Pooling Orders and Section 579E

Pooling Orders and S579E

S579E(1) of the Corporation Act empowers the Court to make an order determining a group of two or more companies is a ‘pooled group’ for the purpose of s579E. Such an order is designated by s9 as a ‘pooling order’. Its effect, broadly speaking, is to cause all of several companies subject to winding up to be jointly and severally liable for the debts of, and claims against, each of them, with debts owing among the companies themselves extinguished. In this way, the assets available in each winding up become applicable towards satisfaction of external debts of all the companies.

The case of   Allen-v-Feather Products Pty Ltd [2008] NSWSC 259 was discussed earlier this year in the April and May 2008 editions. Whilst there have been no further cases on pooling since those articles were written, it is worth a third time mention because of the creative way in which the liquidator’s lawyers sought (albeit unsuccessfully) to overcome the inherent problems in their case by the application of S579N of the Corporations Act.

As you will recall, the case was heard by Barrett J on 27 March 2008. Two companies   - Feather Products Pty Ltd (‘Feather’) and Snuggle Pty Ltd (‘Snuggle’)   - had been subject to an earlier order on 4 February 2008 by Hammerschlag J in circumstances where his honour on that earlier occasion recognised that there had been adequately informed assent by the creditors of Feather and Snuggle to a defined departure from the basis on which (i) assets would otherwise be applied and (ii) debts and claims would otherwise participate in the respective windings up. On that basis, Hammerschlag J gave the liquidators of those two companies guidance to the effect that they might conduct the windings up on the particular modified basis endorsed by the creditors and stated in the orders of   4 February 2008. 

In effect, the earlier orders of Hammerschlag J amounted to a de facto pooling order but they were not orders made under s579E because both companies’ liquidations pre-dated 31 December 2007, being the date that s579E began operation. S1480(20) – one of the transitional provisions in Part 10.9 -   is applicable in this regard and   I comment more on the transitional provisions of the Corporations Act shortly.

In the matter before Barrett J, the liquidators of Feather, Snuggle and a third company Illume Pty Ltd (‘Illume’) wished to adopt a wider form of pooling so that assets distributable in the windings up of all of Feather, Snuggle and Illume were applied to the debts of all of them.

Barrett J had no problem in coming to the conclusion that the provisions of s579E(1)(b)(iv) applied. That subsection states that “if 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” then the court may by order determine, “if it is just and equitable to do so”, that the group is a pooled group for the purposes of the section.

According to the evidence, Feather manufactured feather and down products in premises at St Marys, Snuggle marketed the finished products while Illume, a labour hire company, employed the workforce, supplied their services to the other companies and was responsible for payroll and worker’s compensations insurance.

Barrett J concluded that the word ‘jointly’ where used in s579E(1)(b)(iv) does not mean or require action in unison . He was of the view that all that is required is that the companies be parties to an arrangement under which each contributes part of what is required to carry on a single business.

He then turned to the transitional provisions under s1480(20) of the Corporation Act . That section provides that s589E(1) applies in relation to a group of two or more companies if the winding up of each company in the group begins on or after the day on which the subsection commences.

Whilst the winding up of Illume commenced on 17 March 2008, there was no dispute that the winding up of each Feather and Snuggle began before S579E commenced – that is, before 31 December 2007. This compelled Barrett J to the conclusion that the Court had no power to determine that the group was a pooled group for the purpose of s579E.

It was argued that the provisions of s579N overcame the problems brought to bear by the application of s1480(20) in that s579N states “to avoid doubt, …. a group of two or more companies need not be associated with each other in any way (other than a way described in paragraph …579E(1)(b))”.

In an indication that the bench is not totally bereft of humour in its deliberations, Barrett J then stated: “I must address a question of construction. S579N is, in terms, a provision enacted to ‘avoid doubt’. Precisely what the words to ‘to avoid doubt’ … add to the meaning of a statutory provision may itself be a matter of doubt.”.

His honour noted that the liquidators’ submissions were to the effect that s1480(20) requires a particular form of “association” among companies in a group proposed to be made the subject of   a s579E(1) order, that is, the “association” arising from the common characteristic that winding up began on or after 31 December 2007. That being so, it was argued,   s579N removes or countermands that requirement by ensuring that the only association needed among the companies for the purpose of s579E(1) is an association in a way described in s579E(1)(b).

  He rejected this construction as being unsupportable. He said that the section does not prescribe a need for an “association” based on the time at which winding up began. He said that the section identifies, by reference to a timing characteristic, those cases to which the new provision applies, and those cases to which it does not.

Barrett J indicated that the timing characteristic that must be found if the companies are to come within the scope of the new section is not something that causes all companies possessing the characteristic to be “associated” with each other. . In any event, he was of the view that the postulated construction would, even if otherwise meritorious,   deprive s1480(20) of all meaning and effect, and it was for that reason alone to be rejected.

His honour concluded that the transitional provision in s1480(20) compelled him to dismiss the liquidators’ claim for a pooling order under s579E(1) however  meritorious the claim might have appeared to be.

Further clarification on the operation of these provisions is eagerly awaited.

September 2008

Leigh Adams