High Court clarifies "gateway requirements" for pooling orders

In the recent decision of Morgan v McMillan Investment Holdings Pty Ltd' [2024] HCA 33, the High Court considered the circumstances in which a pooling order is appropriate where one or more insolvent companies in a group use property in a joint business, scheme or undertaking.'  The property in question was a chose in action held by two companies in liquidation. Ultimately, the Court held there was not a sufficient connection between the chose of action and its use in the printing business previously carried on by the companies in liquidation so as to satisfy the requirements of s.579E(1)(b)(iv) of the Corporations Act 2001 (Cth)("Act").

Background

Sydney Allen Printers Pty Ltd ("SAP") and Sydney Allen Manufacturing Pty Ltd ("SAM") operated a colour printing business. SAP undertook the printing work and employed staff.'  SAM owned, or had rights over, the equipment used in the business. SAM and SAP were parties to a finance facility with McMillan Investment Holdings Pty Ltd ("MIH"). On 7 April 2016, SAM was placed into liquidation.'  Shortly thereafter, on 13 April 2016, a receiver and manager ("Receiver") was appointed under the finance facility with MIH.'  On 4 May 2016, the Receiver, SAP and SAM entered into a sale of business agreement with Print Warehouse Australia Pty Ltd ("PWA") with a sale price of $1.3 million. ' The "commencement date" under the contract was 5 May 2016 (i.e. after the liquidation of SAM). On 13 May 2016, SAP was placed into liquidation.'  The same liquidator was appointed as that appointed to SAM ("Liquidator"). The Liquidator alleged SAM and SAP had a chose of action arising from the sale of the printing business to PWA.'  In particular, the liquidator adduced evidence which suggested that a more favourable offer of $1.6M had been made by the Receiver to PWA, but that this was reduced at the eleventh hour.'  The Liquidator relied on an invoice issued to PWA by a company associated with MIH in the amount of $330,000, which bore the same date as the sale contract.'  The Liquidator argued the $330,000 invoice suggested that a payment had been made to the associated entity which would otherwise have been included in the purchase price due to SAP and SAM.

The Proceedings

At first instance the Liquidator sought, and obtained, a "pooling order" under s.579E(1) of the Act. A "pooling order" permits the assets and liabilities of a group of liquidated companies to be "pooled" for the general benefit of unsecured creditors.'  The effects of the order include each company in the pooled group being jointly and severally liable for the debts of the others, and the extinguishment of inter-company debts within the group. Under s.579E(1) of the Act, a Court may make a pooling order if each of the companies in the pool are being wound up; it is just and equitable to make the order; and any of the following gateway requirements are satisfied:

1. each company in the group is a related body corporate to each other company (s.579E(b)(i));
2. the companies are jointly liable for one or more debts or claims (s.579E(b)(ii));
3. the companies jointly own particular property that is, or was, used in connection with a joint business, scheme, or an undertaking (s.579E(b)(iii));
4. one or more companies in the pool own particular property used by any or all of the companies in the group in connection with a business, scheme, or undertaking carried on jointly by the companies in the group (s.579E(b)(iv))

At first instance, the Liquidator successfully relied on s.579E(1)(b)(iv) of the Act to obtain a pooling order.'  The trial judge held that the gateway requirement in that section was satisfied, due to the existence of the choses of action held by SAP and SAM to recover the $330,000 allegedly paid by PWA to the entity associated with MIH, which was the "particular property" within the meaning of that section. On appeal, the Full Court overturned the pooling order. The liquidator was subsequently granted special leave to appeal to the High Court.

The High Court decision

The High Cout held that the starting point for an application under s.579E(1)(b)(iv) is to identify the "particular property" relied on to meet the gateway requirement.'  The Court emphasised that there must be a connection between the identified use of the particular property and the joint business, scheme, or undertaking carried on by the group companies. The Liquidator asserted that the "particular property" was the chose in action held by SAP and SAM to recover the $330,000 amount.'  However, that cause of action accrued on 5 May 2016, being the commencement date of the sale of business agreement, which was after the disposal of the printing business under the sale agreement and the liquidation of SAM. Ultimately, the High Court held that the mere availability of the chose of action for use by SAP and SAM did not have sufficient connection with the carrying on of the joint printing business so as to satisfy the gateway requirement. Rather, the alleged chose of action was connected with the disposal of the business as opposed to the carrying on of the business.'  In the circumstances, the Court concluded the particular property, comprising the chose of action, did not have the required connection with the business carried on jointly by SAM and SAP, so as to satisfy the gateway requirement in s.579E(1)(b)(iv).'  Accordingly, the appeal was dismissed with costs.

Takeaways

Where a pooling order is sought under s.579E(1)(b)(iv) of the Act, it is incumbent on liquidators to identify the "particular property" relied on and a sufficient nexus between the use of that property in connection with a business, scheme or undertaking carried on jointly by the companies in the group. Moreover, where the particular property is connected with the disposal of a joint business, the requirements of s.579E(1)(b)(iv) are unlikely to be engaged.'  However, a pooling order may still be made if one of the other gateway requirements under s.579E(1) can be satisfied.