By Stephen Mullette, a Principal, Rebecca Georges and Amelia Fearnside, Law Clerks of Matthews Folbigg, in our Insolvency, Restructuring and Debt Recovery Group.
In the recent decision of Morgan v McMillan Investment Holdings Pty Ltd [2024] HCA 33 (“Morgan v McMillan”), the High Court provided specific guidance regarding the role and requirements of pooling orders.
What is a “pooling order”
“Pooling” is the process of combining the winding up of multiple companies in a corporate group as one large liquidation, for the benefit of unsecured creditors of all of the entities in the group.
Courts have been traditionally hesitant to make pooling orders because one of the general principles of insolvency law is that a company’s assets should be divided among its own specific creditors. Pooling orders, however, can assist where there are complex corporate structures or arrangements, saving duplication of work and costs of the insolvency practitioner, with the aim being a greater dividend for creditors.
Where this process is challenged, however, the costs savings can be potentially eroded in litigation costs.
Case History
Morgan v McMillan involved a pooling order made in respect of only two entities.
Sydney Allen Printers Pty Ltd (‘SAP’) and Sydney Allen Manufacturing Pty Ltd (‘SAM’) jointly operated a colour printing business. They each entered into a loan agreement with McMillian Investment Holdings Pty Ltd (‘McMillan’). The liquidator alleged the principals of McMillan had become involved in the management of SAP and SAM.
In 2016, both SAP and SAM ended up in liquidation. and McMillan appointed a receiver under its securities to sell the assets and businesses of SAP and SAM to Print Warehouse Australia Pty Ltd (Print Warehouse) for $1.3 million.
The liquidator of SAP and SAM claimed that the purchase price had been reduced at the same time that an associated company of McMillian had received from Print Warehouse the sum of $330,000, which was described as a ‘prepaid invoice’, and which the trial judge described as “curious”.
The liquidator sought to reinstate SAM (which had been deregistered by this time) and pool the winding up of SAM and SAP in order to bring claims against third parties including the associated entity of McMillan (MGS) which had received the $330,000.
The trial judge granted the pooling order on the basis that the Court was satisfied that the ‘gateways’ or grounds for a pooling order in s 579E(1)(b) of the Corporations Act 2001 (Cth) (‘CA’) had been met, in particular s 579E(1)(b)(iv), which permits pooling where “one or more companies in the group own particular property that is or was used, or for use, by any or all of the companies in the group in connection with a business, a scheme, or an undertaking, carried on jointly by the companies in the group”. The Trial Judge held that the jointly owned chose in action to seek recovery from MGS was property which the companies would be able to use in connection with the joint undertaking to discharge their liabilities.
However, on appeal to the Full Federal Court the pooling order was overturned on the basis that there was no particular property used in connection to an existing joint business between SAP and SAM authorising the court to ‘pool’ their assets together pursuant to s 579E(1)(b)(iv), since the business had been sold and SAM had been deregistered. It was not enough that there might be a ‘future joint undertaking’ (the recovery of the chose in action) to satisfy the gateway in s579E(1)(b)(iv) CA.
The Liquidator appealed this decision to the High Court, submitting that the Full Federal Court should have found that the gateway was satisfied by the ‘chose in action’ to recover the monies alleged to have been wrongfully paid, and that the claim arose when the ‘curious’ invoice was issued (and the business had not been sold), not when completion occurred.
Decision
The High Court (Gageler CJ, Edelman, Steward, Gleeson, and Beech-Jones JJ) dismissed the appeal. The Court considered the purpose and history of pooling orders, commenting that the wording of s579E(1) is in the present tense and requires that the court be satisfied of the criteria in the gateways “at the time of order” (at [34]), and that “group” is not defined and was intended to have its ordinary meaning of a collection or plurality – the companies “need not have any shared characteristics”.
The gateways for pooling in s 579(1)(b) “were intended to expand the availability of a pooling order beyond related companies to limited further circumstances that might be comparable to those of related companies, in the interests of creditors”. They require a connection “between the use of the owned or operated property and the joint operation of the companies” (at [37]).
The High Court clarified that in interpreting s 579E(1)(iv) CA, it is necessary to identify the “particular property” relied upon to establish the gateway requirement, which must be ‘owned’ or ‘operated’ at the time of judgment (at [39]).
The Court was satisfied that the various claims of SAP and SAM arose on 5 May 2016, prior to completion of the business.
However, the High Court was less convinced by the argument that (at least in the present matter) merely having a chose in action ‘available to deploy’ was property ‘for use’ within the meaning of s579E(1)(b)(iv). Whilst possible (for instance land which provides ‘fresh air, peace and quiet’, or a receivable yet to be collected (at [47])), the chose in action in the present matter was connected with the disposal rather than the “carrying on” of the business.
The High Court therefore held that the gateway for pooling in s579E(1)(b) CA had not been met, and dismissed the Liquidator’s appeal, with costs.
Read the judgment here.
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