TGIF 10 March 2023 – Get out of the pool: Full Federal Court upholds appeal against pooling order

In this week’s TGIF, we consider an appeal against the making of a pooling order in the Full Federal Court decision of McMillan Investment Holdings Pty Ltd v Morgan [2023] FCAFC 9 and examine the challenges liquidators face in convincing a court to grant such an order.

Key takeaways

• When a pooling order is made, the affairs of the companies within a group are ‘pooled’ meaning that the assets available in each company’s winding-up can be used to satisfy the debts of all of the companies in the pooled group.
  
  
• A pooling order may be made where a court is satisfied that one or more of the companies in a group owns particular property that was used, or is for use, by all or any of the companies in the group in connection with a joint business, scheme or undertaking.
  
  
• In this instance, while it was held that the joint right of two companies in the group to sue satisfied this requirement in principle, ultimately the Full Federal Court held on appeal that other factual considerations were not sufficient for a pooling order.

The liquidator of Sydney Allen Printers Pty Limited (in liq) (SAP) applied for and ascertained a pooling order grouping Sydney Allen Manufacturing Pty Ltd (in liq) (SAM) and SAP.

SAM’s and SAP’s printing business had been sold by the receiver to Print Warehouse Australia (PWA). Following the sale, PWA paid $330,000 to McMillian Group Services Limited (MGS), an entity associated with McMillan Investment Holdings Pty Ltd (MIH) pursuant to an invoice rendered. The judge at first instance was satisfied that SAM and SAP had a right to sue to recoup the $330,000 payment and potentially reduce the secured debt owed by SAM and SAP to MIH. MIH challenged the making of the pooling order.

Who was successful and what did that mean?

MIH, a secured creditor of SAM and SAP, was successful in challenging the making of the pooling order. This meant that SAM’s and SAP’s assets could not be consolidated and the creditors of each of SAM and SAP could only share in the assets of the specific company in which they had a right to lodge a proof of debt.

Why was the Full Federal Court against the making of the pooling order?

A pooling order may be made where three criteria are satisfied:

• the companies in the proposed pool are being wound up;
  
  
• there is an appropriate basis under the Corporations Act 2001 (Cth). In this case, if one or more of the companies in the group owns particular property that is or was used, or is for use, by all or any of the companies in the group in connection with its joint business, scheme or undertaking; and
  
  
• a court considers it just and equitable to ‘pool’ the companies.

MIH said that the liquidator failed to satisfy the second criteria. The Full Federal Court agreed. In particular, the Court focussed on SAP’s and SAM’s usage of the right to sue MSG and found that:

• SAP’s and SAM’s joint right to sue for part of the value of the business allegedly diverted to MGS came into existence after the receivers of SAM and SAP had the sold the business;
  
  
• after the business had been sold, the liquidation of SAM and SAP had been treated separately and not jointly;
  
  
• SAM had been deregistered for some time before the liquidator sought the pooling order;
  
  
• SAM was not jointly in a business, scheme or undertaking with SAP during the period before it was deregistered; and
  
  
• at the time the pooling order was made, the right to sue was not being used in connection with SAM’s and SAP’s existing business, scheme or undertaking.

Comment

Liquidators will have an uphill battle convincing a court to grant a pooling order given the fundamental principle that a company’s assets should be shared only amongst its specific unsecured creditors on a pari passu basis.

For insolvency practitioners, this decision is a reminder that:

• early consideration should be given to whether a pooling order is appropriate and the group to be pooled;
  
  
• when applying for a pooling order, the liquidator ought to have regard to the applicability of each subparagraph of the pooling order requirements set out in section 579E(1)(b) of the Corporations Act to the factual circumstances to enhance the prospects of achieving pooling; and
  
  
• when considering whether the liquidator may be able to rely on section 579E(1)(b)(iv) for the making of a pooling order, the liquidator should focus on the use of the particular property in connection with the joint business, undertaking or scheme at the time of seeking the pooling order.

Although MIH was a secured creditor, unsecured creditors should also keep in mind that the making of a pooling order may have the consequence of advantaging priority creditors and reducing the unsecured creditor’s potential return.

Given the courts’ traditional hesitancy in making pooling orders, it may be commercially justifiable for an unsecured creditor to challenge the equitable making of a pooling order to preserve the ‘kitty’ and provable debts in each separate liquidation.