Allen v Feather Products Pty Ltd

The companies 4The applicant is Mr D J F Lombe. He applies in his capacity as liquidator of each of forty companies which, while operating, were involved, in one way or another, in activities of "bargain" or "discount" retail stores operating under the names "Go-Lo", "Crazy Clark's", "Sam's Warehouse" and "Chickenfeed". 5The companies are:

1. Angzol Pty Limited
2. Ammate Pty Limited
3. Amnete Pty Limited
4. Kirby Street (Holding) Pty Limited - formerly Australian Discount Retail Pty Ltd
5. Kirby Street (Finance) Pty Limited - formerly Australian Discount Retail (Finance) Pty Ltd
6. Kirby Street (Logistics) Pty Limited - formerly Australian Discount Retail (Logistics) Pty Ltd
7. Kirby Street (Trading) Pty Limited - formerly Australian Discount Retail (Trading) Pty Ltd
8. Blue Spike Pty Limited
9. Bluebend Pty Limited
10. Bluepeer Pty Limited
11. Caloundra Retail Co Pty Limited
12. Cashbound Pty Limited
13. Cashbuild Pty Limited
14. Kirby Street (Ipswich) Pty Limited - formerly Crazy Clark's (Ipswich) Pty Ltd
15. Kirby Street (Warwick) Pty Limited - formerly Crazy Clark's (Warwick) Pty Ltd
16. Kirby Street (Dalby) Pty Limited - formerly Crazy Clark's (Dalby) Pty Ltd
17. Kirby Street (Nth Qld) Pty Limited - formerly Crazy Clark's (Nth Qld) Pty Ltd
18. Kirby Street (CC Retail) Pty Limited - formerly Crazy Clark's Retail Pty Ltd
19. DPCo Pty Limited
20. Fireright Pty Limited
21. Freshfame Pty Limited
22. Garden Pty Limited
23. General Variety Pty Limited
24. Goralin Pty Limited
25. Group Variety Pty Limited
26. GSCo Pty Limited
27. Imagewatch Pty Limited
28. ITCo Pty Limited
29. Look Sharp Concepts Pty Limited
30. Makro Cannon Park Pty Limited
31. Makro Toowoomba Pty Limited
32. Mailwalk Pty Limited
33. Moneycure Pty Limited
34. O'Neills Property Company Pty Limited
35. Queensland Discounters pty Limited
36. Shopping Variety Pty Limited
37. State Group Pty Limited
38. Sungate Pty Limited
39. Youngdown Pty Limited
40. Discount Variety Group Pty Ltd. 6When reference to a particular company is necessary, it will be convenient to refer to it by its number in this list.

The statutory criteria 7Mr M B Oakes SC, who appeared for the liquidator, approached the application by reference to the several statutory criteria in turn by posing the following questions:

1. Is there "a group of 2 or more companies" (s 579E(1), introductory words)?
2. Is each company in the group being wound up (s 579E(1)(a))?
3. Is at least one of the conditions in sub-paragraphs (i) to (iv) of s 579E(1)(b) satisfied?
4. What does the evidence show with respect to the matters in s 579E(12) as they may affect the answer to the following Question 5?
5. Is it just and equitable that the order sought be made (s 579E(1)(b) concluding words)?
6. Does s 579E(10) preclude the making of a pooling order?

Question 1 8For reasons I sought to explain in Allen v Feather Products Pty Ltd [2008] NSWSC 259; (2008) 72 NSWLR 597 at [9], the expression "group" in the opening words of s 579E(1) means no more than a collection or plurality; so that a "group" exists merely through identification of several companies, without any need to find any connection or shared characteristic. 9On that footing, the forty companies constitute a "group of 2 or more companies" (I note that each owes its existence to registration under the Corporations Act and is therefore within the s 9 definition of "company").

Question 2 10Each of the companies is being wound up. All except No 40 are subject to the form of creditors voluntary winding up that follows on from voluntary administration under Part 5.3A of the Corporations Act . No 40 is subject to winding up by the court as a result of an order made on 19 September 2011. 11Each winding up commenced after 31 December 2007, so that s 579E and related provisions within Subdivisions B and C of Division 8 of Part 5.6 are available in relation to the "group" they constitute: see Allen v Feather Products Pty Ltd (above) at [37].

Question 3 - functions and ownership of the companies 12At a functional level, the forty companies may be divided into four classes: Class A (three companies): No 4, No 5 and No 7. Class B (five companies): No 6, No 29, No 18, No 39 and No 38. Class C (31 companies): No 1, No 2, No 3, No 8, No 9, No 10, No 11, No 12, No 13, No 14, No 15, No 16, No 17, No 19, No 20, No 21, No 22, No 23, No 24, No 23, No 26, No 27, No 28, No 30, No 31, No 32, No 33, No 34, No 35, No 36 and No 37. Class D (one company): No 40. 13The Class A companies between them were ultimately responsible for the management of the operations of all forty entities. The board of directors of No 4 set policy for all companies. No 5 borrowed from external sources and made funds available as needed among the forty. No 7 conducted retail operations at more than 60 locations, employed some 4,400 people and was the tenant of more than 100 stores, some of which were operated by other companies among the forty. All shares in each of No 5 and No 7 are held by No 4. 14Each of the Class B companies, with the exception of No 38, is a wholly owned subsidiary of No 7 (which, as I have said, is a wholly owned subsidiary of No 4). No 38 is a wholly-owned subsidiary of No 39 (itself, as I have said, a wholly owned subsidiary of No 7). The Class B companies provided certain support and other services to other companies, including the operation of distribution centres, importation and warehousing of stock, the provision of vehicles and equipment and the supply of premises and personnel. To the extent that employees working in the operations of the forty companies were not employed by No 7, they were, as to the great majority, employed by No 38 or No 39. 15The Class C companies were the ostensible operators of retail stores in Queensland. They were formed and structured in such a way as to be regarded as "independent" for the purposes of the Trading (Allowable Hours) Act 1990 (Qld), so that they could trade with fewer restrictions on opening hours under Queensland legislation. Each of these companies operated a shop or shops using resources provided by one or more other companies in the group of forty and on the footing that virtually the whole of the individual company's revenue was paid away in return for the provision of those resources. In particular, No 38 was appointed to manage each company's operations and to provide all necessary services including in relation to accounting, superannuation and statutory compliance. 16The Class C companies may be divided into two sub-classes by reference to the way in which they are owned. The shares in each of No 28, No 19 and No 26 are held by persons who were directors and key management personnel of one or more of the companies in Class A and Class B. The shares in each of the remaining Class C companies are held, as to one third each, by No 28, No 19 and No 26. 17The Class D company (No 40) is a wholly owned subsidiary of No 7. It operated a retail store in Tasmania.

Question 3 - s 579E(1)(a)(i) 18It cannot be concluded that each of the forty companies is a "related body corporate" of each of the others. The structural tests under s 46(a)(ii) and s 46(a)(iii) are satisfied as between certain of the companies but not all; and, while it is clear that significant influence was exerted by the Group A companies (in particular, No 4), there is no evidence warranting a conclusion that, as contemplated by s 46(a)(i), any company controlled the composition of the board of any other in relation to which it did not have formal power to control through majority voting power derived from majority shareholding.

Question 3 - s 579E(1)(a)(ii) 19I have not so far mentioned that certain of the companies are parties to a "deed of cross guarantee" dated 28 July 2006 on the basis of which Australian Securities and Investments Commission made orders under s 341(1) of the Corporations Act granting relief from certain requirements concerning preparation of financial statements and directors reports and certain audit requirements. 20Not all forty companies became party to this deed so that, even if the deed's effect were to make its parties "jointly liable for debts" (a matter on which I need express no opinion), s 379E(1)(a)(ii) would not be satisfied in relation to all forty companies making up the relevant group.

Question 3 - s 579E(1)(a)(iii) 21This condition is satisfied in relation to a group of companies only if all companies making up the group "jointly own or operate" particular property. 22There is no evidence that would warrant a finding of joint ownership or joint operation by all forty companies in relation to any identified item of property, even though it seems likely that there was joint operation of certain property on the part of sub-groups within the group of forty.

Question 3 - s 579E(1)(a)(iv) - "business, scheme or undertaking"? 23It is on this part of s 579E(1)(a) that the liquidator relies. Circumstances are such, he says, as to justify several conclusions which, taken together, satisfy the s 579E(1)(a)(iv) condition. 24The first conclusion for which the applicant contends is that, because policy for all forty companies was set by the board of directors of No 4 and all companies operated according to such policies, there was "a business, a scheme or an undertaking, carried on jointly by the companies in the group". 25At one level, each of certain of the companies carried on a business of its own. Where, say, a particular Group C company operated a retail store in a particular Queensland shopping centre, there is, by virtue of those bare facts alone, a basis for a decision that that company carried on a retail business at that site and did so alone. A similar process of reasoning might lead to a conclusion that, say, No 7, which deployed more than 4,000 employees at some 60 retail stores, thereby carried on a separate business of its own. Again, No 4, which held the whole of the shares in a number of companies and set policy for all companies, could be said to be engaged in the business of a holding company, "holding being a well known method of carrying on business": Commissioners of Inland Revenue v Korean Syndicate Ltd [1921] 3 KB 258 at 276 per Atkin LJ. 26In Allen v Feather Products Pty Ltd (above) at [14] to [19], I expressed the opinion that, if several companies, by arrangement with one another, contributed part of what was required to carry on a single business, the business each element of which came from one or more of them might properly be characterised as a business "carried on jointly" by all of them. "Jointly" does not connote merely action in unison but extends also to circumstances in which there is co-ordinated or co-operative action, with the separate acts of each participant complementing or supplementing acts of the others. 27I have reservations as to whether there is, in this case, a single "business . . . carried on jointly by" the forty companies. The stronger likelihood is that individual companies or collections of companies within the group of forty carried on separate businesses. More promising, I think, is the possibility that there is a "scheme . . . carried on jointly" by them. 28It has been held in the taxation context that the "carrying on" of a "profit-making undertaking or scheme" involves " the habitual pursuit of a course of conduct" ( Premier Automatic Ticket Issuers Ltd v Federal Commissioner of Taxation (1933) 50 CLR 268 at 298 per Dixon J) and that a "scheme" is simply a "program or plan of action": Clowes v Federal Commissioner of Taxation [1954] HCA 10; (1954) 91 CLR 209 at 225 (see also Australian Softwood Forests Pty Ltd v Attorney-General (NSW) [1981] HCA 49; (1981) 148 CLR 121 at 129). The "carrying on" of a "scheme" is therefore nothing more than the habitual pursuit of a course of conduct in accordance with a program or plan of action. 29In this case, a program or plan of action was pursued by means of a course of conduct on the part of all forty companies that was calculated to produce (and did produce) financial results recorded in financial statements prepared on a consolidated basis. Accounts and reports for the period 30 July 2007 to 27 July 2008 are in evidence. The directors of No 4 presented a "report on the consolidated entity . . . consisting of [No 4] and the entities it controls". The accompanying financial statements were said (in their note 28) to "incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in note 1(b) as at 27 July 2008". A list containing the names of No 5, No 6, No 7, No 18, No 29, No 38, No 39 and No 40 followed. There was then this statement: "Shares in the following companies are held by Directors and Key management personnel who have controlled and managed these companies. The group does not own shares in the following companies, however it has the capacity to dominate the decision making directly in relation to the financial and operating policies of the companies so as to enable the companies to operate with the Group in pursuing the objectives of the Group as controlled entities, and accordingly these companies are treated as controlled entities." 30The companies to which that statement referred are No 26, No 28 and No 19. 31Note 28 to the financial statements continued: "Each of the entities listed below are wholly owned by [No 26], [No 28] and [No 19] together. These companies trade in Queensland and purchase stock from [No 7]. [No 7] also performs some administrative services for these companies, with all such transactions being at arms length." 32The list following that statement contains the names of No 1, No 2, No 3, No 8, No 9, No 10, No 11, No 12, No 13, No 14, No 15, No 16, No 17, No 20, No 21, No 22, No 23, No 24, No 25, No 26, No 27, No 30, No 31, No 33, No 34, No 35, No 36 and No 37. 33It is thus clear that not only the several subsidiaries of No 4 mentioned at paragraph [14] above but also the three companies mentioned at paragraph [30] above were, as to decision making in respect of their financial and operating policies, dominated by No 4 in such a way that those companies pursued objectives set by No 4. There is no corresponding statement in relation to the twenty-eight companies mentioned at paragraph [32] above. But it should be inferred that, because No 26, No 28 and No 19 owned all shares in each of those twenty-eight companies and were subject to the capacity of No 4 and the entities it controlled to dominate decision making in relation to their financial and operating policies, that capacity of No 4 and its controlled entities was exercisable indirectly upon decision making in relation to the financial and operating policies of each of the twenty-eight companies. Also highly relevant is the fact that each of the twenty-eight in fact entered into arrangements under which virtually the whole of its revenue was absorbed by payments to No 4 or subsidiaries of No 4 for resources required for the conduct of its operations. 34There is, I am satisfied, ample room for the conclusion that all forty companies conducted themselves, in accordance with a pre-ordained plan, in a way calculated to generate and apply revenues from retail trading activities so that the full financial benefit of those revenues came to be enjoyed by No 4; and with No 4 and its wholly owned subsidiaries bearing the costs of generating the revenues. There was habitual pursuit of that pre-ordained plan and each of the forty companies played the particular role in which it was cast for the purposes of the pursuit and effectuation of the plan and contributed what the plan envisaged that it would contribute. All forty companies therefore "carried on jointly" the "scheme" consisting of or represented by the pre-ordained plan. 35The circumstances therefore fall within s 579E(1)(b)(iv): there was "a scheme . . . carried on jointly by the companies in the group", with "jointly" understood in the sense discussed in Allen v Feather Products Pty Ltd (above) at [14] - [19].

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.

Question 3 - s 579E(1)(a)(iv) - "in connection with" 64The conclusion that the Group Entities referred to in the deed of cross guarantee today "own" property in the form of the choses in action created by that deed and that that property was "used" by those Group Entities leads on to an inquiry whether that use was "in connection with" the scheme I have identified, that is, the scheme carried on jointly by all forty companies. 65That question will be answered in the affirmative if, at the least, the use was ancillary or incidental to the scheme: R v McMahon; Ex parte Darvall [1982] HCA 56; (1982) 151 CLR 57. 66The scheme, as I have said, was calculated to generate and apply revenues from retail trading activities in such a way that the full financial benefit of those revenues came to be enjoyed by No 1. Given the scheme's profit-making objective, a necessary component of it was such financial efficiencies as could be achieved. The deed of cross guarantee and the ASIC relief that it assisted in producing were aspects of those efficiencies. 67The "use" of the relevant choses in action in the way described was thus at least ancillary or incidental to the scheme, so that that use was "in connection with" the scheme.

Question 3 - s 579E(1)(a)(iv) - conclusion 68The court is thus satisfied that (a) all forty companies in the group identified at paragraph [5] above carried on the scheme referred to at paragraphs [34] and [35] above; (b) those of the forty companies that are parties to the deed of cross guarantee now own property in the form of choses in action created by that deed; (c) that property was, in the way discussed at paragraphs [62] and [63] above, used by those of the forty companies that are parties to the deed of cross guarantee; and (d) that use was, as discussed at paragraph [66], in connection with the scheme. 69It is true that only some of the forty companies own the property in question and that only those owner companies were capable of using the property. But s 579E(1)(b)(iv) does not require either that all companies in the group (here, the forty) own or that all use. Ownership by "one or more companies in the group" is sufficient, as is use by "any or all". The only aspect in which all must participate is the joint carrying on of the scheme, a requirement that is met here in relation to the forty companies: see paragraphs [34] and [35] above.

Question 4 70In deciding whether, according to the concluding words of s 579E(1)(b), it is "just and equitable" that a pooling order be made, the court must, in obedience to s 579E(12), "have regard to" all of the matters specified in s 579E(12). 71The direction to "have regard to" the specified matters requires that the court "give weight to" those matters "as a fundamental element" in coming to a conclusion: R v Toohey; Ex parte Menelong Station Pty Ltd [1982] HCA 69; (1982) 158 CLR 327 at 333 per Gibbs CJ. The inquiry in the course of which the specified matters must be given that weight is as to what is "just and equitable". 72It is pertinent at this point to refer to a number of matters emerging from the liquidator's evidence. It is sufficient, I think, to summarise them as follows:

1. The group of forty companies was, to a significant extent, operated as a single unit rather than as separate entities.
2. The main trading and operating entities in the group shared common directors and the board of No 4 was responsible for all material decisions relating to the strategy of the group of forty.
3. There was significant intermingling of the assets of the companies.
4. The group had only one bank account (an account of No 7) with all creditor invoices being paid from this account regardless of which of the companies was the address of the invoice.
5. All of the main trading and operating companies in the group were subject to the deed of cross guarantee pursuant to which they guaranteed the payment of each other's debts.
6. The only funds available for distribution to creditors by the liquidator are funds that have been received from the receivers and managers and represent the surplus from the proceeds of sale of the group's assets after payment of secured creditors. Those funds were received as a lump sum and cannot be allocated between the respective companies.
7. Pooling of the windings up of the companies will avoid the need for the liquidator to engage in the time consuming and costly exercise of reconstructing individual company accounts and determining a basis for distribution of the funds held by the liquidator.
8. Pooling will also result in significant saving in administration costs of the winding up and enable the liquidator to complete the windings up of the companies and make a final distribution to creditors more quickly. 73In relation to the matter at item 4 above, the liquidator explains that the method of operation is reflected by the creditor claims received for the purposes of the second meeting of creditors. The vast bulk of claims ($180,789,988) was directed to No 7. Claims of $10,508,447, $4,162,150 and $4,551,433 were directed to No 4, No 39 and No 38 respectively. Either no claims or negligible claims were directed to the other companies. But there is no good reason to think that some of the overall debts are not attributable to those others. 74In relation to item 7 at paragraph [72], the liquidator points out that he no longer has the services of any staff members of the forty companies, particularly accounting staff. Based on his experience, he expects that the costs of the windings up would be likely to be increased by several hundred thousand dollars if it became necessary for him to undertake the task of attempting to reconstruct the intercompany balances. Even then, the liquidator says, it might be necessary for him to seek a direction from the court as to the adequacy of the reconstruction and the appropriateness of any basis for division emerging from it. That would add cost and further diminish assets available for creditors. 75The evidence given by the liquidator on the matters I have mentioned is directly relevant to the several considerations to which s 579E(12) requires the court to have regard. In relation to s 579E(12)(a), it is shown that many of the forty companies were supine and a small number were dominant in such a way that their officers actively intervened in the management and operations of the supine companies. In relation to s 579E(12)(b), it is shown that the dominant companies and their officers dealt not only with the creditors of those companies but also the creditors of the supine companies. In relation to s 579E(12)(c), the liquidator's evidence of the modus operandi shows clearly enough that courses followed and policies adopted by the decision-making officers brought about the financial instability that led to the failure of all companies. This, of course, was exacerbated for certain of the forty companies by the deed of cross guarantee. As to s 579E(12)(d), the liquidator's evidence about creditors' perceptions of which companies were indebted to them, coupled with the evidence about the very great difficulties confronting any attempt to reconstruct the intercompany balances, establishes a high degree of intermingling of activities and businesses - something that was actively fostered by the way in which the Class C companies were structured and operated (see paragraph [15] above). 76Section 579E(12)(e) requires that the court have regard to the extent to which creditors of any of the forty companies may be advantaged or disadvantaged by the making of the pooling order. It is clear from the liquidator's evidence that the creditors of all companies, taken as a single body, will be advantaged by pooling because of the savings that will be achieved by avoiding the need to reconstruct the intercompany balances and otherwise to attempt to unravel the intermingled finances of the several companies. Because there is no information that enables the court to judge how a particular company's separate creditors would fare in a separate winding up of that company and how the situations of the several groups of creditors would compare if there were forty separate windings up, it is not possible to see that the creditors of any company would be disadvantaged by pooling. The only available conclusion, therefore, is that there will be advantage to creditors.

Question 5 77Numerous cases have considered the significance of the phrase "just and equitable". It is sufficient, I think, to refer to what was said by Sheller JA In Stephenson v State Bank of New South Wales (1996) 39 NSWLR 101 at 113 when considering s 66M of the Conveyancing Act 1919: "The determination of what is just and equitable in the circumstances is not a matter of unfettered individual opinion, nor does it involve a discretion of an arbitrary kind; see Cominos v Cominos (1972) 127 CLR 588 at 599 ; [1972-73] ALR 581 at 587-8. As Kitto J observed in R v Commonwealth Industrial Court; Ex parte the Amalgamated Engineering Union, Australian Section (1960) 103 CLR 368 at 383 ; [1961] ALR 104 at 112-13, the criteria are of a nature with which Courts are familiar. In Talga v MBC International Ltd (1976) 133 CLR 622 at 634 ; 9 ALR 359 at 366 Stephen, Mason and Jacobs JJ dealing with the issue raised for the Court by the Banking Act 1974 of whether it was just and equitable that a transaction should be treated as valid, said: '... The court will have before it an existing transaction replete with all its surrounding facts and circumstances and in their light will determine what is just and equitable. In doing so it will certainly be exercising a wide discretion that this is a commonplace of the curial process; the court will be bound to act judicially, exercising its discretion by reference only to such considerations affecting the transaction as, on an examination of the legislation, may be seen to be material to the decision which it is called on to make. Irrelevant matters, matters such as the plaintiffs instanced in the course of argument, which have no rational connection with the policy of the regulations but would be expressive only of the personal predilections of the Court cannot be allowed by it to play any part in its decision.'" 78Section 579E(12) must therefore be seen as conferring a discretion that, while wide, can only be exercised judicially in the light of the whole of the circumstances surrounding the relevant subject matter. 79The factors referred to in s 579E(12) are identified by the legislation as those central to the court's determination of what is just and equitable. The conclusions I have expressed in relation to those, viewed in the light of the whole of the surrounding circumstances as deposed to by the liquidator, persuade me that efficiency and savings will be achieved if a pooling order is made and that the ultimate effectuation of the several windings up as if they together constituted a single winding up will be beneficial to the creditors of the several companies. 80I am therefore satisfied that, subject to the possible intervention of s 579E(10), it is just and equitable that the pooling order sought by the liquidator is made.

Question 6 81The legislation seems to contemplate, at least on its face, that the court might conclude that it is just and equitable that a pooling order be made yet be precluded by s 579E(10) from making the order because satisfied that it would produce "material disadvantage" as there mentioned. 82My view is that, if such "material disadvantage" were found, the court could not come to a positive conclusion on the "just and equitable" question. It is for that reason that I have expressed the conclusion at paragraph [80] in the terms in which it is expressed. 83It remains to consider the effect of s 579E(10); and, in turning to that matter, I record that the liquidator duly gave notice to known creditors under s 579J so that the court can be satisfied that there has been an opportunity for creditors to make their views known. 84Because none of the windings up in the present case is a members voluntary winding up, s 579E(10) is to be approached by reference to s 579E(10)(a) only. That section is concerned with an "eligible unsecured creditor", an expression defined by s 579Q as follows: "(1) Subject to subsection (2), for the purposes of the application of this Division to a group of 2 or more companies, a creditor of a company in the group is an eligible unsecured creditor of that company if: (a) both: (i) the creditor's debt or claim is unsecured; and (ii) the creditor is not a company in the group; or (b) the creditor is specified in the regulations. Note: For specification by class, see subsection 13(3) of the Legislative Instruments Act 2003 . (2) The regulations may provide that, for the purposes of the application of this Division to a group of 2 or more companies, a specified creditor of a company in the group is not an eligible unsecured creditor of that company. Note: For specification by class, see subsection 13(3) of the Legislative Instruments Act 2003." 85The relevant provision of the Corporations Regulations 2001 (Cth) is regulation 5.6.73: "Creditors that are eligible unsecured creditors (1) For paragraph 579Q (1) (b) of the Act, the following creditors are specified: (a) a creditor to which either of the following applies as a result of a modification of the Act made under paragraph 571 (1) (d) of the Act: (i) a debt payable by a company or companies in a group to any other company or companies in the group is not extinguished; (ii) a claim that a company or companies in a group has against any other company or companies in the group is not extinguished; (b) a creditor that is determined by a Court to be an eligible unsecured creditor. Creditors that are not eligible unsecured creditors (2) For subsection 579Q (2) of the Act, a creditor that is determined by a Court not to be an eligible unsecured creditor is specified." 86Because there has been no modification of the kind referred to in regulation 5.6.73(1)(a) and the court has not made (or been invited to make) any determination as envisaged by regulation 5.6.73(1)(b) or regulation 5.6.73(2), the only creditors to be taken into account under s 579Q are those mentioned in s 579Q(1)(a) being, in summary terms, unsecured creditors of one or more of the group companies where those creditors are not themselves group companies. 87In a report to creditors of all companies except No 40 dated 10 November 2010, the liquidator raised the matter of pooling. It had been referred to in an earlier report (17 November 2009). The liquidator outlined methods of pooling and referred to legal advice recommending an application for court-ordered pooling. The consequences for creditors were fairly summarised. The liquidator invited creditors to provide comments on the proposed pooling and asked that there be sent by post or email to specified addresses by 14 January 2011. 88Thirty-eight creditors responded to this invitation. One opposed pooling. I shall refer to this again later. 89The liquidator has also given evidence that at a meeting of creditors of all companies except No 40 held in December 2010, twenty-seven creditors were present. The minutes of the meeting are in evidence. They show that the liquidator explained pooling possibilities and referred to legal advice that he should seek court-ordered pooling. He then gave detailed reasons for recommending pooling. Creditors were then asked whether any of them had an objection to pooling. No objection was notified. 90The creditor by which an objection was notified in response to the liquidator's written report and invitation had lodged a proof of debt in the winding up of No 7 in the sum of $52,767. Inquiry by the liquidator established that this creditor was under the impression that, in the absence of pooling, the whole of the surplus remaining after the sale of businesses by the receivers and managers would be available for application towards the debts of No 7 only. Because of the liquidator's inability to apportion the sale proceeds among the several selling companies (see item 6 at paragraph [72] above), the liquidator submits that the notified objection proceeded on a mistaken premise and that the objection therefore lacks substance. I accept that submission. 91No 40 has only one creditor. The liquidator has corresponded with that creditor about the pooling proposal. Nothing relevant to the "material disadvantage" question is indicated by that aspect of the evidence. 92I am satisfied, therefore, that the liquidator took adequate steps to investigate and to bring to the court's attention matters concerning "eligible unsecured creditors" with which s 579E(10)(a)(i) is concerned; and that there is no demonstrated basis for a conclusion that the pooling order sought would materially disadvantage any such creditor.

Conclusion on pooling 93All necessary steps have been taken by the liquidator to pave the way for the making of a pooling order in respect of all forty companies. All the statutory criteria to be satisfied to enable the court to make the order have been satisfied, including the court's positive findings on the "just and equitable" question (and the matters to which regard is to be had in that connection) and the absence of "material disadvantage" to relevant persons. 94The clear advantages that will flow from bringing these administrations to a conclusion on a consolidated basis cause the appropriate exercise of the court's discretion to be that a pooling order should be made.

Ancillary orders 95The liquidator seeks certain additional orders. He does so by reference to s 579G: "Court may make ancillary orders etc. (1) If the Court makes a pooling order in relation to a group of 2 or more companies, the Court may, if the Court is of the opinion that it is just and equitable to do so, do any or all of the following things: (a) by order, exempt: (i) a specified debt or claim; or (ii) a specified class of debts or claims; from the application of subsection 579E(2) to the group; (b) by order, transfer, or direct the transfer, of: (i) specified property; or (ii) a specified class of property; from a company in the group to another company in the group; (c) by order, transfer, or direct the transfer, of liability for: (i) a specified debt or claim; or (ii) a specified class of debts or claims; from a company in the group to another company in the group; (d) by order, modify the application of this Act in relation to the winding up of the companies in the group; (e) make such other orders, and give such directions, in relation to the winding up of the companies in the group, as the Court thinks fit. Standing (2) An order or direction under subsection (1) may only be made or given on the application of: (a) the liquidator of a company in the group; or (b) a creditor of a company in the group; or (c) in a case where a company in the group is being wound up under a members' voluntary winding up--a member of the company, so long as the member is not a company in the group. Conditional orders etc. (3) An order or direction under subsection (1) may be made or given subject to conditions. (4) An order or direction under subsection (1) may provide for different returns for different creditors or classes of creditors. (5) An order or direction under subsection (1) may provide for the subordination of the debts and claims of specified creditors or classes of creditors to those of other creditors. (6) Subsections (4) and (5) do not limit subsection (1) or (3). Rights of secured creditors (7) An order or direction under subsection (1) does not affect the rights of a secured creditor, unless the relevant debt is payable by a company or companies in the group to any other company or companies in the group. Lodgment of order or direction (8) An order or direction under subsection (1) must be lodged with ASIC." 96The orders the liquidator seeks are: "Order that the property of the ADR Group be combined into a single fund." "Order that the committee of inspection for the pooled ADR Group be initially constituted by [named persons], being those persons referred to in the resolution passed at the meeting of creditors held on 17 December 2010, without the need for a resolution under s 548A of the Corporations Act 2001." 97The liquidator accepts that the effect of s 579E(2) is that the assets of all companies in the pooled group are available for application towards the debts of all those companies by way of rateable distribution without regard for the identity of the company by which any particular asset is owned. The first proposed order is therefore not needed as an element of pooling as such. Rather, the liquidator wishes to avoid any residual or associated need to identify the assets of a particular company. The only particular matter to which he refers arises under s 539 which requires a liquidator to lodge accounts in the prescribed form every six months. The prescribed form is Form 524. The main matters to be covered by such accounts are an estimate of total creditors, dividends paid since the last accounts, remuneration and expenses recovered by the liquidator, total receipts and payments during the period, a statement and reconciliation of total money held and an estimate of the outcome of the winding up. 98The second ancillary order sought seeks to ensure that the existing committee of inspection of No 4 continues as the committee of inspection of the pooled group, without the need for any further resolution of creditors. 99There is practical merit in the position the liquidator takes with respect to future accounts under s 539 and the continuity of the existing committee of inspection. I am not persuaded, however, that the orders the liquidator proposes are the appropriate orders to achieve what the liquidator seeks to achieve. 100In order to produce the desired result in relation to six-monthly accounts, the liquidator will need relief from the requirement of s 539 with respect to the content of accounts so that it applies only in relation to the group as a whole rather than to each company separataely. There is accordingly a need for an order under s 579G(1)(d) modifying the application of the Act. In my opinion, such an order must be in explicit terms that identify the relevant provision of the Act and set out the altered application it is to have (a like process in relation modification of provisions of Part 5.3A is required under s 447A: see Honest Remark Pty Ltd v Allstate Explorations NL [2006] NSWSC 735; (2006) 58 ACSR 234 at [66]). 101What seems to be called for, therefore, is an order to the effect that the application of s 539 to the liquidator of the forty named companies is modified so as to require lodgement in respect of each company of an account in the prescribed form (and verified by a statement in writing) dealing as a whole with the pooled group resulting from the court's order of a specified date, instead of an account dealing separately with the particular company. There would then be separate lodgement of the same consolidated account for each company (that is, forty lodgements, each referable to one company, but consisting of the consolidated account) 102It would be consistent with the objectives of the pooling provisions to make an order in the terms outlined to deal with the particular difficulty the liquidator has identified concerning s 539 accounts. I shall defer making any order, however, pending the liquidator's consideration of the kind of order I have outlined; and also to give the liquidator an opportunity to identify any other specific matters that might have given rise to the perceived requirement that the property of the forty companies "be combined into a single fund". 103In relation to the second ancillary order sought, there is again, in my opinion, clear merit in principle. Section 548A makes provision for a meeting "on a consolidated basis" of the creditors of a pooled group for the purpose of constituting a committee of inspection for the group. Given the intermingled circumstances of the group of forty companies and the fact that a committee has been appointed and is operating for the lead company (No 4), creditors should be spared the expense of a s 548A meeting and the existing committee should be made the committee of inspection for the group. 104Again, however, there is a need for an appropriately framed order under s 579G(1)(d). The order might be to the effect that s 548A be modified by adding a new subsection (4) in terms set out in the order stating that, on and from the date of the making of the pooling order in relation to the forty named companies, the particular named persons are taken to have been constituted under s 548A(1) as the committee of inspection of the pooled group resulting from the making of the order. 105In this case also, I shall not make any order without first hearing further from the liquidator.

Disposition 106I shall direct that the liquidator submit short minutes containing an order determining that the group consisting of the forty named companies is a pooled group for the purposes of s 579E, together with such additional orders consistent with the discussion under the heading "Ancillary orders" above as the liquidator wishes the court to make.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 14 December 2011