Question 6 - does s 579E(10) of the Act preclude the making of a pooling order?
97 Section 579E(10) of the Act is set out at [55] above. In Re Lombe at [82] Barrett J expressed the view that if "material disadvantage" is found the court could not be satisfied that it is just and equitable to make a pooling order.
98 Only s 579E(10)(a) of the Act is relevant to the present application because none of the companies in the WDS Group is being wound up under a members' voluntary winding up. Section 579E(10)(a) precludes the court from making a pooling order if it is satisfied that it 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.
99 Section 579Q of the Act provides that a creditor of a company in a group of two or more companies is an eligible unsecured creditor if the creditor's debt or claim is unsecured and the creditor is not a company in the group or if the creditor is specified in the regulations. Regulation 5.6.73 of the Corporations Regulations 2001 (Cth) provides that:
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.
100 Having regard to the definition of an eligible unsecured creditor in s 579Q and reg 5.6.73, the only relevant class of creditors for the purposes of s 579E(10)(a) in this case are unsecured creditors of one or more of the companies in the WDS Group who are neither WDS or a WDS Subsidiary.
101 The Liquidators raise as an issue whether they bear the onus of adducing evidence to establish whether the making of a pooling order would materially disadvantage an eligible unsecured creditor of a company in the WDS Group or whether a pooling order can be made on the evidence before the Court provided that the Court is not satisfied that the order would materially disadvantage an eligible unsecured creditor. The Liquidators describe the issue of statutory construction as finely balanced but consider that the better view is that they bear the onus of adducing sufficient evidence to allow the Court to conclude that no material disadvantage would arise to an eligible unsecured creditor by the making of an order under s 579E(1). However, in oral submissions senior counsel for the plaintiffs invited the Court not to resolve the issue and submitted that the scope and nature of the onus may well turn upon the particular circumstances of the case. In that regard, as I understood it, the position put was that in circumstances where the Court was minded to make the direction sought in para 1 of the Amended Application the issue of material disadvantage was straightforward and easily resolved in favour of making the pooling order.
102 It is on this issue that the Commonwealth wished to make submissions. The Commonwealth submits that contrary to the position posited by the Liquidators, s 579E(10)(a)(i) of the Act does not involve the imposition of an onus to prove the negative but means what it says. Namely, that if on all of the material before it the Court forms a state of satisfaction that an unsecured creditor would be materially disadvantaged by the making of a pooling order, the Court must not make the order.
103 Putting that to one side, the Commonwealth contends that one of the comparators in that exercise is the distribution to ordinary unsecured creditors if a pooling order is made, which in this case is nil. It says that the more difficult question is identifying and quantifying the other comparator, the position of ordinary unsecured creditors if no pooling order is made. The Commonwealth notes that in those circumstances, the position of ordinary unsecured creditors is completely unknown, as is the position of employees and, through them, the Commonwealth. The Commonwealth also notes that all the Court knows is the position of ordinary unsecured creditors at two extremes, namely:
(1) if WDS owns all assets of the WDS Group in which case, absent pooling, ordinary unsecured creditors, as well as employees under the Deed of Cross Guarantee, would receive 18c/dollar (which is scenario 1 referred to at [51(1)] above). The Commonwealth says that if this scenario was established there would be a serious issue about material disadvantage; and
(2) if the WDS Subsidiaries own all assets of the WDS Group in accordance with its operating divisions, absent pooling, ordinary unsecured creditors would receive about 0.08c/dollar (which is Scenario 5 referred to at [51(5)] above). The Commonwealth says that if this scenario was established a comparison of 0.08c/dollar to 0c/dollar would not result in material disadvantage.
104 The Commonwealth observes that an intermediate position is that the Employing Entities owned material assets with other assets being held in other entities including WDS. It contends that if that were the position then employee priority claims will exhaust the assets in the liquidations of the Employing Entities reducing the return to ordinary unsecured creditors.
105 The Commonwealth refers to the Liquidators' evidence as to the cost and time that would be involved in establishing the true asset position of the WDS Group and submits that at the end of that process, if undertaken, there is no real prospect of a conclusion that WDS owned all of the assets of the WDS Group and that, consistent with the evidence, the more likely scenarios are divisional ownership, which is the Liquidators' opinion to which weight should be afforded, or at least material asset ownership by the WDS Subsidiaries including the Employing Entities.
106 The Commonwealth also observes that there is a further layer of complexity to the extent that the Receivers realised property that was subject to a circulating security interest. In those circumstances the Commonwealth says that s 433 of the Act required the Receivers to pay out of that property amounts having priority under s 556(1)(e), (g) or (h), which did not occur. The Commonwealth notes that whether that was a breach of s 433 depends on the extent to which assets were owned by the Employing Entities and those assets were subject to a circulating security interest, a matter about which the Receivers and the Commonwealth are in dispute. The Commonwealth submits that if the Receivers breached s 433 of the Act, any monies the Commonwealth recovered would reduce the amount for which it would otherwise prove in the liquidations. It notes that while that dispute is on foot, the Receivers will not release the Surplus because they claim an entitlement to be indemnified and that the dispute will further delay and diminish any return to creditors. It says that if a pooling order is made, the Commonwealth has agreed to release the Receivers from any claims for breach of s 433 of the Act thereby freeing up the funds for immediate release to the Liquidators and distribution to creditors.
107 The Commonwealth thus submits that for the purposes of the comparison required by s 579E(10)(a)(i) the position of ordinary unsecured creditors absent pooling cannot be equated to an entitlement to 18c/dollar and rather, it is a far more contingent and uncertain position which is likely, if anything, to be at, or closer to, the divisional asset allocation scenario of 0.08c/dollar for ordinary unsecured creditors. It says that the Court would not reach a state of satisfaction that any ordinary unsecured creditor would be materially prejudiced by the pooling order.
108 The Commonwealth referred by way of analogy to Re Lombe where, in the context of considering s 579E(10)(a)(i), Barrett J referred at [90] to the fact that one creditor, who had lodged a proof of debt for $52,767, opposed pooling. Barrett J noted that upon inquiry the liquidator established that the objecting creditor was under the impression that, absent pooling, the whole of the net surplus from the sale of the business would be available for application to the debts of the company of which he was a creditor. Barrett J accepted the liquidator's submission that the creditor's objection proceeded on a mistaken premise and thus lacked substance. The Commonwealth submits that, although there are no creditors who oppose the making of a pooling order in this case, the same could be said here. That is, if a creditor did object on the basis that they thought they could get a higher return, arguably 18c/dollar based on the analysis in scenario 1 in which all assets were allocated to WDS (see [51(1)] above), they would similarly have proceeded on a mistaken premise for the reasons identified by the Liquidators.
109 Section 579E(10) of the Act acts as a constraint on the exercise of the Court's power to make a pooling order. The Court must be satisfied that a pooling order if made would not materially disadvantage any eligible unsecured creditor. In circumstances where I am satisfied that a direction should be made that the Liquidators distribute the assets in accordance with the Proposed Approach, that conclusion is open to the Court. In those circumstances the relevant counterfactual is that ordinary unsecured creditors would receive 0.08c/dollar. On that basis, the analysis of the amount that would be received by the two largest creditors by value is set out at [94] above. In Re Walker at [40] Jagot J undertook a similar analysis to that undertaken by me in the context of s 579E(12)(e) based on a counterfactual where ordinary unsecured creditors would receive 0.23c/dollar. Her Honour concluded at [42] that while it is possible that there may be disadvantage, the extent of that possibility for disadvantage was not sufficient to weigh against the potential advantages of making the pooling order in the circumstances before her. Her Honour concluded at [53] that for the same reasons there was no material disadvantage in the context of s 579E(10) of the Act.
110 Having regard to the likely recovery to eligible unsecured creditors and the fact that despite being put on notice of the application no creditor has appeared to oppose the making of a pooling order, I am satisfied that a pooling order would not materially disadvantage any eligible unsecured creditors.
111 I should add that even if I were not minded to make the direction sought by the Liquidators in para 1 of the Amended Application I would, substantially for the reasons identified by the Commonwealth in its submission set out at [103]-[108] above, be satisfied that there would be no material disadvantage to any eligible unsecured creditor in making the pooling order.
112 In light of that it is not necessary for me to resolve the issue of onus as raised by the Liquidators, an issue which was not considered in any of the authorities to which I was taken and which, as noted at [101] above, I was invited by senior counsel for the plaintiffs ultimately not to resolve. However, in passing I observe that a court can of course only consider and form a view about the presence or otherwise of material disadvantage based on the evidence before it which will be led by a liquidator seeking such an order and, in the event of objection by an eligible unsecured creditor, evidence relied on by the objector. It may be that the issue of onus only arises in that scenario where, in the face of opposition, it would fall to the liquidator to satisfy the court that there is no material disadvantage.