Ashurst Restructuring Roundup

Pooling Orders: Use of Property in a Joint Business

Morgan v McMillan Investment Holdings Pty Ltd [2024] HCA 33 ("McMillan")

"Where two or more related companies have engaged in a common business enterprise and are being wound up in insolvency, it may be appropriate in certain circumstances for the separate entities of the companies to be disregarded so that they are wound up together as if they were the one company."  Harmer Report  [854]

Section 579E(1), Corporations Act 2001 (CA) provides that the court may make a pooling order in respect of two or more companies in a group if (amongst other things):

"(a)  each company in the group is being wound up; 

(b)  any of the following sub-paragraphs applies:

(iii)  the companies in the group jointly own or operate particular property that is or was used, or for use, in connection with a business, a scheme, or an undertaking, carried on jointly by companies in the group; 

 (iv) 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"

 and the court is satisfied that it is just and equitable to make a "pooling order".

The effect of a "pooling order" is that the affairs of the group can be administered on a consolidated basis: s 579E(2), CA

In McMillan, the High Court considered the requirements in sub-paragraphs (iii) and (iv) in s 579(1)(b), CA for the making of a pooling order.

In that case, two companies in the group jointly operated a printing business.  One company conducted the business, including employing staff and the other owned or had rights over the equipment used in the business.  Receivers were appointed to those companies and the printing business was sold as a going concern.

The sale and a related transaction was said to give rise to a right to a claim against the secured creditor which had appointed the receivers.

That claim or chose in action was argued to be the property which satisfied the prerequisite or "gateway" provided in either section 579E(1)(b)(iii) or (iv) insofar as it was necessary to identify "particular property that is or was used, or for use, in connection with a business, a scheme or an undertaking, carried on jointly by the companies in the group".  

That argument failed in the High Court.

So far as the operation of the two sub-paragraphs is concerned, the Court said (at [38]):

"As to these latter two gateways, the first, s 579E(1)(b)(iii), requires that the particular property be jointly owned or operated.  The second, s 579E(1)(b)(iv), is satisfied if only one company owns the particular property, but mere operation of the property is not sufficient.  The two gateways can overlap where property and joint ownership is used as part of a joint undertaking.  But the two gateways are distinct."

That is to say, and as appears from the passages from the High Court's judgment which are cited below, the relevant property must have been used or available for use in the joint enterprise which was being undertaken by the companies in the group.

As to the identification of the property, the Court said (at [30]):

"The starting point … must be the identification by the applicant for a pooling order of the 'particular property' which is relied upon to meet the gateway requirements.  The use of the present tense for 'own' and 'operated' … requires that ownership or operation of the 'particular property' by a company in the group be established at the time of judgment."

Moreover, the property may be either 'tangible or intangible'.  

Importantly, though:

"The necessary connection is not merely between particular property and the jointly carried on business, but between use of particular property by one or more of the group companies and the business jointly carried on by the group companies"; McMillan at [46]

So, in McMillan: 

"The mere availability of the alleged chose in action 'for use' by [the companies in the group] by commencing an action will not have sufficient connection with the 'carrying on' of the joint business that was sold.  The alleged chose in action will instead, have a direct and substantial connection with the disposal of the business". (at [49])

The practical significance of these requirements is that the application for a "pooling order" should be made expeditiously and determined before the relevant property is realised in the course of the administration process.  As was the case in McMillan, that may prove burdensome, if not impossible, if there is another form of external administration, such as a receivership, prior to the commencement of the liquidation.

Author: Richard Fisher AM, Partner.