Pooling orders: when is a right to sue 'used in connection with' a joint business?

High Court clarifies criteria in insolvency case 6 min read

In September 2024, the High Court delivered an important decision concerning whether a right to sue held by companies in liquidation could engage the requirements for a pooling order under s579E(1) of the Corporations Act 2001 (Cth) (Corporations Act). While the issues in Morgan v McMillan Investment Holdings Pty Ltd [2024] HCA 33 (Morgan) were somewhat confined, the High Court provided general guidance on when a pooling order is appropriate where one or more insolvent companies in a group own particular property that is or was used in connection with a joint business, scheme or undertaking.

Background

The decision in Morgan concerned two companies, Sydney Allen Printers Pty Ltd (SAP) and Sydney Allen Manufacturing Pty Ltd (SAM), which jointly operated a colour printing business.

In 2015, SAP and SAM jointly entered into a finance facility with McMillan Investment Holdings Pty Ltd (McMillan). In 2016, both companies were placed into external administration. Subsequently, McMillan appointed a receiver and manager to both SAP and SAM. The receiver entered into an agreement to sell the assets and business of SAP and SAM, as a going concern, to Print Warehouse Australia Pty Ltd (Print Warehouse) for $1.3 million. It was later alleged by the liquidator of SAP and SAM that the receiver had obtained an offer by Print Warehouse to the value of $1.6 million. According to the liquidator, the purchase price was reduced to $1.3 million at the same time that an associated company of McMillan paid Print Warehouse $330,000, which was described in a pre-paid invoice as relating to, 'our costs in relation to services provided in connection with printing plant and equipment'.

At first instance, the liquidator of SAP and SAM brought a claim seeking, among other things, a pooling order pursuant to s579E(1)(b)(iv) of the Corporations Act. This was sought to enable the liquidator to bring claims against various third parties, including a claim to recover the $330,000. The trial judge granted the pooling order on the basis that SAP and SAM jointly held a chose in action to seek recovery of the $330,000 payment from Print Warehouse.

However, this was overturned on appeal. The Full Court of the Federal Court held that the gateway in s579E(1)(b)(iv) was not satisfied, and therefore the pooling order should not have been made. The Full Court made this decision on the basis that, among other things, SAP's and SAM's joint right to sue came into existence after the receiver of SAM and SAP had sold the business, and that in any event at the time the pooling order was made, the right to sue was not being used in connection with SAM's and SAP's existing business, scheme or undertaking.

The liquidator appealed this decision to the High Court.

What is a pooling order?

The pooling order provisions, which were introduced in 2007, are contained in s579E of the Corporations Act. The aim of the regime is to simplify the process of winding up a group of companies in liquidation, thereby reducing the cost of insolvency practitioners and increasing returns for unsecured creditors. The effect of a pooling order is that the assets and liabilities of a group of companies in liquidation are pooled for the general benefit of the companies' unsecured creditors. Each company subject to the pooling order will be jointly and severally liable for the debts of each other company in the group, and intercompany debts within the pooled group will be extinguished.

A court may make a pooling order where three criteria are satisfied, being:

1. the companies in the proposed pool are being wound up;
2. any of the following applies:
   1. each company is a related body corporate of each other company;
   2. the companies are jointly liable for one or more debts or claims;
   3. the companies jointly own or operate particular property used in connection with a business, a scheme, or an undertaking, carried on jointly; or
   4. one or more companies own particular property used by any or all of the companies in the group in connection with a business, a scheme, or an undertaking, carried on jointly; (the Gateway Requirements) and
3. it is just and equitable to 'pool' the companies.

The High Court's decision

In dismissing the appeal and upholding the Full Court's decision that the fourth Gateway Requirement was not satisfied, the High Court set out a number of principles relevant to interpreting the third and fourth Gateway Requirements, namely:

• First, the starting point is to identify the 'particular property'. Given that this phrase is not defined in the Corporations Act, the Court adopted a broad interpretation holding that 'particular property' encompasses both tangible and intangible property and extends to all valuable rights and claims.
• Second, there must be use of the property in connection with a joint business, scheme or undertaking. This use must be either present use, or past use—not future use.
• Third, there must be a connection between the identified use of the property and the joint operation of the companies. For example, this connection might be satisfied where property is available for use (ie a debt, or holding land). However, a bank account containing the proceeds of a sale of a joint business would more likely be connected to the disposal of the joint business rather than its operation.

Applying the above to the facts in Morgan, the Court accepted that SAP's and SAM's choses in action constituted property and that they were available 'for use' by SAP and SAM. However, the choses in action were not connected with the operation of the joint printing business and were instead connected with the disposal of the business. There was no dispute in the appeal before the High Court that in the conduct of their joint business, SAP and SAM did not incur any joint liability for a debt and did not have any joint ownership or operation of property. As such, the Court held that the mere availability to SAP and SAM of an alleged chose in action, arising from the disposal of the business of the companies, and which might be enforced in the future, did not have the required connection with the previously existing business that they carried on jointly to satisfy the fourth Gateway Requirement.

The Court also briefly considered the effect of reinstatement (as SAM was deregistered in 2018) on the pooling order. Section 601AH(5) of the Corporations Act provides, '[i]f a company is reinstated, the company is taken to have continued in existence as if it had not been deregistered…'. The Court commented that s601AH(5) is a 'statutory fiction' with limited effect. The reinstatement of a company under this provision operates retrospectively by deeming the company to have continued to exist. It has no effect, the Court noted, on the fact that no business, scheme or undertaking took place during that period of deemed existence. Given this, the reinstatement did not deem SAM to have held any property during that period.

Key takeaways

Given that a core tenant of insolvency law is that a company's assets should only be divided among its specific creditors, courts have traditionally been hesitant to make pooling orders. Notwithstanding this, the decision in Morgan is a useful reminder on the factors that liquidators should consider when seeking pooling orders. In particular:

• A claim arising from the disposal of a jointly operated business will not satisfy the third or fourth Gateway Requirements. However, other Gateway Requirements remain available and a pooling order may still be made if, for instance, the companies are related entities, or are jointly liable for debts or claims.
• Where a pooling order is sought, it is essential to identify a nexus between the particular property and its use in the joint business, scheme or undertaking.

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