Question 3 - s 579E(a)(iv) - "own" property that "is or was used"?
36It is necessary now to decide whether "one or more companies in the group own particular property that is or was used, by all or any of the companies, in connection with" the "scheme" just identified.
37An immediate problem here is that the whole of the business of each company has been sold. Receivers and managers appointed by a secured creditor of each company other than No 40 exercised a power of sale in respect of the whole of the assets and undertaking of the company. The assets and undertaking of No 40 were sold by that company itself in conjunction with the sales made by the receivers and managers of the other companies.
38As a result of these sales, none of the forty companies any longer owns goodwill or items of tangible property of the kind used in the conduct of its business - stock-in-trade, leaseholds, shop fittings, business machines, vehicles and the like. All these passed to the purchaser. The companies, under the control of their liquidator, now have the balance of the proceeds of sale remaining after expenses of sale and satisfaction of the secured creditor's debt (or, in the case of No 40, expenses of sale only).
39Under s 579E(1), the court may make a pooling order if it appears to the court that the conditions set out in paragraphs (a) and (b) are satisfied. Where, as here, reliance is placed on s 579E(1)(b)(iv), one such condition is that "one or more companies in the group own particular property", being property that "is or was used, or for use, by all or any of the companies in the group in connection with" a relevant business, scheme or undertaking.
40The questions for the court are thus whether, at the time of the court's decision, particular property "is or was used, or for use" in a relevant way and is property that "one or more companies in the group own". The inquiry into use directs attention to both the present (whether the property " is ... used, or for use") and the past (whether the property "was used, or for use"). The inquiry into ownership, by contrast, concentrates wholly on the present - whether one or more of the relevant companies "own" the property at the time of the court's decision.
41This aspect of the pooling provisions recently received attention in the judgment of Windeyer AJ in Re Australian Hotel Acquisition Ltd [2011] NSWSC 1374. The circumstances there were similar to those of the present case in that a secured creditor had sold hotel premises and businesses previously carried on by relevant companies. Windeyer AJ said at [42] - [44]:
"42 Assuming all seven companies are a group, because they are all identified as required by the decision of Barrett J [ Allen v Feather Products Pty Ltd ], and further assuming for the moment that because the assets of both NRP and NRH were subject to the CBA 2004 charge, and also because there were intercompany loans, it could be held that the property of each company was used in connection with a business, it seems to me the business would have to be one in which only the North Ryde companies were involved. This is not the case. There is no evidence to suggest that the North Ryde assets were used by any of the AHA group companies apart from some loans between AHA and NRP not clearly identified. For this reason alone (iv) does not apply.
43 The wording of (iv) raises an additional problem as the words 'one or more companies in the group own particular property that it is or was used or for use by any or all of the companies in the group' speaks in the present tense, as do the words in (i) (ii) and(iii). The wording is not 'own or owned' and this should be compared with 'is or was used'. The total borrowing under the 2005 AHA facility was $35M. The liability of AHA was guaranteed by each of HPIA, HPIP, Ce'Nedra and SPAC. Each of those companies gave a Deed of Charge over all its present and future assets to support the charge. SPAC mortgaged its hotel property as particular security. HPIP may have mortgaged the Parramatta Hotel land to support its guarantee although this is not clear as the document in evidence does not identify any mortgaged land. I do not consider all assets of the company could be "particular property".
44 I do however consider that SPAC did mortgage the Surfers Paradise Hotel to the CBA to support the borrowing and to that extent that property was used in connection with a business carried out by the AHA companies but not the North Ryde companies. However the Surfers Paradise Hotel has been sold and is no longer particular property now owned by SPAC. The ordinary construction of (iv) requires the property to be now owned not previously owned so the particular mortgage transactions do not assist under (iv). The evidence is that the property now held in the companies is the surplus money available after sale of the Parramatta Hotel and any surplus from sale of North Ryde Hotel if the claim of Barcroft Holdings to be secured creditor is not successful. These surplus funds are not particular property within (iv). As I have said if there were any particular property it no longer exists. Again the requirements of (iv) are not made out."
42It was submitted that I should decline to follow this decision regarding the construction of the words "own particular property". To require that the "particular property" remain in the ownership of one or more of the companies when the court comes to decide the pooling application is, it was submitted, to overlook a key aspect of the winding up process, that is, realisation of the company's property so that the assets are reduced to a fund of cash from which admitted debts may be paid.
43Because of that core aspect of the winding up process, it is said, the construction adopted by Windeyer AJ has the consequence that pooling is denied unless the application is made and dealt with at a point before full realisation of assets; that the prospects of success in achieving pooling therefore diminish as the process proceeds; and that there is no reason of policy or logic why the outcome should be different according to the stage the winding up has reached when the application comes before the court.
44There is clear merit in that submission, so far as the apparent policy of the legislation is concerned. But the plain words are uncompromising in the message they deliver. Both s 579E(1)(b)(iii) and s 579E(1)(b)(iv) deal with a case where property "is or was used, or for use" in connection with a business, scheme or undertaking, thus extending to both a case in which property is now used (or for use) and a case in which property was at some earlier time used (or for use); but each provision makes it perfectly plain that it is concerned only with property that is now owned.
45The legislature could have referred to property that the companies "own or owned" that "is or was used (or for use)". One can only assume that it consciously chose not to do so. Mr Oakes SC referred me to the relevant part of the Explanatory Statement to the Corporations Amendment (Insolvency) Bill , 2007 (Cth) as follows:
"4.260. New sections 579E and 579G of the Corporations Act will provide for court-ordered pooling.
4.261. New section 579E will empower a Court to determine, by order, that a group of companies is a pooled group for the purposes of section 579E. The Court may make such an order if it is satisfied that it is just and equitable to do so. In considering whether to make an order the Court must have regard to the
following matters (new subsection 579E(12)):
the extent to which a company in the group and the officers or
employees of a company in the group were involved in the
management of any of the
other companies;
the conduct of a company in the group and the officers or
employees of a company in the group towards the creditors of any of the other companies;
the extent to which the circumstances that gave rise to the winding up of any of the pooled companies were attributable to the actions of any of the other companies in the group or the officers or employees any of the other companies in the group;
the extent to which the business of the pooled companies has been intermingled;
the extent to which creditors of any one or more of the pooled
companies may be advantaged or disadvantaged by the making of the pooling order;
and
any other relevant matters.
4.262. A court may not make a pooling order if the order would materially disadvantage an eligible unsecured creditor of a company in the group and that eligible unsecured creditor has not consented to the making of the order (new subsection 579E(10)).
4.263. New subsection 579E(2) will provide that the consequences of a pooling order under section 579E are:
each company in the group is taken to be jointly and severally liable for each debt payable by and each claim against each other company in the group;
each debt payable by a company in the group to any other company in the group is extinguished.
4.264. An application for a court-ordered pooling may only be made by the liquidator or liquidators of the companies in the group (subsection 579E(11)).
4.265. Under new section 579G of the Corporations Act the Court may make ancillary orders in approving the making of a pooling determination. It may:
exempt specified debts or claims from the determination;
transfer property or liabilities from one company to another;
modify the application of the Corporations Act in relation to the winding up of the companies in the group; and
give such directions in relation to the winding up of the companies in the group as the Court thinks fit.
4.266. The Court's power to make an order or direction under section 579G includes power to provide for different returns for different classes of creditors or the subordination of the debts and claims of specified creditors.
4.267. Subsection 579G(2) specifies that the liquidator or a creditor of a company in the group has standing to make an application for an ancillary
order.
4.268. New section 579L of the Corporations Act makes provision for consolidated meetings of creditors."
46Nothing at all is said here about the s 579E(1)(b)(i) to (iv) conditions. There is accordingly nothing to indicate any basis in which the court might depart from the plain meaning of the words - even assuming that it would be permissible to have regard to the parliamentary material in the face of those clear words.
47The construction that commended itself to Windeyer AJ in Re Australian Hotel Acquisition Ltd is, in my respectful opinion, correct.
48Mr Oakes submitted on behalf of the liquidator that, if that construction is adopted, it is possible to conclude that particular property that is or was used in connection with the relevant undertaking is still owned, despite the sales of businesses to which I have referred. The relevant property is said to be the product of the deed of cross guarantee referred to at paragraph [19] above. The submission is as follows:
"One such piece of property is the class order guarantee. A guarantee is a thing in action: Loxton v Moir (1914) 18 CLR 360. The class order guarantee carried with it the ordinary incidents of guarantee including the right to call on it (albeit in the future), and, if called upon, the right of indemnity and the right of contribution from co-guarantors. It was used to assist in the publication of consolidated accounts of the group."
49In Loxton v Moir [1914] HCA 89; (1914) 18 CLR 360, there was a question whether new trustees appointed in consequence the retirement of the original trustees held the benefit of a guarantee of a mortgage debt. The mortgage and the guarantee were given to the original trustees and the court was called upon to consider the effect of a statutory provision stating that, upon the appointment of a new trustee, the whole of the trust property was conveyed, assigned and transferred so as to be vested in the new trustee both at law and in equity. The court held that the right of action on the guarantee was, by that provision, vested in the new trustees..
50To this point the relevant deed of cross guarantee has been mentioned only briefly. It is necessary to say more about its terms and operation. There are three parties or groups of parties: the "Group Entities" (being No 4, No 5, No 7, No 29, No 42, No 39, No 38, No 6 and No 18): the "Trustee" (being No 5); and the "Alternative Trustee" (being No 7). The position of the Alternative Trustee may be left to one side. The leading provisions of the deed are as follows:
"3.1 Subject to clause 3.4, each Group Entity covenants with the Trustee for the benefit of each Creditor that the Group Entity guarantees to each Creditor payment in full of any Debt in accordance with this Deed of Cross Guarantee.
3.2 Each Group Entity agrees with the Trustee that this Deed of Cross Guarantee becomes enforceable in respect of the Debt of a Group Entity ('the Group Entity').
(a) upon the winding up of the Group Entity under subsection 459A or paragraph 461(1) or (h) or (j) of the Act or as a creditors' voluntary winding up under Part 5.5 Division 3 of the Act; or
(b) in any other case - if six months after a resolution or order for the winding up of the Group Entity any Debt of a Creditor of the Group Entity has not been paid in full.
3.3 Subject to clause 3.4, the Trustee and each Group Entity acknowledge that the Trustee holds the benefit of the covenants and commitments of each Group Entity made pursuant to this Deed upon trust for each Creditor."
51Clause 3.4 deals with the Alternative Trustee and is unimportant for present purposes.
52A "Creditor" is a person who is not a Group Entity and to whom a debt admissible to proof in a winding up of a Group Entity is payable at the time of the execution of the deed or any later time. Thus, the Trustee is the recipient of a covenant by each Group Entity that that Group Entity will pay as and when due each debt admissible to proof in a winding up of any Group Entity, with that covenant becoming enforceable upon a winding up of the kind mentioned in clause 3.2(a) or at the time mentioned in clause 3.2(b).
53The chose in action created by the deed is, in a direct and immediate sense, a chose in action which is held by No 5 as the Trustee and which No 5 has acknowledged that it holds "for the benefit of" each Creditor.
54To the extent that it is sensible to speak of a chose in action, in the form of a right to sue, being "used", the relevant "use" will usually be that to which the right of action can be put by bringing the relevant action - here, recovery steps that No 5, as Trustee, could take for the benefit of a Creditor against the Group Entity by which the money was payable.
55Choses in action no doubt accrued also to each Group Entity upon the execution of the deed, although these were not enforceable until the time referred to in clause 3.2. Each other Group Entity, as a guarantor, could, at that point require the Trustee to institute debt recovery proceedings against the Group Entity liable to pay and, after satisfying the guarantee, claim by subrogation the Trustee's rights against the defaulting Group Entity. The rights to require the Trustee to act in those ways arose immediately upon the deed being executed but, until a debt of a Group Entity became due and payable, the right, although existing, was not exercisable.
56The thesis of the liquidator is that this interconnected series of choses in action - each being "property" that has been, since the execution of the deed, vested in the group company entitled to maintain the relevant action - "is or was used, or for use" in connection with the "scheme" referred to at paragraphs [34] and [35] above.
57A reference to property that "is or was used, or for use, by any or all of the companies in the group in connection with" a scheme of the kind identified would usually conjure up images of the deployment of land, buildings, stock-in-trade, machinery and the like. In other words, the "particular property" in contemplation would be expected to be of a tangible quality.
58But there is nothing in the legislation confining the provision to tangible property. Intangibles such as patents and trade marks might well be used in connection with a business, undertaking or scheme. And debts could properly be regarded as items of property "used" - in the sense of being turned to profitable account - in, say, a factoring or mercantile agency business, undertaking or scheme.
59In this case, the several choses in action arising from the deed of cross guarantee were not actively deployed or exploited as a patent or trade mark would be. Nor were they made the subject of commercial transactions as would be the case with debts in a factoring business. Does it follow that they were not "used" in the relevant scheme?
60In Newcastle City Council v Royal Newcastle Hospital [1959] AC 248, there was a question whether a substantial area of vacant land owned by a hospital was "used by the hospital ... for the purposes thereof" (that is, for the purposes of the hospital). The land was adjacent to the hospital's convalescent facility for tuberculosis patients. It was held that the land, although vacant and the site of no activity at all, was used for the purpose of providing quiet and serene surroundings conducive to the recovery and rehabilitation of the convalescent patients. The Privy Council said (at 255):
"Mr MacKenna submitted that an owner of land could not be said to use the land by leaving it unused: and that was all that had been done here. Their Lordships cannot accept this view. An owner can use land by keeping it in its virgin state for his own special purposes. An owner of a powder magazine or a rifle range uses the land he has acquired nearby for the purpose of ensuring safety even though he never sets foot on it. The owner of an island uses it for the purposes of a bird sanctuary even though he does nothing on it, except prevent people building there or disturbing the birds. In the same way this hospital gets, and purposely gets, fresh air, peace and quiet, which are no mean advantages to it and its patients. True it is that the hospital would get the same advantages if the land were owned by the Crown or by a trust which had determined to keep it in a natural state, or by an owner who was under a restrictive covenant not to build on the land. But the advantages then would be fortuitous or at any rate outside the control of the hospital. Here they are intended, and that makes all the difference."
61It thus appears that a person who owns property may "use" that property simply by holding it, where the mere holding can be regarded as the source of some advantage.
62In the present case, the several Group Entities referred to in the deed of cross guarantee entered into that deed in favour of No 5 as trustee for the purpose of reducing the workload and administrative burdens to which they would have been subjected had each individual company not had the benefit of the relief flowing from ASIC's s 341(1) order and therefore remained under an obligation to produce its own financial statements and directors reports. The subsistence of the deed and therefore the ownership by relevant companies of choses in action flowing from the subsistence of the deed were the source of that benefit.
63I am persuaded that it is permissible and correct to regard each Group Entity, as referred to in the deed of cross guarantee, as having had vested in it continuously since execution of the deed on 28 July 2006 (and therefore as having vested in it today) a chose in action of the kind referred to at paragraphs [53] and [55] above. I am therefore satisfied that each party to the deed of cross guarantee today has "property" in the form of such a chose or action. Moreover, that property was "used" by the company in which it was vested to maintain in existence the economies and administrative advantages that came from the ASIC order which became available only because of the execution and continuing existence of the deed that is the source of the order.