20 March 2020
This week’s TGIF considers a recent application to the Federal Court by liquidators of the WDS Group for a pooling order.
This case concerned the WDS Group of companies.
WDS Limited (WDS) was a publicly listed company on the ASX with 11 wholly owned subsidiaries (together, the WDS Group).
WDS and its 11 subsidiaries traded as a single entity and structured their operations between three principal divisions as follows:
WDS and its 11 subsidiaries were centrally managed by WDS’s board and senior management team. Their administrative and financial reporting functions were also centrally managed.
WDS and each of the subsidiaries had entered into a Deed of Cross Guarantee by which the companies cross-guaranteed full payment of any debt owed by a company within the group to an external creditor.
WDS had entered into a Major Works Construct Only Contract as contractor with Eagle Downs Coal Management Pty Ltd (EDCM). Pursuant to the terms of that contract, WDS was required to provide security to EDCM for 10% of the estimated contract sum. The security was in the form of an unconditional and irrevocable undertaking given by an approved financial institution. WDS procured that undertaking from Assetinsure Pty Ltd as agent for Swiss Re International SE in the amount of $14,280,638 (Performance Bond).
A “friction ignition” event occurred at the mine site, which resulted in certain works being suspended. This lead to WDS notifying its financier, GE, and the ASX that it would breach its “fixed charge coverage ratio”. WDS also announced to the ASX that it expected a greater NPAT loss than it had previously forecast.
Thereafter, EDCM cashed the Performance Bond, which gave rise to a corresponding obligation on the part of WDS to indemnify Assetinsure for the full amount of $14,280,638.
About a week later, WDS and the other companies in the group entered into voluntary administration, and the creditors then subsequently resolved that the companies be wound up.
Following the appointment of the administrators, GE had appointed receivers to the group. The receivers took control of the WDS Group’s operations and assets, including all bank accounts, communicated with all stakeholders, including employees and major creditors, and undertook the task of realising all assets.
The sale of the WDS’s group assets was sufficient to pay out GE in full, leaving a surplus of $9.7M (Surplus).
The litigation the subject to this article concerned how the liquidators should distribute the Surplus to creditors. The amount owing to creditors was $45,862,232 and that amount included outstanding employee entitlements of $13,398,810.
The liquidators applied to the Federal Court for the following relief:
A pooling order would allow the liquidators to liquidate the group as though it were one company, rather than having separate liquidations for WDS and each of the 11 subsidiaries.
One of the driving factors behind the liquidators’ decision to seek the judicial direction referred to above was the difficulty they had encountered in determining the asset and liability position of each company within the group. Without further investigation, which would involve significant time and cost, the liquidators could not be certain as to asset ownership within the group.
In the circumstances, the liquidators conducted extensive analysis to determine the way in which to distribute the Surplus so that it would yield the best return for creditors as a whole while having regard to statutory priorities (i.e. the employee entitlements). The approach recommended by the liquidators was the divisional asset allocation approach, and the liquidators observed that this approach was consistent with the way in which the WDS group reported internally and how the group operated in practice.
Without a pooling order being made, the divisional asset allocation approach would result in unsecured non-priority creditors receiving 0.08 cents in the dollar.
The Court concluded that it was appropriate for a direction to be made in the terms sought by the liquidators, noting that the liquidators could come under scrutiny from unsecured creditors, including potentially allegations of breach of duty, if they took the divisional asset allocation approach. Given the benefits of the approach, it was appropriate for the judicial direction to be made to give the liquidators an added layer of protection.
The Court acknowledged that any pooling order would, in effect, subsume the judicial direction referred to above.
That said, the judicial direction remained relevant because it provided the counterfactual scenario which allowed the Court to assess whether or not it was appropriate for a pooling order to be made in the circumstances of this case, including:
The Court observed that, if the pooling order was made, priority creditors (i.e. the employees) would be advantaged. They would have priority claims to the whole of the pooled surplus assets of the group irrespective of which entities previously owned the assets. In those circumstances, the employees would receive 100% of their entitlements in respect of wages, superannuation and leave and about 28% of their entitlements in respect of payments in lieu of notice and redundancy payments. Those payments would exhaust the Surplus meaning that the ordinary unsecured creditors would receive no dividend.
If the pooling order was not made, the employees would only have statutory priority in respect of the assets held by the relevant employing entities within the group. To the extent the employee entitlements were not satisfied from the assets of those companies, the employees would be left with contractual claims against other companies within the WDS Group which would rank pari passu with the claims of other ordinary unsecured creditors.
The Court ultimately concluded that it was just and equitable for a pooling order to be made, and that it had not been established that there would be “material disadvantage” for eligible unsecured creditors.
In the counterfactual scenario based on the divisional asset allocation approach without any pooling order being made, ordinary unsecured creditors would only receive a dividend of 0.08 cents in the dollar. This return was not material considering that the return in this scenario to the largest unsecured creditor, Assetinsure who had a debt of $14.2M in respect of the Performance Bond, would only be $11,854.10. The second largest unsecured creditor was owed $2.3M, and was only expected to receive a dividend of less than $2,000. In the circumstances, it was difficult to see how the making of the pooling order would disadvantage ordinary unsecured creditors.
Noting that the pooling order would also minimise cost and delay and increase administrative efficiency in the winding up by obviating the need for the liquidators to conduct multiple liquidations, the Court was satisfied that a pooling order should be made and proceeded to do so.
This case is a useful reminder of the utility of pooling orders in complex group liquidations where the group in effect traded as a single economic entity.
In such cases, early consideration should be given to whether a pooling order is appropriate.
In applying for a pooling order, it will be necessary to explore and explain how creditors will be impacted if a pooling order is, or is not, made (as the liquidators did in this case).
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