Pooling orders for companies being wound up: the High Court wades in

When a pooling order is made, the assets and liabilities of companies in a corporate group are effectively merged. As a result, each company within the pooled group (all in liquidation) is jointly and severally liable for each debt payable by, and claim against, each other company within the pooled group for the purposes of adjudicating creditor claims and dividend distributions to the companies’ creditors. Moreover, intra-group debts and claims are extinguished.

Getting a pooling order, however, is not as easy as pointing to a corporate group in liquidation. Under section 579E(1)(b)(iv) of the Corporations Act 2001 (Cth), there are four gateway requirements, and at least one must be met. Two of those gateways broadly ask whether “particular property” is owned or used by the companies.

The High Court has explored whether a chose in action (a right to sue) could be “particular property” and underscored that liquidators must exercise caution in relying on a connection between the particular property and the jointly carried on business, if the business is no longer being carried on (Morgan v McMillan Investment Holdings Pty Ltd [2024] HCA 33).

Pooling orders

Section 579E(1) of the Act allows the court to make a “pooling order” in relation to a group of two or more companies that are being wound up, where it is just and equitable to do so, and any of the following gateway requirements are met:

1. each company is a related body corporate of the other(s) in the same group;
2. the companies are jointly liable for one or more debts or claims;
3. the companies jointly own or operate particular property that is or was used, or for use, in connection with a business, a scheme, or an undertaking, carried on jointly by the companies in the group; or
4. 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.

It is the last gateway – section 579E(1)(b)(iv) – that was under consideration in Morgan v McMillan.

A printing business is liquidated, and a pooling order is sought

Sydney Allen Printers Pty Ltd (In Liq) (SAP) and Sydney Allen Manufacturing Pty Ltd (In Liq) (SAM) operated a colour printing business. SAP did all the printing work and employed the business’ staff, and SAM owned the equipment used in the business (including the printing presses).

In 2015, McMillan Investment Holdings Pty Ltd entered into a finance facility with SAM and SAP. On 7 April 2016, SAM was placed into liquidation, and on 13 April 2016, a receiver and manager was appointed both to SAM and SAP under the McMillan finance facility. On 13 May 2016, SAP was also placed into liquidation.

On 4 May 2016, the Receiver, SAM and SAP entered into an agreement to sell the assets and business as a going concern for $1.3 million to Print Warehouse Australia Pty Ltd. Completion occurred on 1 July 2016 (when both SAP and SAM were in liquidation).

Five years later, the liquidator of SAP and SAM, Mr Morgan, sought (among other things) an order that SAP and SAM be a pooled group, which would benefit the joined creditors of SAP and SAM if certain proposed insolvent trading and voidable transaction claims were successful, by eliminating intercompany debts and claims. To establish the gateway in section 579E(1)(b)(iv) – the most plausible gateway available in the circumstances – Mr Morgan alleged SAM and SAP jointly owned a right to sue a related entity of McMillan to recover money paid to it in connection with the sale of the business.

In evidence at the hearing of the application was:

• correspondence from McMillan’s lawyer suggesting that prior to the sale of the business, Print Warehouse had made a higher offer to the Receiver, but which had been reduced at the last minute; and
• a “curious” invoice from McMillan Group Services Pty Ltd (MGS), a company associated with McMillan, to Print Warehouse for $300,000 (ex GST), for “our costs in relation to services provided in connection with printing plant and equipment.”

Mr Morgan alleged that the invoice represented a payment to MGS of the funds that would otherwise have been included in the purchase price for the sale of the business and assets due to SAP and SAM, the SAM and SAP had a right to bring a claim against MGS for the recovery of the $300,000 alleged to have been paid to it.

At first instance, Justice Rares held that the gateway in section 579E(1)(b)(iv) was satisfied by the existence of a right to sue to seek recovery of money from MGS based on an allegation that the money had been wrongfully paid to MGS. This right to sue constituted “particular property” that SAP and SAM “will be able to use” in connection with their “undertaking carried on jointly to discharge their debts and conduct recovery of their assets”.

The NSW Court of Appeal overturned this, and held section 579E(1)(b)(iv) required a past or present joint undertaking, not a future joint undertaking to enforce debts.

The High Court: it’s not enough to connect the business with the particular property

The High Court found that the starting point for the application of section 579E(1)(b)(iv) was the identification of the “particular property” which is relied on to meet the gateway requirement. This extends to tangible and intangible property, and includes a chose in action.

The particular property relied upon by Mr Morgan at trial was a “chose in action to receive the proceeds of the $330,000 that Print Warehouse paid MGS on 5 May 2016”. The High Court held that any such choses in action were held separately by SAP and SAM. Moreover, and contrary to Mr Morgan’s assertion at trial, the High Court found the steps taken in the liquidations of SAP and SAM were carried on separately. Thus, SAP and SAM could not seek to use these separate choses in action for a joint undertaking to discharge their debts and conduct recovery of their assets. Mr Morgan therefore focused upon how the proposed use of the alleged chose in action could be said to be for use in connection with the printing business that SAP and SAM carried on jointly.

The High Court noted it is not sufficient for the companies to have previously conducted a joint business, scheme, or undertaking. There must be a connection between the identified use of the property and the joint operation of the companies.

The Court held that the mere availability to SAP and SAM of the alleged chose in action arising from the disposal of the business which might be enforced in the future, is not property that is used in connection with carrying on the joint business that was sold. Rather, the chose in action had a connection with the disposal of the business. Consequently, the gateway in section 579E(1)(b)(iv) was not established, and the High Court dismissed the appeal.