, referred to below as “The Death of Shock”). This article outlines the legal position of visual artists and recommends a few measures artists can adopt to protect themselves against the consequences of their gallery's insolvency and liquidation. It also advocates a stronger use of separate accounts for artist related payments, as provided under clause 10.9 of the “Code of Practice for Australian commercial galleries and the artists they represent” endorsed by the Australia Council for the Arts, the Australian Commercial Galleries Association and the National Associations for the Visual Arts (the Code), or the legislative introduction of mandatory trust accounts for artists.


Gallery insolvency

A gallery is insolvent when its liabilities exceed its assets with the result that it cannot pay its debts as and when they become due and payable. In plain text: the gallery does not have enough cash to completely pay all its creditors. If an individual operates the gallery, that person is declared bankrupt; if the gallery is an incorporated entity, for example a company, it goes into liquidation. For simplicity's sake, this article refers only to an incorporated gallery's liquidation. The consequences of bankruptcy or insolvency are, however, the same in both situations: a trustee or liquidator is appointed with the task of taking control of assets (subject to those assets charged in favour of secured creditors), converting them into money, determining its liabilities and paying creditors proportionally to the funds available. Further, insolvency precludes creditors from taking action against the company to recover any claim, leaving the process in the hands of the liquidator.

For a visual artist, this state of affairs raises two main issues:

  1. Asserting property rights over any work held by the gallery; and
  2. Asserting claims for payment.


The artist's position in the gallery's insolvency proceedings

Before examining those issues, it is important to remember (see “The Death of Shock”) that although the artists and their works constitute not only the raison d'être of a gallery but also the foundation of its operations, artists are generally neither secured nor priority creditors in insolvency proceedings. Secured creditors are people owed money by the company who have the right to receive payment by selling some property of the company that has been granted to them as security. This means that the secured creditor, not the liquidator, can take control over any asset secured in its favour and sell it until the debt is paid in full, without regard to the claims of other creditors. Priority creditors are people owed money by the company whose claim, though unsecured, is considered as deserving special protection; This protection translates in the payment of their claim by category of creditors, the category next on the rank receiving payment only once the debts of the category coming above have been paid in full. For example, employees of the company are priority creditors for the payment of wages, superannuation, leave entitlements and retrenchment pay.

In the absence of a security, the position of unpaid artists is tantamount to that of any supplier of goods or services to the company in liquidation: they are at the end of the line and will only be entitled to payment out of any monies available after all priority creditors have been paid. In addition, unlike secured and priority creditors, artists cannot demand full payment of the debt to the exclusion of other creditors. Any funds available to pay unsecured creditors (referred to as “dividends”) are distributed to them equally in proportion to the amount of their claim. For example, if $10,000 remain available and 5 artists are owed money totalling $100,000 for works sold, the dividends are divided in 5 shares: the artist owed $40,000 will receive $4,000, the three artists owed $20,000 will get $2,000 each and the remaining one will be paid $1,000 instead of the $10,000 owing.

In light of this precarious position, it is particularly important that artists not only know what to do in the event of a liquidation of their gallery, as explained in “The Death of Shock”, but also how to protect themselves.


Asserting property rights over artworks


Many if not most galleries operate on a consignment basis: the artist delivers (or consigns) artworks to the gallery with the understanding that the gallery will sell the artworks on the artist's behalf and forward the purchase price paid by the buyer to the artist after deduction of the gallery's commission. Unsold works are returned to the artist at the end of any agreed consignment period, for example at the end of an exhibition, or kept in the gallery's stockroom for future sale on behalf of the artist. The gallery does not acquire any property rights (or title) in the artworks consigned, which remain the artist's property. Both the sample Consignment Agreement and the sample Artists and Gallery Agreement (long term) available from Arts Law reflect this arrangement.

Consignment means that if the gallery becomes insolvent and goes into liquidation, the consigned artworks escape the reach of the liquidator; those artworks are not property of the gallery, and the artist can assert his or her rights by regaining possession of them. One artist who contacted Arts Law for legal advice after “his” gallery in Melbourne closed its doors with tens of thousands of dollars owed to the artists it represented was in the fortunate position he could collect his unsold paintings from the gallery just before it went into receivership. Yet, once this has occurred there might be an obstacle to overcome before the artist can regain possession of his or her works because the law does not presume consignment. It considers that the company owns goods, for example paintings, in its possession, with the result that the receiver can sell them and use the proceeds to pay creditors.

Records of consignment

Therefore, it is paramount that the artist is in a position to establish that the artworks were consigned, and did not become property of the gallery. This is easy if a consignment agreement is in place, or a document exists that evidences that the artist delivered the artworks to the gallery on consignment only. A verbal agreement between artist and gallery might, however, not be sufficient, as the story of Camille Masson-Talansier above illustrates:

When Camille protested about the online sale of her works, Jirsch Sutherland required evidence of the consignment to consider any claim over the online auction proceeds. However, when the artist subsequently supplied a letter from the former chief curator of the gallery confirming that her works in the stockroom were consigned, the administrator rejected this document as evidence of the verbal consignment. Proper written consignment would have possibly avoided Camille a lot of headache: not only would the administrator not have been able to question the existence of the consignment after the forced sale; it would not have been allowed to include the paintings in the gallery's assets after it was appointed as administrator of Smith & Hall.

While it might be preferable for an artist to enter a written consignment agreement with the gallery that specifies the rights and obligations of each party in relation to the artworks (including duration of the consignment, responsibility for damage, insurance requirement etc), a consignment note or receipt as provided under clause 2 of the Code will usually be sufficient to oppose title over the artworks to the liquidator. Ideally, the consignment document should list the artworks delivered to the gallery, with a photograph of each work attached to the list. The gallery should sign it; the artist should retain the signed original, and the gallery a copy for its records.

Sale of artworks

In situations where the gallery in fact purchases artworks directly from the artist and sells them on to clients in its own name, artists should ensure that they do not relinquish title to their artworks before the gallery has fully paid the agreed purchase price. Ideally, this will occur upon delivery of the artworks to the gallery against or after full payment. Unfortunately, this is not always possible; if the artist delivers artworks to the purchaser under an unconditional sale, property in the artworks is presumed to pass to the purchaser at the time the contract is made, even if the goods are not fully paid for by the purchaser. This means that in liquidation proceedings the artworks will be considered as part of the gallery's assets over which the liquidator can exercise control.

In order to displace this presumption, the artist and the gallery should enter into an agreement specifying that the contract is made only once payment is completed, or that property passes only upon full payment. The later is achieved by a retention of title clause in favour of the artist. Again, a complete agreement such as Arts Law's sample Sale of Artwork Agreement might help achieve this. However, a simple statement in a delivery note or receipt stating that title in the artworks will pass to the purchaser only upon full receipt of the purchase price by the artist might be sufficient.

Personal property securities interests

Legislation passed by the Commonwealth Parliament in 2009 provides for the registration of personal property security interests in a single national online register. Registration of the security interest on the register is a way of perfecting the security, i.e. ensuring that it is enforceable against third parties. In addition, registration is necessary for the secured party to be able to enforce the security interest in insolvency. The Personal Property Securities Act 2009(Cth)(“the Act”) defines a security interest as an interest in personal property (i.e. any form of property other than land or buildings and fixtures that are part of the land) that secures payment of a debt or other obligation. For example, retention of title clauses in sale agreements, under which the purchaser has possession of the personal property but acquires title from the seller only when the purchase price is fully paid (see above), create security interests. Further, the Act deems certain transactions as security interests; importantly for artists in their dealing with galleries, consignment arrangements are deemed security interests.

As a result, it would appear that once the Act commences its operations, presumably in October 2011, artists will have to register their security interests into the online Personal Property Securities Register (PPSR) to ensure they are protected. They should contact the PPSR or Arts Law for more information on this requirement.


Asserting claims for payment

Proper recording and reporting

Artists should verify that any gallery representing them has proper recording, accounting and reporting processes in place. While the relationship between gallery and artist ought to be based on mutual trust and respect, such measures reflect best practice – when the Corporations Act does not outright dictate them. Sadly, situations of insolvency often arise more often as a result of poor accounting than because of a lack of acumen on the part of the gallery. Therefore, artists should receive statement of accounts regularly. For example, clause 10.7 of the Code provides for written accounting every 90 days with a list of sales, sale prices, expenses and amounts owing to the artist. Moreover, artists ought to try to reserve the right to request a statement of account at any time, at least verbally (see also clause 10.7 of the Code).

Regular accounting might assist raising any concern about the gallery's viability at an early stage, before its financial situation gets worse. A situation that might arise when a gallery, as any business, is in difficulty is that proceeds from current sales are used to pay money owing from earlier sales. In clear text: the gallery uses the money paid by the purchaser of artwork “Blue Moon” by artist B to pay artist A the money it owes him or her after the sale of A's “Auto portrait”. Often, this degenerates in a domino effect bringing the whole business to a collapse. With early warnings about the gallery's solvency, artists might be able to take appropriate measures for the protection of their interests as soon as possible, for example by collecting consigned artworks from the gallery.

Further, proper statement of accounts will facilitate the artist's task of evidencing his or her claim in any insolvency proceedings.

Enforcing claims

Receiving regular statements of account is of little use if the artist does not request the payment of any amount owing as it becomes due. Proceeds from sales are payable immediately upon completion of the sale unless the artist and gallery have agreed otherwise. Often, the parties agree on payment terms; under clause 10.2 of the Code, payment to the artist should occur within 30 days of the earlier of the sale or payment being received by the gallery. Accordingly, if the statement of account reveals any amounts unpaid for a period longer than the agreed payment term, the artist should claim that money immediately. If a simple demand is not sufficient, the artist might consider sending the gallery a formal letter of demand such as the one suggested in Arts Law's information sheet “Debt recovery letter of demand“. Again, such a letter might be a useful document in liquidation proceedings as written proof of the artist's claim of the debt owed and attempt to settle the matter with the gallery.

As mentioned above, artists should also demand payment for artworks delivered to the gallery under a sale, or subject any credit payment to a retention of title over the artworks.


Trust accounts

Advantage of trust accounts

While the clear documentation of transactions as well as proper accounting and reporting processes might not always prevent a gallery from running into financial difficulties, they might assist artists whose gallery faces insolvency. An effective means of ensuring that artists, who are the gallery's lifeline, are not prejudiced in liquidation proceedings is to require galleries to hold any monies due to the artists they represent in separate trust accounts.

A trust account is an account set up for a beneficiary who is entitled to the assets recorded in the account, at the exclusion of the person setting the account and anyone else. Members of regulated professions, for example lawyers and certain agents such as real estate agents or entertainment industry agents, are required by law to hold any money transferred to them on behalf of their clients in trust accounts. In the event of insolvency and liquidation proceedings, the funds in the account are considered as belonging to the beneficiary and should be transferred to that beneficiary; they cannot be used for the payment of the other debts of the person or entity that set up the account.

Clause 10.9 of the Code contains a recommendation that the gallery should lodge the proceeds of a sale in an account separate from the gallery's funds after deduction of the gallery's commission. This account is intended to operate as a trust account: the funds in the account must not be used for any other purpose than making payments to the artist. As the Code is a best practice document, clause 10.9 does not impose any obligation on galleries to have trust accounts. It does, however, request galleries that do not maintain separate artist accounts to disclose this in writing to the artists. Some galleries do have trust accounts while others don't – without this being any reflection about the professionalism of the gallery. Artists ought, however, to address this question when entering into a relationship with a gallery to ascertain how their money will be handled.

Statutory trust accounts for galleries

As mentioned above, members of certain profession must maintain trust accounts for their clients. For example, legislation in New South Wales and Queensland stipulates that entertainment industry agents or managers must pay any money they receive on behalf of a performer either immediately to the performer or to the credit of a trust account kept exclusively for the purpose of money received on behalf of the performer. The law imposes strict accounting obligations on the entertainment industry agent to ensure that the accounting records disclose at all times the true position concerning the money received. In addition, the legislation requires the agent to lodge a bond with council to cover the payment of money owed to performers.

To date, there is no law obliging galleries to hold any money received on behalf of an artist exclusively for the artist, and to be paid into a trust account. In New South Wales, only entertainment industry agents or those agents defined in the Property, Stock and Business Agents Act 2002 (being for example real estate agents, stock and station agents, business agents),are required to use trust accounts. The consequences of a gallery's insolvency on an artist are, however, no lesser than the consequences of that of any agent on the person represented. Arts Law believes that given that impact, legislation requiring galleries to hold trust accounts is necessary, and will be advocating for its introduction on behalf of visual artists in accordance with its vision to foster a society that promotes justice for artists and values their creative contribution.

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