TGIF 27 September 2024 — High Court clarifies pooling orders for liquidators of insolvent companies

In Morgan v McMillan Investment Holdings Pty Ltd [2024] HCA 33, the High Court had to consider whether a right to sue held by companies in liquidation could provide the required gateway for a pooling order under s 579E(1) of the Corporations Act 2001 (Cth).

Key Takeaways

• The High Court has considered and provided guidance on the availability of pooling orders under s 579E of the Corporations Act 2001 (Cth).
  
  
• While the legal and factual issues considered by the High Court are relatively narrow, the decision nevertheless provides clarity on when a pooling order is appropriate in circumstances where one or more insolvent companies in a group use property in a joint business, scheme or undertaking.
  
  
• To satisfy this gateway for a pooling order, there must be a connection between the relevant property and the business, scheme or undertaking carried on jointly by the companies in the group. In this case, the connection was not satisfied because the right to sue held by the two relevant companies arose when those companies were in liquidation and where the right to sue related to the disposal of the joint business, not the carrying on of the joint business.

Background

The Appellant, Mr Morgan, was the liquidator of two companies, Sydney Allen Printers Pty Ltd (SAP) and Sydney Allen Manufacturing Pty Ltd (SAM). SAP and SAM operated a colour printing business.

SAP and SAM had entered into a finance facility with the Respondent, McMillan. A receiver and manager (the Receiver) was appointed to SAP and SAM under that facility.

The Receiver, SAP and SAM entered an agreement with Print Warehouse Australia Pty Ltd (Print Warehouse) to sell, as a going concern, the assets and business operated by SAP and SAM for $1.3 million. At the ‘Commencement Date’ of the agreement, SAM was in liquidation, but SAP was not. By completion, both companies were in liquidation.

The evidence suggested that a ‘much stronger’ offer had been made to the Receiver by Print Warehouse but was reduced ‘at the last minute’. Mr Morgan exhibited an invoice issued to Print Warehouse by a company associated with McMillan apparently dated as the same day as the sale contract. The invoice amount was $330,000. The invoice was on prepaid terms with the description: ‘[t]o our costs in relation to services provided in connection with printing plant and equipment’.

Mr Morgan alleged that the $330,000 invoice represented a payment to the associated company of funds that would otherwise have been included in the purchase price due to SAP and SAM. The true purchase price, according to Mr Morgan, would have been $1.6 million.

Mr Morgan sought, and was granted, a pooling order by the trial judge. The affairs of SAP and SAM had been substantially intermingled. The pooling order would allow Mr Morgan to bring claims against various third parties, including for the recovery of the $330,000 payment that it received from Print Warehouse.

On appeal, the Full Court overturned the pooling order (see our earlier article on that decision: Get out of the pool: Full Federal Court upholds appeal against pooling order).

Mr Morgan appealed the Full Court’s decision to the High Court (see our earlier article on the special leave application: High Court willing to test pooling orders).

Decision

The High Court dismissed the appeal on the basis that the gateway in
s 579E(1)(b)(iv) was not satisfied. That gateway permits a pooling order to be made in respect of two or more insolvent companies in a group 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”

Mr Morgan’s position was that the ‘particular property’ was a right to sue held by SAP and SAM to recover the $330,000 amount. This arose on 5 May 2016, being the ‘Commencement Date’ of the sale contract with Print Warehouse. Mr Morgan argued that this right to sue was ‘for use’ and thus the gateway was engaged in the sense it was ‘available to deploy’.

The High Court observed that whether property is sufficiently ‘for use’ for the purposes of s 579E(1)(b)(iv) will depend in every case upon whether the identified use has a sufficient ‘connection’ with the carrying on of the joint business, scheme or undertaking. There must be a connection between the identified use of the property and the joint operation of the companies.

While the Court accepted that, in some circumstances, mere availability of an asset ‘for use’ will have a sufficient connection, it held that such a connection did not exist in this case. The Court found that the alleged right to sue had a direct and substantial connection with the disposal of the companies, rather than the carrying on of the joint business between them.

Comment

This decision provides timely clarity for liquidators on the availability of pooling orders and what must be proved to obtain one.

Where a pooling order is sought on the basis that particular property is used in connection with a business, scheme or undertaking jointly carried on by a group of two or more insolvent companies, close attention needs to be paid to:

• precisely identifying the ‘particular property’ in question; and

• establishing the link between that property and its use in the business, scheme or undertaking carried on jointly by the companies in the group. This requires analysis of the usual process of trade.

Each case will turn on its facts. However, where the property in question is the product of a sale process, there is a risk of a Court concluding that the property was connected with the disposal of the business rather than the carrying on of a joint business, such that the gateway will not be engaged.