High Court Makes A Splash: Liquidator’s Appeal In Relation To Pooling Order Dismissed

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.

Background

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 sale process was run over a relatively short time period;
  • the primary interested party was a party named Print Warehouse Australia Pty Ltd (Print Warehouse);
  • there was some evidence to suggest that at one point in the negotiations, Print Warehouse had been discussing a “much stronger” offer for the business with the Receiver;
  • then, at the last minute, the purchase price for the business was suddenly reduced to $1.3m.  This offer was accepted by MIH, and the Receiver caused SAP and SAM to enter into an agreement to sell the business as a going concern to print Warehouse for $1.3m.  The sale agreement was entered into on 4 May 2016; 
  • however, on that same day (4 May 2016), a company related to MIH named McMillan Group Services Pty Ltd (MGS) issued an invoice to Print Warehouse for $330,000 described as being a pre-payment for “costs in relation to services provided in connection with printing plant and equipment”.

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:

  • SAP and SAM jointly owned the chose in action or claim against MGS;
  • SAP and SAM would be able to use that chose in action in connection with their “undertaking carried on jointly to discharge their debts and conduct recovery of their assets” and
  • the gateway in section 579E(1)(b)(iv) had been established and permitted the making of the pooling order.

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.

High Court’s decision

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:

  • first, sections 579E(1)(b)(iii) and (iv) both require that there must be “particular property” which justifies the making of the pooling order.  However, while section 579E(1)(b)(iii) requires that the relevant companies must jointly own the particular property, section 579E(1)(b)(iv) can be satisfied by property only owned by one company although this is subject to the requirement for a connection with a joint undertaking, scheme or business carried out by the relevant companies;
  • secondly, in this case, and contrary to the position taken and findings made at first instance, it was not the case that SAP and SAM had a joint claim against MGS.  However, it was possible that SAP and SAM had separate claims for breach of statutory and fiduciary duties against their shadow directors (being the principals of MIH) at the time of entry into the sale agreement, and separate claims against MGS for knowing participation in the breaches of fiduciary duty.  In that sense, it was correct for the Liquidator to rely on section 579E(1)(b)(iv) as this gateway does not require joint ownership of the particular property which is said to justify the making of the pooling order; and
  • thirdly, and critically, section 597E(1)(b)(iv) requires that there must be an inquiry into the “use” of the “particular property” and this “use” must have a connection to a joint undertaking, scheme or business of the companies.  For example, while the proceeds of the sale of a business might be available “for use” by the former joint owners of the business, that “use” cannot be said to have sufficient connection to the previous carrying on of the joint business to satisfy section 579E(1)(b)(iv).  Taking this approach, while the choses in action held by SAP and SAM might be available for use in the liquidations, it could not be said that this use has a direct and substantial connection with the printing business previously carried on by SAP and SAM so as to satisfy section 579E(1)(b)(iv). 

Lavan comment

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.

Disclaimer – the information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.