Mark McKillop Barrister

In March I presented to the Foleys List Commercial Law conference on the subject of pooling in corporate insolvency under s579E of the Corporations Act 2001 (Cth). See the overheads from the seminar at the link below:

Why Pool

Pooling is the process of administering the affairs of a group of companies as if they were one entity for the purposes of insolvency. Assets and liabilities of all companies are shared, whilst intragroup claims are eliminated. The key advantage of doing so is that the cost of the pooled administrations is usually much lower than the cost of separate administrations. Other major advantages include:

• there is no need for the liquidator to determine which asset belongs to each company, or which external liability attaches to each;
• there is no need to investigate or deal with intragroup claims; and
• the pooled assets allow fee recovery by the liquidator in respect of assetless companies, and allow recoveries available to asset poor companies to be funded without risk of the liquidator breaching proper purpose duties.

There are two  practical hurdles to pooling that sometimes arise, which I discussed in the presentation:

• Identifying what the “group” is where the companies are not related by common ownership
• Overcoming the no disadvantage test

Identifying the Group

The Court has power to make a pooling order under s579E where each company is being wound up and, as a collective, they fall into one or more of the following types of “groups”:

• the companies are all related bodies corporate, say where there is a parent/subsidiary structure;
• the companies are jointly liable for one or more debts or claims, say where a cross deed is in place or all companies have guaranteed payment of a principal lender’s debt;
• the companies in jointly own or operate particular property that is or was used jointly for doing business, say for example where there are SPVs owning assets used by the entire group;
• 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 connection with a business, a scheme, or an undertaking, carried on jointly by the companies, say for example where an asset owned by one company is used by a group.

The first two types of groups are common and make identification of the group very easy.

What is harder is whether a group of companies operates together prior to liquidation but does not have any common ownership or cross debts.

In Blakeley v Ausmart Services Pty Ltd (in liq), in the matter of Ausmart Services Pty Ltd (in liq) [2021] FCA 1470, in which I appeared, the liquidators were appointed to a group of companies used in a massive tax fraud in the labour supply industry. The companies had some common shareholders and directors, but were operating as a group only because they were controlled by the principal fraudster and his family. There were no common assets (to satisfy the 3rd type of group) and, due to serial phoenixing, many of the companies had never existed or traded at the same time.

Nevertheless the liquidators were able to satisfy O’Callaghan J that the fourth type of group covered all of the applicant companies. The key arguments accepted by the Court were:

• “group” means nothing more than “a collection or plurality” and the reference to a “group” does not, of itself, make it necessary to find any common relationship or shared characteristic
• the common business, scheme or undertaking could be carried on by different group members at different times, so there is no need for all to participate simultaneously;
• a “scheme” is much wider than a business and included a criminal enterprise by a group of companies to avoid tax;
• although the companies participated in arguably different businesses at different times, they were all participants in the fraudster’s criminal enterprise;
• “particular property” must be used for the purposes of the business, scheme or undertaking, and be presently owned by a group member, but its use can have been in the past;
• “property” can include intangible property, rights of action and inter company debts, and a company can “use” property simply by holding it for other embers of the group.

Showing no disadvantage

The obvious potential losers from a pooling order are those creditors of asset rich companies in the group who as a result of pooling will be diluted by creditors of asset poor companies in the group.

For this reason, s579E(10) prohibits the Court from making a pooling order if it will materially disadvantage an unsecured creditor of the group and that creditor has not consented to the order.

This requirement is known in the caselaw as the “no disadvantage test” and can be an effective bar to pooling and all its advantages where the distribution of assets in a group makes large differences in returns between group companies.

The problem should not arise where there is a cross deed of guarantee or some other equivalent legal device by which all companies share joint liability for debts.

However, in less formal situations such as in the Ausmart case or where no cross deed is in place, the problem frequently comes up.

The proper approach to demonstrating no disadvantage is to analyse the comparative returns to each company’s unsecured creditors in a pooled group and outside a pooled group.

The advantages of pooling can often be reduce or eliminate what appears to be an insurmountable difference in returns:

• It is often the case in liquidation of groups of companies that the accounting records are sparse, or badly kept, so it is very difficult to identify which company owes which debt, and which company owns which asset. It follows that a liquidator can produce a wide range of asset and liability scenarios, as to which company holds them, in doing the analysis ;
• The higher costs of liquidation administration without grouping on a per company basis can be factored in;
• Potential returns from recoveries which, but for funding from pooled assets, which would otherwise not be available, especially voidable transactions or tracing claims, can be counted.

Further, the liquidator will be assisted by

• the fact that small differences in return, of a few cents in the dollar, are not material;
• the liquidator does not carry an onus of showing that no creditor will be disadvantaged, until such time as a particular creditor objects.

This issue arose in It the matter of Atlas Gaming Holdings Pty Ltd [2023] VSC 91 in which I appeared before Osborne J and from which the above analysis wis drawn. In that case, a private group had sold a business during Covid and gone into liquidation thereafter, without any cross deed or other debt obligations that were common. The records of the group were so poor that the liquidator could not properly identify which group companies owned the business assets sold.

More details about both issues appear in the attached overheads from the presentation.