Pooling
8 The plaintiff liquidators applied for an order determining that the 17 defendant companies constitute a "pooled group" for the purposes of s 579E of the Act. That provision relevantly provides:
579E Pooling orders
Making of pooling order
(1) If it appears to the Court that the following conditions are satisfied in relation to a group of 2 or more companies:
(a) each company in the group is being wound up;
(b) any of the following subparagraphs applies:
(i) each company in the group is a related body corporate of each other company in the group;
(ii) apart from this section, the companies in the group are jointly liable for one or more debts or claims;
(iii) the companies in the group jointly own or operate particular property that is or was used, or for use, in connection with a business, a scheme, or an undertaking, carried on jointly by the companies in the group;
(iv) 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;
the Court may, if the Court is satisfied that it is just and equitable to do so, by order, determine that the group is a pooled group for the purposes of this section.
Note 1: Section 9 provides that pooling order means an order under subsection (1) of this section.
Note 2: See also subsection (12) (just and equitable criteria).
Consequences of pooling order
(2) If a pooling order comes into force in relation to a group of 2 or more companies:
(a) 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; and
(b) each debt payable by a company or companies in the group to any other company or companies in the group is extinguished; and
(c) each claim that a company or companies in the group has against any other company or companies in the group is extinguished.
Note: For exemptions, see paragraph 579G(1)(a).
(3) Subsection (2) applies to a debt or claim:
(a) whether present or future; and
(b) whether certain or contingent; and
(c) whether ascertained or sounding only in damages.
(4) Subsection (2) does not apply to a debt payable by, or a claim against, a company in the group unless the debt or claim is admissible to proof against the company.
…
(10) The Court must not make a pooling order in relation to a group of 2 or more companies if:
(a) both:
(i) the Court is satisfied the order would materially disadvantage an eligible unsecured creditor of a company in the group; and
(ii) the eligible unsecured creditor has not consented to the making of the order; or
(b) all of the following conditions are satisfied:
(i) a company in the group is being wound up under a members' voluntary winding up;
(ii) the Court is satisfied that the order would materially disadvantage a member of that company;
(iii) the member is not a company in the group;
(iv) the member has not consented to the making of the order.
Note: For eligible unsecured creditor, see section 579Q.
Standing
(11) The Court may only make a pooling order on the application of the liquidator or liquidators of the companies in the group.
Just and equitable criteria
(12) In determining whether it is just and equitable to make a pooling order, the Court must have regard to all of the following matters:
(a) the extent to which:
(i) a company in the group; and
(ii) the officers or employees of a company in the group;
were involved in the management or operations of any of the other companies in the group;
(b) the conduct of:
(i) a company in the group; and
(ii) the officers or employees of a company in the group;
towards the creditors of any of the other companies in the group;
(c) the extent to which the circumstances that gave rise to the winding up of any of the companies in the group are directly or indirectly attributable to the acts or omissions of:
(i) any of the other companies in the group; or
(ii) the officers or employees of any of the other companies in the group;
(d) the extent to which the activities and business of the companies in the group have been intermingled;
(e) the extent to which creditors of any of the companies in the group may be advantaged or disadvantaged by the making of the order;
(f) any other relevant matters.
…
9 As Vaughan J (as his Honour then was) explained in Re Watch Works Australia Pty Ltd (in liq); ex parte Francis [2020] WASC 6 at [33]-[35]:
Accordingly, there are various formal matters of which the court must be satisfied. First, there must be a group of two or more companies. Second, each company in the group must be being wound up. Third, one of the sub-paragraphs in s 579E(1)(b) must apply. Fourth, as previously mentioned, by s 579E(11) the court may only make a pooling order on the application of the liquidator or liquidators of the companies in the group. Once the pre-conditions are satisfied the court may make a pooling order if the court is satisfied that it is just and equitable to do so. As will be seen, s 579E(12) specifies a number of mandatory considerations in assessing whether it is just and equitable to make a pooling order. Section 579E(10) also specifies two situations in which the court must not make a pooling order.
The consequences of a pooling order determination are provided for by s 579E(2). First, each company in the group is taken to be jointly and severally liable for each debt payable by and claim against each other company in the group. Second, each intra-group debt and claim is extinguished. These two consequences of a pooling order apply to all debts and claims whether present or future, certain or contingent and whether ascertained or sounding only in damages (s 579E(3)). However, the debt or claim must be admissible to proof as against the company (s 579E(4)). The usual order of priority applicable under s 556, s 560 and s 561 is not altered (s 579E(4)).
In this way the available assets in each winding-up become available to satisfy the external debts of all of the companies in the pooled group. So far as external creditors are concerned the separate windings-up are administered as if they were a single winding-up. The available assets from all of the windings-up are applied to the external debts and claims of all companies rateably as if the external creditors were the creditors of a single company.
10 Here, the 17 companies the subject of the pooling order application are each of the defendants.
11 I turn to the statutory criteria.
12 The first criterion is whether there is "a group of 2 or more companies".
13 The expression "group" means no more than a collection or plurality, so that a group exists merely through identification of several companies. There is no need to find any connection or shared characteristic. See Allen v Feather Products Pty Ltd (2008) 72 NSWLR 597 at 599 [9] (Barrett J); and Re Lombe [2011] NSWSC 1536; (2011) 87 ACSR 84 at 88 [8] (Barrett J).
14 It follows that the 17 companies here constitute a "group of 2 or more companies".
15 The second criterion is whether each of the companies in the Group is being wound up. That is so in this case. That fact is established in Mr Blakeley's first affidavit.
16 The third criterion relied on by the liquidators is that contained in s 579E(1)(b)(iv). That is to say, the court must be satisfied that "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 … scheme … carried on jointly by the companies in the group".
17 "Scheme" is not defined, but the word obviously bears its ordinary meaning, namely "[a] plan of action devised in order to attain some end; a purpose together with a system of measures contrived for its accomplishment; a project, enterprise. Often with unfavourable notion, a self-seeking or an underhand project, a plot …" See Oxford English Dictionary (online edition).
18 As to the requirement that the scheme be "carried on jointly", it is sufficient that there be identified separate acts of several legal persons sharing a purpose and acting in concert. See Allen v Feather Products Pty Ltd (2008) 72 NSWLR 597 at 600-601 [14]-[19].
19 As Mr Blakeley deposed, the scheme in this case operated along these lines.
20 The Group operated a labour hire business in the abattoir/meat processing industry, and engaged in large scale tax evasion over a significant period via a variety of means.
21 Each of the companies in the Group was directed and/or controlled by Mr Shi, a member of his family, and/or an associate of Mr Shi.
22 Mr Blakeley deposed that the Shi family was comprised as follows:
(a) Mr Shi, his wife (Yu Qin Zhang), and their children (Michael Shi and Yun Jiao Shi, who is also known as Amy Shi);
(b) Mr Shi's older brother (Zu You Shi, who is also known as David Shi), his wife (Wan Fang Wen), their daughter (Yan Qin Shi), and her husband (Hong Fei Yu); and
(c) Mr Shi's younger brother (Quan Fa Shi, who is also known as Roger Shi), and his wife (Mei Ming Zheng).
23 The liquidators estimated that the Group contracted with some 42 abattoirs between 2008 and 2017, engaging some 1,100 workers per year.
24 Many of the entities within the Group engaged workers as "contractors" rather than "employees", despite being treated as employees, which affected the entities' taxation liabilities.
25 Most workers were Chinese, Taiwanese, and/or Korean nationals with limited rights to work in Australia. Workers were housed in residential properties owned by the Group (or entities/individuals associated with the Group) and/or situated close to the principal place of business of a Group entity. These properties were often grossly overcrowded with other workers, with rent paid via wage deductions before payment.
26 The liquidators say that, over a period of more than 10 years, Group members deliberately failed to pay federal and state tax obligations on revenues of some $349 million. The evasion of the obligation to meet those obligations included the following practices:
(a) underreporting or failing to report tax liabilities;
(b) failing to lodge income tax returns;
(c) lodging tax returns that grossly underreported income tax liabilities;
(d) lodging tax returns that overstated entitlement to claim tax deductions;
(e) failing to lodge Business Activity Statements (BAS);
(f) lodging BAS that underreported GST liabilities;
(g) lodging BAS that overstated entitlement to GST input credits; and
(h) collecting "pay as you go" withholding amounts from employees and/or workers, but failing to remit the same to the ATO.
27 Tax obligations were also evaded through frequent illegal "phoenix" activity.
28 Different companies in the Group provided different functions:
(a) some contracted directly with abattoirs to supply labour (head companies);
(b) some contracted workers to provide to the abattoirs and paid them (payer companies);
(c) some were used to collect revenue from the head companies and distribute it to payer companies and divert it outside the Group; and
(d) others did not use a divided structure, and instead operated to hold contracts with abattoirs and retain workers directly.
29 The scheme also involved diversion of large sums of money overseas, and into land assets in Australia. The liquidators identified payments or transfers from Group companies of:
(a) $7,055,891 in overseas payments or transfers;
(b) more than $96 million in intragroup payments made between different Group entities; and
(c) approximately $1.25 million that was applied towards the purchase, maintenance and/or improvement of various properties, mostly owned by members of the Shi family and their associates.
30 I am accordingly satisfied that the defendant companies, by devoting their assets to the common pursuit of the scheme in different ways, amount to a group of companies whose property has been used in connection with a business, scheme or undertaking which they carried on jointly within the meaning of s 579E(1)(b)(iv).
31 The fourth criterion is whether it is just and equitable to make a pooling order.
32 Section 579E(12) says that the court must have regard to all the following matters:
(a) the extent to which:
(i) a company in the group; and
(ii) the officers or employees of a company in the group;
were involved in the management or operations of any of the other companies in the group;
(b) the conduct of:
(i) a company in the group; and
(ii) the officers or employees of a company in the group;
towards the creditors of any of the other companies in the group;
(c) the extent to which the circumstances that gave rise to the winding up of any of the companies in the group are directly or indirectly attributable to the acts or omissions of:
(i) any of the other companies in the group; or
(ii) the officers or employees of any of the other companies in the group;
(d) the extent to which the activities and business of the companies in the group have been intermingled;
(e) the extent to which creditors of any of the companies in the group may be advantaged or disadvantaged by the making of the order;
(f) any other relevant matters.
33 This is an overwhelming case for the exercise of the discretion to make the pooling order, for reasons which, if I may say so with respect, were put succinctly and persuasively by counsel in his written submissions.
34 As was submitted, the following matters are compelling in favour of the exercise of the discretion:
(a) many companies in the Group worked with each other, for example as payer companies and as operational or head companies;
(b) intermingling of the business for that reason, exacerbated by serial "phoenix" activity between successive companies;
(c) the collapse of the Group as a whole had been caused by the intercompany indebtedness and interoperation of the Group companies;
(d) Mr Shi, his family, and his associates were involved in the control and operation of all the Group companies;
(e) the apparent overall purpose of the scheme was to defraud the federal and state revenue authorities, and contractor creditors;
(f) pooling will permit coordination and funding of recoveries across the Group for the benefit of creditors; and
(g) pooling will permit coordination and funding of investigations across the Group, which will involve common issues across many companies, including tracing of funds remitted overseas and offences involving tax fraud and modern slavery, many of which would be hampered without pooling.
35 On the other side of the ledger, there is no disadvantage or prejudice to unsecured creditors. Again, if I may borrow from counsel's submissions, the key points, which emerged from the evidence adduced by Mr Blakeley, are these:
(a) The liquidators do not presently expect that there is likely to be a return to ordinary unsecured creditors, so questions of financial detriment do not arise.
(b) The liquidators issued a joint report to creditors on 29 October 2021, which was sent to all known eligible unsecured creditors by email and post, and uploaded to the FTI Consulting Creditors' Portal (accessible on its website). It identified that the liquidators would be seeking a pooling order, included a copy of the Originating Process, and stated that any creditor wishing to object was required to do so by serving a notice of objection stating the grounds for objection within 14 days of the date of the report. As at 19 November 2021, the liquidators had not received any correspondence from or on behalf of any creditor of the defendants objecting to the application.
(c) The cost of the liquidation of the defendants will be significantly higher if no pooling order is made, because the liquidators will need to reconstruct the accounts of each company to ascertain and account for intragroup claims.
(d) Unfunded companies in the Group which have claims of potential value will not be able to investigate or pursue them without litigation funding, or third-party funding.
(e) The largest unsecured creditor, the ATO (which is also the largest priority creditor, owing to superannuation guarantee charge liabilities), consented to the pooling order.
(f) The liquidators cannot currently form a view as to whether other priority creditors may emerge when proofs are called, but based on current expectations, no material priority claims apart from statutory claimants are likely.
(g) There is likely to be some question as to which company is entitled to assets in the Group, particularly real property, when tracing and fiduciary claims are considered, and a pooling order will make such questions less significant.
(h) Although the second, fifth, seventh, and eighth defendants have either made material recoveries, have material assets, or have pending unfair preference claims, it is not yet possible to determine if there will be sufficient funds for any priority creditor distribution after the costs of liquidation and payment out of traceable funds to other Group entities. In respect of the unfair preference claims, it is presently uncertain that a recovery will be made since the proceedings have not yet been issued and the defence to be put to the claims has not been articulated.
36 For those reasons, I made the pooling order in the form sought by the liquidators,