Consideration
224 It was not in dispute that "particular property" for the purposes of s 579E(1)(b)(iv) of the Corporations Act includes a chose in action: see Re Lombe at [54], [58].
225 The relevant chose in action for the purpose of the liquidator's application for a pooling order is SAP and SAM's claim for $330,000 from MGS (and others) which it contends was paid by Print Warehouse to MGS at about the time of the sale of their jointly operated printing business to Print Warehouse and which amount represented a reduction in the amount otherwise payable to purchase the business which was diverted to MGS at the direction of McMillan and/or Mr and/or Ms McMillan.
226 As described by senior counsel for the respondents, SAP and SAM have brought a claim to recover the $330,000 Payment being a reduction in the purchase price for the business they operated jointly. Among other things, in the proceeding they allege that Mr McMillan and Ms McMillan were shadow directors of SAP and SAM, in that capacity they owed the duties set out in, among others, s 180 of the Corporations Act to those companies and, in allowing the diversion of a part of the purchase price to MGS, they breached those duties. They also allege that, pursuant to s 79 of the Corporations Act, MGS was knowingly concerned in the breaches by Mr and Ms McMillan of their duties owed to SAP and SAM. In the alternative, SAP and SAM allege that the sum is repayable as monies had and received.
227 The first question that arises is whether the chose in action described at [225] above is presently existing "particular property". McMillan contends that it is not. In doing so it relies on the analysis in Re Watch Works to support its contention that surplus proceeds of sale are not presently existing particularly property.
228 In answering this question it is convenient first to consider the decision in Re Lombe. In that case, as is the case here, receivers and managers appointed by a secured creditor of each company, save one, in the group of companies the subject of an application for a pooling order had sold the assets and undertaking of those companies. The company to which there had been no appointment sold its own assets and undertaking in conjunction with the sales by the receivers and managers. Accordingly, none of the companies in question owned goodwill or any tangible property used in the conduct of their business at the time the liquidator made the application under s 579E of the Corporations Act for a pooling order. Rather, they held the balance of the proceeds of sale.
229 In applying for a pooling order the liquidator relied on s 579E(1)(b)(iv) of the Corporations Act. Justice Barrett identified the questions for the court to be "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'": at [40]. His Honour referred to the decision in Re Australian Hotel noting that in that case Windeyer AJ considered whether a pooling order could be made in circumstances similar to those before his Honour, namely where a secured creditor had sold hotel premises and businesses previously carried on by the relevant companies. At [41] his Honour set out Re Australian Hotel at [42]-[44] including relevantly that:
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.
230 Despite an invitation to do so, Barrett J refused to depart from the decision in Re Australian Hotel and the construction adopted by Windeyer AJ in that case. At [44] his Honour observed:
But the plain words are uncompromising in the message they deliver. Both s 579E(1)(b)(iii) and (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.
231 His Honour then turned to consider whether, having regard to that construction of s 579E(1)(b)(iv) of the Corporations Act, it was possible to conclude that particular property that is or was used in connection with the relevant undertaking was still owned, despite the sales of the businesses. In that case the relevant property was the product of a cross guarantee. After examining the terms of the cross guarantee, at [53]-[55] his Honour observed that:
53 The 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.
54 To 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.
55 Choses 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 cl 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.
232 At [58] Barrett J noted that there was nothing in the legislation confining s 579E(1)(b)(iv) of the Corporations Act to tangible property, that intangible property may well be used in connection with a business, undertaking or scheme and that could include debts. In considering whether the choses in action arising from the cross guarantee were "used" in the sense contemplated by the section, his Honour observed (at [61]) that a person who owns property may "use" it simply by holding it "where the mere holding can be regarded as the source of some advantage". His Honour found that each of the companies had vested in it a chose in action since execution of the deed of cross guarantee and thus each such company presently has property in the form of that chose in action which was used by the company "to maintain in existence the economies and administrative advantages that came from the ASIC order" which became available as a result of the execution of the deed of cross guarantee: at [63].
233 In Re Watch Works Vaughan J came to the same conclusion insofar as proceeds of sale of a business were concerned. There his Honour considered an application by the liquidators of two companies, Watch Works Australia Pty Ltd (in liq) and Cobbler Plus Services Pty Ltd (in liq), for an order pursuant to s 579E of the Corporations Act that Watch Works and Cobbler Plus are a pooled group and ancillary orders. In their application, the liquidators only sought to rely on s 579E(1)(b)(iv) of the Corporations Act. At [38] Vaughan J observed in relation to the subsection that:
The focus of the inquiry under sub-par (iv) is the actual state of affairs. One or more of the companies must own 'particular property' that is or was used, or for the use, by any or all of the companies in the group in connection with, among other things, a business carried on jointly by the companies in the group. In the present case the plaintiff liquidators pointed to the funds in the Watch Works' liquidation account as being the relevant particular property.
(Footnote omitted.)
234 At [40]-[45], in relation to what he described as the "related requirements of ownership and use" in s 579E(1)(b)(iv), his Honour referred to Re Lombe and Re Australian Hotel and stated at [42] that:
The plaintiff liquidators accepted that I should not depart from the construction of s 579E(1)(b)(iv) adopted in Re Australian Hotel Acquisition (in liq) and Kirby Street (Holding) Pty Ltd; Re Lombe. That concession was properly made. It cannot be suggested that the decisions are plainly wrong. To the contrary, the text of s 579E(1)(b)(iv) compels the conclusion reached in those decisions. The consequence is that s 579E(1)(b)(iv) requires that the plaintiff liquidators identify some presently existing 'particular property' owned by one or both of Watch Works or Cobbler Plus which was relevantly used in connection with a business, scheme or undertaking carried on jointly by the companies. The proceeds of realisation from the sale of the Watch Works and Cobbler Plus businesses will not suffice.
235 It is beyond doubt that the surplus proceeds of sale of the business carried on by SAP and SAM cannot be "particular property" for the purposes of s 579E(1)(b)(iv) of the Corporations Act. But that is not the "particular property" relied on by the respondents. Rather, they contend that the "particular property" is the chose in action to recover that part of the proceeds of sale which was diverted to MGS. As Barrett J recognised in Re Lombe, "particular property" may comprise intangible property.
236 The chose in action arises from the sale of the business. SAP and SAM have a cause of action for recovery of the $330,000 Payment from MGS which is presently existing and, it follows, is presently owned. In any event, and despite the detailed written submissions on which the appellant relied, as senior counsel developed McMillan's submissions at the hearing of the appeal, there appeared to be no dispute, at least for the purposes of McMillan's argument on the appeal, that SAP and/or SAM owned the particular property at the time the primary judge made orders, as required by s 579E(1)(b)(iv), and that they continue to do so.
237 The more vexed question is whether the "particular property", which is the chose in action, is or was used, or for use, by SAP and/or SAM in connection with a business, scheme or undertaking carried on jointly by them.
238 The first thing to observe is that these are alternatives. That is, the Court must be satisfied that the particular property which is presently owned by SAP and/or SAM is used or was used or is for use by them in connection with their joint business, scheme or undertaking.
239 The gravamen of McMillan's submissions is that the particular property in this case was not in use or used, or for use by SAP and SAM and the requisite use could not have been made out had the primary judge adopted the correct approach to the identification of the jointly carried on "business, undertaking or scheme". McMillan contends that the alleged claim for recovery of the $330,000 Payment did not come into existence when there was any "business, scheme or undertaking" carried on jointly by SAP and SAM.
240 McMillan contended that by the time of the sale of the printing business to Print Warehouse (and the contemporaneous payment of the sum in issue to MGS), the business which had been jointly carried on by SAP and SAM had ceased.
241 The respondents accept that the chose in action arose upon the sale of the printing business. It was at the time of the sale that they were deprived of part of the purchase price and thus it was from that time that the chose in action, being a cause of action against Mr and Ms McMillan and MGS for recovery of the amount which they say should have formed part of the purchase price but which was diverted to MGS, came into existence.
242 However, the business, scheme or undertaking carried on jointly by SAP and SAM did not necessarily cease upon sale of the printing business. Rather, its nature changed from one of actively carrying on a business to one of recovery and payment of debts.
243 In Donoghue v Russells (A Firm) [2021] FCA 798 Rangiah J considered the meaning of the term "carrying on business in Australia" in the context of s 43(1)(b)(iii) of the Bankruptcy Act 1966 (Cth), which is one of the jurisdictional preconditions to the making of a sequestration order. In addressing a submission as to whether that phrase could be described as having "a very wide meaning", his Honour said:
30 … In Theophile v The Solicitor-General [1950] AC 186, the House of Lords considered s 1(2) of the Bankruptcy Act 1914 (UK) which defined a "debtor" as including a person who, "was carrying on business in England, personally, or by means of an agent or manager". Lord Porter held at 201:
In a sense it is true that the appellant was not actively carrying on business within three months of the presentation of the petition, but there is a series of cases…which in unbroken sequence have decided that trading does not cease when, as the expression is, "the shutters are put up," but continues until the sums due are collected and all debts paid.
31 In In re Bird v Inland Revenue Commissioners; Ex parte the Debtor [1962] 1 WLR 686, the Court of Appeal at 693, 697-698 and 699, described the ratio decidendi of Theophile as being that, "trading is not completed until you have performed all the obligations that the fact of trading imposed upon you".
32 In Mendonca, Gibbs J referred at 574-575 to, "the somewhat wide understanding of those words ["carrying on business"] that has come to be established in bankruptcy law", citing Theophile and Bird.
33 In Vassis, Burchett J at 525-526 adopted the view of Gibbs J and added that the words, "either personally or by means of an agent or manager", are words of extension, not limitation. Justice Burchett held that the debtor was "carrying on business in Australia" since the winding-up of the debtor's business and the payment of its debts had not been concluded.
244 Although the phrase used in s 579E(1)(b)(iv) of the Corporations Act is slightly different I see no reason why the term as understood in the context of the Bankruptcy Act would not be equally applied to a company being wound up pursuant to the provisions of the Corporations Act. Indeed, given that a pooling order is sought in circumstances where each company in the relevant group is being wound up it must be the case that in many instances the business, scheme or undertaking will, at the time the requirements for the making of a pooling order are considered, be at the stage described in the authorities referred to in Donoghue.
245 Finally it is necessary to consider whether the chose in action is or was used in connection with that joint business.
246 Insofar as present or past use is concerned, that the alleged cause of action had not been commenced at the time of the hearing before the primary judge does mean that that it was not in use or used. As was recognised in Re Lombe at [61], a person who owns property may "use" it by holding it "where the mere holding can be regarded as the source of some advantage". Here the property, being the chose in action, was held by SAP since the sale of the printing business and, once reinstated, by SAM. In holding the property SAP and SAM enjoy an advantage in that they have a cause of action by which they can recover for their/their creditors' benefit the amount which they allege was paid to MGS at the time of the sale of the printing business against those persons who they contend breached their duties owed to them or were knowingly concerned in those breaches.
247 Insofar as use or past use in connection with a jointly held business, scheme or undertaking is concerned, a complexity arises because as at 10 June 2018 SAM was deregistered. It was reinstated by orders made by the primary judge on 2 December 2021 when his Honour also made the order pursuant to s 579E of the Corporations Act. In a temporal sense at the time the primary judge considered the requirements of s 579E(1)(b)(iv) of the Corporations Act and the question of whether the particular property is or was used, or for use, by any of SAP and or SAM in connection with a business, scheme or undertaking carried on jointly by them, SAM remained deregistered thus raising a question about how the use at that time could be in connection with a business, scheme or undertaking carried on jointly by SAP and SAM.
248 The primary judge made the orders for reinstatement of SAM first. The effect of those orders was and is that SAM is taken to have continued in existence as if it had not been deregistered and, among other things, any property that vested in the Commonwealth or ASIC revests in SAM: see s 601AH(5) of the Corporations Act. His Honour then made the pooling order pursuant to s 579E(1) of the Corporations Act. Thus at the time the pooling order was made SAM was taken to have continued in existence and so to have continued in its joint business or undertaking with SAP of getting in and paying debts.
249 Contrary to McMillan's submissions, that there are or were, absent a pooling order, two distinct liquidations with the liquidator required to discharge his duties in relation to each, liquidation does not preclude the carrying on of a joint business or undertaking for the purposes of s 579E(1)(b)(iv) of the Corporations Act. To conclude otherwise would make the subsection unworkable given that the premise for, and a precondition to, seeking a pooling order is that there are companies in a group, each of which is being wound up separately and in relation to which, absent a pooling order, the liquidator of each is required to apply any recoveries in that company's liquidation to payment of creditors of the particular company.
250 Finally, to the extent that the primary judge, at [97] of the Reasons, reasoned that "Mr Morgan, SAP and SAM will be able to use, as a chose in action, 'particular property' that is now being used or will be if SAM is reinstated and a pooling order made, by both companies" (my emphasis), I accept the respondents' submission that, insofar as his Honour referred to future use, he was addressing the consequence of making an order pursuant to s 579E(1) of the Corporations Act. That aspect did not form part of his Honour's reasons for the determination of the "gateway" issue and whether the respondents had otherwise established the criteria in s 579E(1)(b)(iv) of the Corporations Act.