Relevant issues in obtaining pooling orders
A recent case handed down in the Victorian Supreme Court Lofthouse v Environmental Consultants International Pty Ltd and Ors  VSC 416 provides some useful guidance on the matters a court is likely to consider in deciding whether to make a pooling order, and further, whether or not a liquidator can be remunerated from pooled assets.
The business of each of the defendant companies (Companies,or individually a Company) was conducted by Environmental Consultants International Pty Ltd (ECI) until about 21 December 2006. After this date, ECI formed the group of Companies by incorporating them to conduct various parts of its business for the purpose of insulating itself from liability.
Mr Lofthouse, the liquidator of the defendant companies, sought orders that:
the defendant companies be pooled together to form a group of companies (Pooled Group) pursuant to section 579E of the Corporations Act 2001 (Cth) (Act); and
the liquidator be entitled to be paid from the assets of the Pooled Group the remuneration that had previously been approved by the creditors.
The liquidator’s objective was to avoid the difficult and potentially fruitless exercise of trying to untangle the affairs of each of the Companies, all of which had unkept financial records.
The pooling orders in the liquidation would have resulted in the Companies being treated as if they were a single company with any Pooled Group inter-company debts being extinguished¹.
Ferguson J held that the key issues in the case were:
whether it is just and equitable that a pooling order be made; and
whether a pooling order would materially disadvantage an unsecured creditor of the Pooled Group (other than one of the Companies) who had not consented to the making of the pooling orders².
Just and equitable
In determining whether pooling orders would be just and equitable to make, section 579E(12) of the Act required that his Honour consider:
the extent to which a particular Company was involved in the management or operations of the other Companies;
the conduct of a particular Company (including its officers and employees) towards the creditors of any of the other Companies;
the extent of intermingling of the activities or businesses of the Companies;
the extent to which creditors of any of the Companies may be advantaged or disadvantaged by the making of the pooling orders; and
any other relevant matters.
Ferguson J held that section 579E(12) of the Act required the Court to consider the whole of the circumstances of the Pooled Group and its creditors. His Honour found that the operations of the businesses were never effectively divided between the Companies and specifically cited the following considerations in support of pooling orders being made:
all of the Companies had the same directors and chief financial officer;
the operations of the business continued in much the same way after creation of the Pooled Group;
the businesses were intermingled and treated as a single enterprise within the Pooled Group;
the acts and omissions of the common directors and management led to the downfall of the Companies;
none of the creditors had sought to oppose the pooling orders;
the creditors of ECI may receive less dividends, but no distribution to them could be made without further investigations that would significantly erode any dividends;
the liquidator would be able to receive payment for his fees in relation to the Pooled Group as a whole rather than failing to recover fees against the assetless members of the Pooled Group;
any benefit to the liquidator and disadvantage to the creditors of ECI were outweighed by the fact that the Companies never operated independently and their true position could not be determined without significant costs; and
pooling orders were likely to hasten the end of the liquidation and payment of dividends.
Ferguson J also considered that each of the Companies was liable for the liquidator's claim for remuneration and expenses and that the liquidator was entitled to priority of payment out of the assets of the Pooled Group. Otherwise, the liquidator would have been required to ascertain the ownership of each asset in the Pooled Group and make a claim against each Company. This would not have been desirable in this case where the affairs of the Companies were inextricably linked and the Pooled Group's business had been conducted as one enterprise. In all likelihood, any advantages of making a pooling order would have been lost as a result.
His Honour also took into account the liquidator’s willingness to accept a cap of $75,000 in relation to his fees.
Ferguson J was satisfied that it was just and equitable to make a pooling orders and to authorise the liquidator’s remuneration to be paid from the pooled assets, subject to a maximum limit of $75,000. In his Honour’s view, unsecured creditors would not likely be materially disadvantaged by such a payment being made to the liquidator from the assets of the Pooled Group.
Lavan Legal comment
Liquidators are often faced with groups of companies that are set up for tax or liability reasons. Such groups of companies may operate as one entity without regard to the separation of each member. In such cases, pooling orders offer a means of minimising the costs and complexity of untangling the business affairs of the group, especially when access to proper records is limited or non-existent.
This decision highlights the emphasis likely to be placed by a court on whether pooling would “materially disadvantage” unsecured creditors. An analysis of whether there has been material disadvantage will necessarily be made in the context of all the circumstances of the case, with a focus on “substance over form”. It is likely that a pooling order would be made where the costs of a liquidator regularising the accounts of each company would exceed any advantages and where pooling would reduce costs by removing unnecessary duplication that would otherwise ultimately be payable by the creditors.