In the recent case of Morgan v McMillan Investment Holdings Pty Ltd [2024] HCA 33, the High Court considered the operation of the pooling regime set out in Division 8 of Part 5.6 of the Corporations Act 2001 (Cth) (the Act).
The case involved claims by two companies in liquidation arising from the sale of the business previously jointly carried on by those companies. The liquidator sought and obtained pooling orders at first instance on the basis that the pooling order was justified by the proposed future pursuit of the claims in and for the benefit of the liquidations of the companies. This decision was overturned on appeal to the Full Court of the Federal Court, and the liquidator then appealed to the High Court.
In dismissing the appeal, the High Court carefully considered the strict technical requirements of the pooling provisions under the Act, before finding that for the purposes of the specific “gateway” relied upon by the liquidator, the liquidator had failed to establish the necessary connection between the relevant use of the particular property (being the claims arising from the sale of the joint business) and the previous conduct of the joint business by the companies.
The matter revolved around two companies, Sydney Allen Printers Pty Ltd (SAP) and Sydney Allen Manufacturing Pty Ltd (SAM), that operated a colour printing business. SAP ordered supplies for the business, employed the staff and carried out the printing work. SAM owned or had rights over the printing presses and business equipment.
In March 2015, SAP and SAM entered into a finance facility with McMillan Investment Holdings Pty Ltd (MIH) pursuant to which SAP and SAM were jointly liable for the amounts owing under the facility.
SAM went into liquidation in April 2016, and SAP followed suit in May 2016. MIH also appointed a receiver and manager over SAP and SAM at around the same time (Receiver).
The Receiver then ran a sale process for the business and assets of SAP and SAM. Whilst unclear, it appears that:
The liquidator of SAP and SAM (Liquidator) learned of these matters and became concerned that the reduction of the purchase price and the additional payment by Print Warehouse to MGS was an attempt to distort the “true” purchase price for the SAP and SAM business.
The Liquidator conducted further investigations and formed the view that SAP and SAM had a claim against MGS on the basis that the $330,000 payment to MGS was in fact part of the proceeds of the sale of the SAP and SAM business.
The first instance and appellate decisions
The Liquidator subsequently applied to the Federal Court for, amongst other things, a pooling order in respect of the liquidations of SAP and SAM pursuant to section 579E(1) of the Act.
Section 579E(1) sets out a number of grounds or “gateways” for the making of a pooling order.
The Liquidator relevantly sought the pooling order in this case under the ground or gateway in section 597E(1)(b)(iv) which describes a situation 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 primary judge found that:
It is important to note that this finding can only be understood as concluding that the gateway had been established by the proposed future use of the chose in action in the course of the liquidations of SAP and SAM, and on the basis that the liquidations themselves were “in connection with” the previous joint undertaking of the business by SAP and SAM.
MIH appealed this finding to the Full Court of the Federal Court.
On appeal, the majority of the Full Court (Yates J and Beach J) held that the gateway in section 579E(1)(b)(iv) requires that the property in question must have a connection to a past or present joint undertaking by the companies in question, and that a connection with a future joint undertaking is not sufficient to establish the gateway and to support a pooling order.
In addition, Beach J held that as the chose in action arose after SAP and SAM had been placed into external administration, any undertaking to enforce the chose in action could only be “in connection with” the legally separate liquidations and could not be “in connection with” the previous joint undertaking of the business.
The Liquidator then appealed this decision to the High Court.
In a unanimous decision dismissing the Liquidator’s appeal, the High Court considered the legislative history of the pooling regime under the Act, before making the following key findings in relation to the proper interpretation of section 579E(1)(b)(iv) of the Act and the appeal:
This decision contains a useful analysis by the High Court as to the history and purpose of the pooling regime in the Act, which provides some insights into how the High Court will approach any questions as to the interpretation of the pooling regime.
It also provides definitive guidance confirming that a claim arising from the disposal of a jointly operated business will not be sufficient to justify a pooling order under section 579E(1)(b)(iv) (although we would recommend that any liquidator in this position should take a careful look at the other gateways available under section 579E(1)).
If you have any questions about this decision, or about the pooling regime under the Act, the experienced Lavan team are here to help.
Thank you to Mitchell Davis, Solicitor, for his valuable research and assistance with this article.