Federal Court of Australia

Morgan v Sydney Allen Manufacturing Pty Limited (In Liquidation) [2021] FCA 1669

ORDERS

THE COURT ORDERS THAT:

1.    The second defendant reinstate the registration of the first defendant, Sydney Allen Manufacturing Pty Ltd (in liquidation) pursuant to s 601AH(2) of the Corporations Act 2001 (Cth).

2.    The first plaintiff be appointed as liquidator of the first defendant pursuant to s 601AH(3) of the Corporations Act.

3.    Pursuant to s 579E(1) of the Corporations Act, the second plaintiff and the first defendant be a pooled group.

4.    The third defendant pay the plaintiffs’ costs occasioned by its application to be joined as a defendant and its joinder:

(a)    on a party-party basis from 25 February 2021 up to 5pm on 9 November 2021; and

(b)    on an indemnity basis from 5pm on 9 November 2021.

5.    The plaintiffs’ costs of the proceeding up to and including 2 December 2021 otherwise be costs in the pooled winding up of the second plaintiff and first defendant.

6.     The first defendant’s name in the proceeding be changed to Sydney Allen Manufacturing Pty Limited (In Liquidation).

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

(REVISED FROM THE TRANSCRIPT)

RARES J

1    On 7 April 2016, the director of Sydney Allen Printing Pty Limited (SAP), John Mangos, appointed John Morgan and Geoffrey Davis as its joint and several administrators, pursuant to Pt 5–3A of the Corporations Act 2001 (Cth). Also on 7 April 2016, the members of Sydney Allen Manufacturing Pty Limited (SAM) resolved to appoint Mr Morgan and Mr Davis as its joint and several liquidators.

2    On 13 May 2016, the second meeting of the creditors of SAP resolved, pursuant to s 439C(c) of the Act, to place it in liquidation, as a result of which Mr Morgan and Mr Davis became its liquidators.

3    Prior to 2013, SAP and SAM operated a colour printing business from rented premises in Rydalmere. In about late 2013, the business premises relocated to Condell Park. I will explain the sequel to that shortly.

4    On 5 April 2018, Mr Davis lodged with the second respondent, the Australian Securities and Investments Commission (ASIC) (which has not appeared), a form 578, seeking that SAM be deregistered on the basis that:

There are no funds left in the creditors’ voluntary liquidation to hold a final meeting and also the affairs of the company are fully wound up.

5    On 10 June 2018, ASIC deregistered SAM.

Mr Morgan’s application

6    On 14 February 2020 Mr Davis retired as liquidator of SAP and has taken no part in the proceeding. Mr Morgan seeks an order that SAM be reinstated and that he be reappointed as its sole liquidator pursuant to s 601AH of the Act, and that there be an order under s 579E(1) that the group of companies comprising SAP and (the to be reinstated) SAM be a pooled group (a pooling order).

7    McMillan Investment Holdings Pty Limited (MIH), was a secured creditor of both SAP and SAM. MIH opposes Mr Morgan being reappointed as SAM’s liquidator and the making of a pooling order.

Statutory context

8    Relevantly, the Act provides:

553    Debts or claims that are provable in winding up

(1)     Subject to this Division and Division 8, in every winding up, all debts payable by, and all claims against, the company (present or future, certain or contingent, ascertained or sounding only in damages), being debts or claims the circumstances giving rise to which occurred before the relevant date, are admissible to proof against the company.

…

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

(1)    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.

…

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.

…

601AH  Reinstatement       

…   

(2)      The Court may make an order that ASIC reinstate the registration of a company if:

   (a)    an application for reinstatement is made to the Court by:

(i)    a person aggrieved by the deregistration; or

(ii)    a former liquidator of the company; and

(b)      the Court is satisfied that it is just that the company’s registration be reinstated.

The claims that Mr Morgan wants to pursue with the benefit of the pooling order

9    Mr Morgan wishes to have SAM reinstated and a pooling order made so that the companies, and he as their liquidator, can bring claims against:

    Mr Mangos pursuant to s 588M(2) of the Act for recovery, at least of about $4.5 million, being an amount equal to what Mr Morgan asserts is the loss or damage suffered by persons to whom the companies incurred debts during the period of two years from the relation back day, namely, between 7 April 2014 to 7 April 2016;

    Christopher Wallace, a former director of SAM and SAP, also pursuant to s 588M(2), for the period between 7 April 2014 and his resignation on 25 November 2015, for recovery of about $2.25 million;

    the principals of MIH, Robert McMillan (Mr McMillan) and his daughter, Julie-Anne McMillan (Ms McMillan), pursuant to s 588M(2), on the basis that Mr Morgan contends that they were shadow directors of SAP and SAM during the period between when MIH began providing finance under a facility agreement (the MIH facility) made on 27 March 2015, to 7 April 2016 for recovery of at least $3.65 million;

    MIH, pursuant to s 1317H of the Act, seeking that it pay SAP and SAM the same sum as he claims against Mr and Ms McMillan; and

    an associated company of MIH or Mr and Ms McMillan, namely, McMillan Group Services Pty Limited (MGS), seeking recovery of $330,000, including GST, that it received which Mr Morgan claims were proceeds of the sale, on or about 4 or 5 May 2016, of the business of SAP and SAM, effected by their receiver appointed by MIH, John Warner.

10    Mr Morgan based the proposed claims against Mr Mangos, Mr Wallace, and Mr and Ms McMillan, as directors or shadow directors, on their owing duties to each of SAP and SAM, under ss 180, 181 and 182 of the Corporations Act, to prevent either company incurring debts while it was insolvent.

The issues

11    At the end of the evidence, the following substantive issues remained in dispute:

(1)    whether there was any real or sensible possibility of a conflict of interest or other reason why Mr Morgan ought not be appointed to SAM, were I to determine that it should be reregistered (the conflict issue). The conflict issue arises in the context that Mr Morgan does not seek the reinstatement of SAM under s 601AH of the Act unless, first, he is made the liquidator, and, secondly, a pooling order is made.

(2)    whether the conditions for the making of a pooling order under s 579E have been satisfied in respect of:

(a)    a ground under either s 579E(1)(b)(ii) or (iv) (the gateway issue),

(b)    whether there was no material disadvantage to any unsecured creditor under s 579E(10)(a) (the material disadvantage issue), and,

(c)    whether, for the purposes of s 579E(12), there was sufficient intermingling of the affairs of SAM and SAP to warrant the making of the pooling order (the just and equitable issue).

The factual background

The nature of SAM and SAP’s business

12    At the time of the move of the companies to the premises at Condell Park, SAM and SAP employed about 80 staff. From no later than that time:

    all the staff were employees of SAP;

    SAM owned, or had rights over, expensive and substantial printing presses made by, among others, a manufacturer, Heidelberg Graphic Equipment Limited;

    SAM had provided security over certain of its assets to both Heidelberg and to other suppliers of materials necessary to enable printing work to be done, namely, BJ Ball Pty Limited and KW Doggett & Co Pty Ltd, which subsequently appear to have entered into some form of merger or association in Ball & Doggett Pty Limited, which may have rights under the securities that SAM created over its assets in favour of BJ Ball and or KW Doggett.

13    What appears to have happened is that SAP ordered supplies for its printing business using the credit facilities that SAM had created and given security to the suppliers, and SAP caused Heidelberg, BJ Ball and KW Doggett to be paid in the course of operating its business. However within the internal accounts between SAP and SAM, journal entries were effected through their general ledgers, under which, notionally, SAP paid the creditors on behalf of SAM.

14    It appears that the way in which the businesses were run at least by early 2014 was that SAP did all the printing work, but SAM owned the equipment used. SAM does not appear to have received any, or any sufficient financial remuneration or return by SAP for providing its machinery and credit facilities to enable SAP to conduct the business. Nonetheless, as between the two companies, by the time of the administration and liquidation on 7 April 2016, the books of the companies recorded that SAM owed SAP in the companies’ accounts over $1 million.

15    The liquidator alleges that by no later than mid-2014 and possibly, as he said in the course of his oral evidence, perhaps as early as 2013, SAM and SAP experienced cash flow difficulties and may have been insolvent.

MIH becomes involved

16    MIH became involved in the provision of finance or having some form of financial relations with the companies in about May 2014. The liquidator alleges that MIH, Mr and Ms McMillan became involved in the management of both SAP and SAM and, ultimately, became shadow directors of them by reason of their direction and conduct of the operations and financial affairs of both companies and the degree of information which MIH required from both companies.

17    A dispute with the then landlord of the Condell Park premises arose in about 2014. Ultimately, that dispute resolved when SAM, SAP and MIH entered into the MIH facility on 27 March 2015.

18    Mr Mangos and Mr Wallace were guarantors under the MIH facility, and it described both SAP and SAM as the “borrower”. Initially, the principal advanced under the MIH facility comprised moneys paid by MIH in respect of, first, discharging sums due to the Condell Park landlord and, secondly, paying moneys originally owed to Westpac Banking Corporation, in respect of which, on 28 August 2015, Westpac assigned to MIH by deed its debt together with its securities in consideration of the payment of $354,183.22 (the Westpac assignment). Under the Westpac assignment, Westpac assigned the debts due to it by SAP and SAM and its securities to MIH. The borrowers under Westpac’s securities were SAP, SAM, Mr Mangos and his wife. Each of the two companies, Mr Mangos, his wife and Mr Wallace were guarantors of the debts secured to Westpac. The securities included business financing agreements between Westpac and each of SAP and SAM entered into in July 2009, a mortgage given by Mr Mangos, guarantees and indemnities given by Mr Wallace and Mr Mangos for each of the companies and a guarantee and indemnity given by each of SAP and SAM in respect of the other company’s debts, as varied from time to time.

The external administrations of SAP and SAM

19    On 13 April 2016, MIH appointed Mr Warner as receiver and manager of SAP under the MIH facility.

20    On 18 April 2016, Mr Davis and Mr Morgan, as liquidators, circulated a report to creditors of SAM, in which they noted that its known total liabilities were about $1.1 million. They kept, as commercially sensitive, their view of the then value of SAM’s plant and equipment, which appeared to be its only assets. The report noted that MIH, Heidelberg, BJ Ball and KW Doggett were each the holders of security interests over SAM’s property. The liquidators noted that an area for investigation related to the dealings between the two companies and that they would be examining the basis and amount of charges which SAM levied on SAP for the use of its equipment and payments made back to SAM in respect of that use. In that report, Mr Davis and Mr Morgan advised creditors that they also had been appointed as administrators of SAP but did not consider that there was a basis on which they had a relevant conflict of interest that might disqualify them from so acting. At no time up to this proceeding has any suggestion been made that they did.

21    On 19 April 2016, for voting purposes, BJ Ball put in a proof of debt for $679,579.17 to SAP and, on 20 April 2016, it also put in a proof of debt in the same amount but, with much more detail, to SAM. Attached to the SAM proof of debt was a lengthy statement of account from BJ Ball addressed to SAM for the supply of significant quantities of goods, no doubt pursuant to the securities that Ball held. In the event, on 19 April 2016 the administrators admitted BJ Ball as a creditor with debts valued at $1 for voting purposes to the meeting of creditors of SAP that was held on that day.

22    On 2 May 2016, Mr Warner was appointed receiver and manager of SAM under the MIH facility.

The $330,000 dealing

23    On 4 May 2016, Mr Warner personally, as receiver and manager of SAM, entered, and he caused each of SAM and SAP to enter, into a sale agreement using the names of SAP and SAM, and Print Warehouse Australia Pty Limited (the Print Warehouse agreement) for the sale, as a going concern, of the business previously operated by SAP and SAM. The sale included, among other assets, the business, business names, goodwill, all work in progress and goods deliverable to any customer, intellectual property and, relevantly, the printing presses and equipment. The sale price was $1,300,000, which the Print Warehouse agreement claimed was GST exempt, because it was the sale of a business as a going concern. The commencement date of the Print Warehouse agreement was 5 May 2016, and completion was to take place eight weeks after the payment of the deposit.

24    Mr Morgan exhibited to his first affidavit of 3 February 2021 a letter to Mr Warner dated 4 July 2016 from Paul Fordyce of PMF Legal, the lawyers acting for MIH in respect of the Print Warehouse agreement transaction that stated:

A much stronger offer was received from Print Warehouse Australia. This purchase price was reduced at the last minute and McMillans agreed to the reduced purchase price.

25    Mr Morgan also exhibited an invoice from MGS to Print Warehouse for $330,000, including GST, which appears to be dated 4 May 2016, on prepaid terms that described the invoiced sum as:

To our costs in relation to services provided in connection with printing plant and equipment.

26    Although it is a party to this proceeding, MIH has given no evidence in relation to this curious invoice or any dealing to which it could relate.

Subsequent reports to creditors

27    In their report to creditors of SAP for the second meeting held on 13 May 2016, the administrators recommended that the creditors vote to place SAP in liquidation on the basis that, in both an optimistic and pessimistic scenario, it was likely that, after payment of priority creditors, ordinary unsecured creditors would receive a nil return. They said that they were aware that a number of the printing machines utilised by the business were owned, not by SAP, but by SAM, and they were investigating the accuracy of the accounting treatment and correct allocation of assets and associated costs. They noted that, since late 2015, SAP had not paid an appropriate rental or asset utilisation fee to SAM for the use of its equipment and that further investigations would be needed to ascertain whether the accounting entries were correct. The administrators told the creditors that there were prospects of an insolvent trading recovery, but they would need to obtain statements from Mr Mangos and Mr Wallace about their personal assets and liabilities and that they would pursue the matter further in a winding up. The administrators said that there was insufficient information to determine accurately whether SAP had traded whilst insolvent, but it was likely that it had done so as far back as June 2013, based on balance sheet accounts that they had seen by then.

28    In a presentation of accounts and statement for SAP that he caused to be lodged with ASIC on 10 November 2016, Mr Warner recorded that, at the time of his appointment, the amount owing to secured lenders was $2,080,165 and that, at the date of the presentation $1,104,216.50 was owing. Mr Warner’s presentation noted that on 15 July 2016 he had received about $975,000, which I infer was part of the proceeds of sale of the equipment.

29    On 11 May 2017, the liquidators reported to SAM’s creditors that they had completed all statutory tasks, reported to ASIC, lodged relevant returns with the Australian Taxation Office, liaised with creditors and undertaken investigations in relation to SAM, SAP and Mr Mangos, pursuant to s 533 of the Act. They noted that the debts owed to the other secured creditor, Scottish Pacific, by SAP, which SAM had jointly secured, had been discharged in full. They said that they were undertaking investigations into SAM’s affairs but that it was unlikely that it would pay a dividend of more than 50 cents on the dollar to unsecured creditors. They stated:

There are currently insufficient funds in this liquidation to cover the costs of the winding up. Consequently, we do not expect to be able to pay a dividend to any class of the Company’s creditors.

(emphasis added)

30    The liquidators said that they would notify the creditors in writing should that position change. They noted that they expected to finalise the liquidation after completing the recovery of any outstanding debts owed and their investigations. That was the last report SAM’s liquidators gave to creditors before Mr Davis made the deregistration request on 5 April 2018.

31    On 16 June 2017, the liquidators of SAP reported to creditors and observed that they also had insufficient funds to cover the costs of its winding up, but had completed their investigations, did not expect to make any further distributions and expected a nil recovery.

32    On 6 November 2017, Mr Warner made a further presentation of accounts and statements to ASIC in which he noted that, by 12 October 2017, the amount still owing pursuant to his instrument of appointment in respect of SAP was $1,062,675.17. He noted that, in 2017, he had made some payments totalling about $42,000 to MIH.

The earlier Court proceedings

33    In 2018, MIH began proceedings in the Supreme Court of New South Wales against Mr and Mrs Mangos and Mr Wallace seeking recovery under their guarantees to it of SAP’s and SAM’s debts and other transactions entered into between those individuals and MIH (the MIH proceeding). Relevantly, in the third further amended statement of claim that Ms McMillan verified on 23 April 2019, MIH pleaded (in pars 12A and 12B) that on about 5 May 2016, MGS received $330,000 from Print Warehouse and that “in order to avoid any dispute in this proceeding, and solely for the purposes of this proceeding, MIH brings to account” the $330,000 payment as a deduction against, and in reduction of, the amounts that MIH claimed against the guarantors. I was informed from the bar table that the MIH proceeding is set down for hearing in the Supreme Court in 2022. Despite MIH’s vigorous pursuit of Mr Mangos and Mr Wallace, the evidence revealed they did not now own, although they previously had owned, real property.

34    On 24 March 2020, Mr Morgan and SAP, as plaintiffs, brought proceedings in the Supreme Court against a number of companies claiming recovery of preferences or uncommercial transactions (the SAP proceedings) based on SAP's trading activities. The debtors against whom the plaintiffs made claims included both Heidelberg and the, by then, combined Ball & Doggett. Each of Heidelberg and Ball & Doggett vigorously defended, including by expressly pleading, that it had traded not with SAP but only with SAM, to which it had issued invoices and statements and over whose assets it held security. In the event, during 2020 Mr Morgan settled the proceedings against Heidelberg and Ball & Doggett for a total recovery of $90,000.

Mr Morgan rejects MIH’s proof of debt in SAP

35    Mr Morgan appears to have called for, or received, a proof debt in SAP from MIH. It claimed $2,156,966.42 pursuant to both the MIH facility and the Westpac assignment. MIH’s proof of debt alleged that Mr Mangos had claimed that he was not a debtor in respect of one item in the proof worth $150,000. Mr Mangos claimed that sum was in respect of a loan made on 28 January 2016 by MIH to SAP and SAM. MIH did not accept that Mr Mangos was correct, however MIH submitted its proof for that lower sum in case he were and said in it that if he were not correct, MIH would press its proof for the higher sum.

36    In his notice of rejection of MIH’s proof of debt dated 15 February 2021 (the rejection), Mr Morgan noted that, despite requests to do so, MIH had failed and refused to provide information or documentation to support a number of its asserted claims. He also rejected MIH’s claim, based on any amounts due under the Westpac assignment. The rejection noted that, on about 5 May 2016, MGS had received $330,000 from Print Warehouse as an undisclosed consideration for the sale of SAP’s and SAM’s business. Mr Morgan asserted that, in light of his analysis, MIH was indebted to SAP, and not the other way around.

Mr Morgan’s 2021 report to creditors of SAP and SAM

37    On 16 February 2021, Mr Morgan sent a circular addressed to creditors of each of SAP and the deregistered SAM, including among others, to MIH, Heidelberg and Ball & Doggett as creditors of each of SAP and SAM. He recorded some of the history more pithily than I have above. He noted that he had applied to this Court for orders to have SAM reinstated under s 601AH of the Act and that he was seeking reappointment as its liquidator, as well as a pooling order. He gave notice of the date of the first case management hearing on 25 February 2021 and invited anyone interested to file notice of an appearance by 24 February 2021. He summarised the relief he was seeking and informed the creditors that he had been funded by the Commonwealth, through the Attorney-General’s Department administering the Fair Entitlement Guarantee Scheme Recovery Program (FEG scheme) to bring the claims that he now makes.

38    Next, in his report to creditors of SAP dated 16 April 2021 for a meeting on 11 May 2021, Mr Morgan informed them that, following his initial investigation into insolvent transactions, he had determined that it was necessary to obtain an expert insolvency report to assess and support the strength of his intended proceedings. He said that, in 2018, he had sought additional funding from Department to cover the costs of examinations and further work. The Department provided funding for that purpose. He noted that the Department was a creditor of SAP for $1,299,364 under the FEG scheme because it had advanced that amount to meet the entitlements of SAP’s employees at the time of its collapse. He said that, after being satisfied of the strength of the proposed unfair preference claims against various trade creditors that resulted in the Supreme Court proceeding, he applied for further funding to pursue the claims that he then wished to bring, but the Department had not granted that funding. As a result, he sought further legal advice.

39    Mr Morgan gave evidence that he engaged his current lawyers, ERA Legal, who agreed to pursue the proposed claims referred to in [9] above on a recoveries basis, that is, they would only seek to be paid if there were a successful recovery by way of judgment or settlement, which would allow him to pursue the claims.

40    In the 16 April 2021 report, Mr Morgan noted that, MIH was recorded as a first ranking secured creditor of SAP and claimed to be owed approximately $1.8 million. Mr Morgan said that he had rejected McMillan’s proof of debt on 15 February 2021. Mr Morgan informed SAP’s creditors report that:

[MIH] had a right to appeal and make an application to the court within 14 days of my adjudication. [MIH] did not appeal the rejection and I, therefore, do not consider it to be a creditor of the [c]ompany.

(emphasis added)

41    Mr Morgan also noted that he had received $407,251.80 in funding from the Department as at 16 April 2021.

MIH’s appeal against the rejection

42    On 21 July 2021, MIH filed an originating process against Mr Morgan and SAP appealing against the rejection, seeking a declaration that it was a creditor of SAP in the sum of $2,156,966.42 and an order that Mr Morgan be directed to admit its proof of debt in that sum in SAP’s winding up.

43    On 26 July 2021, the liquidator’s solicitors wrote to MIH’s solicitors saying that the rejection had occurred because MIH had failed to provide information that MIH said it held and supported its claim. Mr Morgan offered to allow MIH the opportunity of providing that information within seven days. The solicitors for the parties appear to have engaged in further correspondence.

44    On 3 September 2021, I ordered that MIH provide a response to the liquidator’s solicitors’ letter of 26 July 2021 by 13 September 2021.

45    On 28 September 2021 ERA Legal wrote to the solicitors for MIH, noting that MIH had not complied with the order of 3 September 2021.

46    On 29 September 2021, MIH’s solicitors wrote back asserting that the preparation of MIH’s revised proof of debt “[was] nearing an advanced stage”. They foreshadowed that there would be a number of schedules, and explained that documents were being extracted and collated, but that in the circumstances of the lockdown, that had occurred because of the COVID-19 pandemic, no doubt, there were some difficulties in locating certain documents going back to the year 2015 and earlier, that they needed to check and cross-check.

47    On 5 October 2021, ERA Legal replied, saying that the liquidator did not accept the matters set out in the 29 September 2021 email. They asserted that the suggestion that the preparation of the proof of debt was nearing an advanced stage was surprising, given the commencement of the appeal and the passage of time. They required MIH’s evidence in support of the proof of debt by 22 October 2021.

48    On the material before me, the position still is that MIH had not yet complied with the order of 3 September 2021 or provided the liquidator with particulars to support its appeal and proof of debt.

The basis of the Department’s funding

49    On 23 November 2021, the Department wrote to ERA Legal, stating that it had distributed $1,299,363.76 under the FEG scheme, in accordance with the Fair Entitlements Guarantee Act 2012 (Cth) (the FEG Act) for outstanding employee entitlements to former employees of SAP in respect of unpaid wages, annual leave, payment in lieu of notice, redundancy pay and long service leave. As a consequence, the Department said it was subrogated to the rights of the employees in respect of those moneys, pursuant to s 560 of the Corporations Act and s 29 of the FEG Act. The letter noted that, on 17 March 2017, the Department had lodged a proof of debt in SAP in that sum and that no claims had been made under the FEG scheme in the winding up of SAM.

50    The Department stated that it was funding SAP and its liquidator, Mr Morgan, in relation to this proceeding and the litigation that Mr Morgan proposes to bring, if SAM is reinstated, he is reappointed as SAM’s liquidator and a pooling order is made. The Department noted that while MIH had appealed against the rejection of its proof of debt, the Department was the largest non-related creditor in SAP’s winding up. The Department stated that, if the Court were to reinstate SAM but declined to order that it and SAP be pooled as a group, it would not provide an indemnity or funding to Mr Morgan in relation to any litigation commenced on behalf of SAM. It stated that the Department would not fund SAM or its liquidator in the event that a pooling is not made because it had not paid out any employee entitlements under the FEG Act in the winding up of SAM. The Department stated that it supported Mr Morgan’s present application but would fund Mr Morgan in pursuing the claims on behalf of SAP, were this application granted even if a pooling order were not made.

MIH’s challenge to the quantification of the proposed claims

51    Mr Morgan set out in his affidavits calculations as to the possible recovery amounts. He set out both a high and low case basis, that treated all pooled payments made to creditors over the different periods, which I have described, as being recoverable from the actual directors, asserted shadow directors, as well as from MIH.

52    In response, MIH relied on an expert report of Max Donnelly, a highly experienced liquidator and insolvency expert. He opined that the basis of Mr Morgan’s calculation of those sums overstated what was potentially recoverable. Mr Donnelly opined that the pooling calculation ought to be done to reject the net benefit to the relevant creditors, and that if this were done it would reduce substantially.

53    Suffice to say, in Mr Donnelly’s assessment, the correct calculation of the potential recovery was as follows:

7.1.36    To calculate the potential fruits of litigation on a pooled basis, using the information in my analysis summarised at paragraphs 7.1.18 and 7.1.29, I set out below:

    Table 5: SAP and SAM Potential Pooled Insolvent Trading Claim

    Note 1 - I note that in preparing this table I have utilised the figure of $229,710 for costs of litigation as estimated by Mr Morgan.

This figure may be higher given the liquidator would need to bring two actions on behalf of both SAP and SAM.

54    It is not necessary for me to resolve the basis on which any claim that Mr Morgan proposes to bring may ultimately be litigated or decided. It suffices, in deciding this application, to note that even on Mr Donnelly’s calculations, the Department will recover for the FEG scheme between $415,047 and $665,464, even if no costs were recovered from the unsuccessful respondents. If that were the case, other unsecured creditors in SAP and SAM, in a pooling order situation, based on Mr Donnelly’s assumed figures, will not receive anything.

55    Mr Donnelly addressed considerable parts of his evidence to the situation in which SAM’s liquidation would be pursued by a liquidator other than Mr Morgan. Since Mr Morgan does not seek an order that SAM be reinstated unless he is appointed liquidator and a pooling order is made, it is not necessary to deal with that evidence.

56    Mr Donnelly gave evidence that, in his lengthy experience, he had never in his been involved in a case involving a claim against any shadow directors and insolvent trading. He accepted that the necessary investigations and work to consider and then bring such a case would be considerable and extensive.

57    Mr Donnelly contended that a reasonably competent liquidator would have undertaken a number of steps to update creditors of SAM before filing the application for deregistration that Mr Davis lodged on 5 April 2018. He asserted that a reasonably competent liquidator should have provided an update to SAM’s creditors of the outcome of the investigations. He opined that this should have included the liquidator’s view about any potential recoveries that might be available to the liquidator or SAM for the benefit of the creditors, including whether there was any evidence of insolvent trading activity, whether the directors had received any unfair preferences or been involved in any other voidable transactions that he or she had identified as the outcome of the review of the inter-company loan accounts, whether it was necessary to conduct any examinations of officers of SAM under the Corporations Act and whether any litigation funder had expressed an interest in providing funding.

58    He also said that in circumstances where the liquidators of SAM had decided that its affairs were fully wound up and it should be deregistered, if SAM were reinstated, a decision by a liquidator as to whether or not proceedings should be brought for insolvent trading could not be made until certain matters had been determined. Those matters included the date on which SAM was insolvent, if at all, the balance of inter-company loan accounts at that date, whether there was any evidence that the directors of SAM had permitted it to incur debts during any time that it was insolvent, whether any examination of SAM’s officers would be necessary and whether creditors or a litigation funder would be willing to fund any actions. He opined, on a hypothetical basis, given that SAM presently does not exist and will only come back into existence if a reinstatement order is made, that it followed in strict logic that none of those inquiries could be undertaken until a reinstatement had occurred.

59    Mr Donnelly also noted that the unpaid remuneration of SAM’s former liquidators, at the time of its deregistration, was $45,065. He referred in his report to s 545(1) of the Corporations Act that provides that:

Subject to this section, a liquidator is not liable to incur any expense in relation to the winding up of a company unless there is sufficient available property.

60    In the course of his cross-examination, he said that a liquidator was not obliged to fund hundreds of thousands of dollars out of his own pocket in order to conduct investigations of the nature that he had described as necessary to be conducted in order to consider whether to bring insolvent trading or related proceedings, saying “[i]t's not something that liquidators would do normally out of their own pocket. No.”

61    Mr Donnelly said that he understood the expression “fully wound up” meant, in his own words, that the administration “[was] finalised”. He said that the liquidator had to form a view whether the administration was finalised and in doing so would rely on the facts as they were known to him or her at the time. He accepted that the formation of such a view depended on the situation in any particular liquidation. He said that, for the purposes of preparing his report, he had billed MIH over $100,000, indicating the significant amount of work necessary to review matters and progress them to the point where he could give the detailed opinions he had expressed.

62    Mr Donnelly noted in his report that Mr Morgan had settled the preference claims for $90,000, which, he said, appeared to be an insubstantial amount as compared to the amounts claimed. During cross-examination, he accepted that, on one view, the settlement sum achieved for one of those claims could have been amounted to a substantial part of the claim.

The conflict issue – MIH’s submissions

63    MIH argued that the inference should be drawn that Mr Morgan had, and had caused SAP to sue the wrong companies and that that somehow caused a problem with his ability to be re-appointed as SAM’s liquidator. MIH does not suggest that Mr Morgan is not a fit and proper person to be a liquidator of SAM. Rather, it argued that he may not be impartial, for example, because of the settlement of the preference claims against Heidelberg and Ball & Doggett for an insubstantial sum as compared to the amount claimed as Mr Donnelly had suggested.

64    MIH argued that another independent liquidator might seek damages from Mr Morgan or Mr Davis for their failure properly to bring the preference claims against Ball & Doggett and Heidelberg in SAM’s name.

The conflict issue - consideration

65    I reject MIH’s argument. In Pilmer v The Duke Group Ltd (2001) 207 CLR 165 at 199 [78], McHugh, Gummow, Hayne and Callinan JJ said:

[78] In particular, the fiduciary is under an obligation, without informed consent, not to promote the personal interests of the fiduciary by making or pursuing a gain in circumstances in which there is "a conflict or a real or substantial possibility of a conflict" between personal interests of the fiduciary and those to whom the duty is owed. That is how the matter was put by Mason J in Hospital Products [Limited v United States Surgical Corporation (1984) 156 CLR 41 at 103. See also Clay v Clay (2001) 202 CLR 410 at 432–433 [46]–[47]]. Similar reasoning applies where the alleged conflict is between competing duties, for example, where a solicitor acts on both sides of a transaction.

(emphasis added)

66    MIH did not identify, and I am unable to see, what possible conflict or a real or substantial possibility of one, in Mr Morgan being re-appointed as liquidator were I to reinstate SAM. There is no suggestion that, before its deregistration, he had done any damage to SAM’s estate, or he had any funds available to him to seek benefits for SAM that he failed to realise for it or that his appointment in some way would be inimical to the proper pursuit of the litigation he contemplates bringing on a pooled basis with SAP to seek recovery for the intended benefit, at the very least, of the FEG scheme and, possibly, other creditors. The outcome of those proceedings will depend on how the claims ultimately are litigated and what, if any, the amounts the subject of the insolvent trading and related allegations are found at trial to be recoverable.

67    Mr Morgan’s position is no different from any other trustee or liquidator who acts for reward and has a statutory charge or equitable interest amounting to a right to exoneration or reimbursement for his or her expenses in acting on behalf of the estate: Chief Commissioner of Stamp Duties for New South Wales v Buckle (1998) 192 CLR 226 at 245–247 [47]–[51] per Brennan CJ, Toohey, Gaudron, McHugh and Gummow JJ,. The fact that there is an outstanding sum due to Mr Morgan and his co-liquidator Mr Davis, for their unpaid remuneration as liquidators of SAM before its deregistration is no reason not to appoint Mr Morgan as a liquidator. He would be entitled to receive that money whether he was re-appointed or someone else was.

68    Mr Morgan has undertaken considerable work and research to bring this application and place himself in the position where he is now able to commence the proceedings that he has identified. As Mr Donnelly noted, it could be assumed that Mr Morgan, acting putatively as if he were the liquidator of the reinstated SAM, has undertaken a considerable amount of work and investigation to come to the point that he has. I am unable to comprehend why he would not be in a position properly to discharge the duties of a liquidator were reinstatement of SAM to occur.

69    Moreover, there was no suggestion that SAP had suffered any prejudice, loss or damage from the proceeding being brought by it and its recovery of the total sum of $90,000 from Heidelberg and Ball & Doggett. This was so even though Heidelberg and Ball & Doggett (or BJ Ball and KW Doggett) appeared to have had a reasonable basis to deny liability to SAP given that each had established credit facilities with, and taken security over property of, only SAM. There is no evidence before me that SAM has lost the opportunity to bring proceedings in its name against Heidelberg or Ball & Doggett. Mr Morgan was not cross-examined to suggest that this was a possibility or that he had prejudiced any claim SAM might have against those creditors. There is no basis for MIH to assert a real or substantial possibility of a conflict in Mr Morgan’s interest or duty in relation to that situation.

70    However, MIH argued that because of the provisions of s 588FF(3) of the Act, a claim against those creditors might be statute-barred. There is a difficult and interesting argument that may develop around that question and no decided case on exactly how that provision operates, in light of the power of the Court under s 601AH(3)(d) to make any other order it considers appropriate, including to suspend the running of limitation periods during the period in which a company is deregistered.

71    In Pagnon v WorkCover Queensland [2001] 2 Qd R 492 at 497–499 [10]–[15], McPherson JA, with whom Thomas JA agreed, discussed whether a dissolution or deregistration of a corporation stopped time from running against a creditor under a limitation statute. His Honour held (at 499 [15]) that:

[i]t will be seen that the Court’s power to order reinstatement under s 601AH(2) is predicated only on the need to be satisfied that it would be ‘‘just’’ to do so. That is the criterion which the courts have applied in the past in cases of this kind: see, for example, Universal Forming & Construction [1977] A.C.L.C. 29,398; Venn v. Direct Line Freight Pty Ltd (1983) A.C.L.C. 998. Furthermore, the power conferred by s. 601AH(3)(b) is now very wide, and extends to making ‘‘any other order’’ that the Court ‘‘considers appropriate’’. I would have no doubt that under this provision the court could, and in a case like the present would if asked to do so, exercise the power under s. 601AH(3)(b) to order that the time between dissolution of the company on 11 December 1998 and the expiration of the limitation period under s. 11 of the Limitation of Actions Act 1974 should not be counted against the plaintiff here. There is every reason why it would be ‘‘just’’ to adopt that course.

72    In Chalker v Clark [2008] VSCA 92 the Court of Appeal of the Supreme Court of Victoria also discussed this question, without reference to Pagnon [2001] 2 Qd R 492. Osborn AJA, with whom Dodds-Streeton JA agreed, said (at [39]) that the onus was on an applicant for an order under what is now s 601AH(3)(d) to persuade the court that it was just to do so in all the circumstances of a case. Maxwell P also agreed, but added (at [45]) that in that case the application for reinstatement was a device to escape the application of a limitation period to defeat the purpose for which the limitation was established, namely, to protect defendants against litigation being commenced too long after the events the subject of the litigation.

73    In Grant Samuel Corporate Finance Pty Ltd v Fletcher (2015) 254 CLR 477 at 485–487 [18]–[23] French CJ, Hayne, Kiefel, Bell, Gageler and Keane JJ discussed whether s 588FF evinced a legislative policy or intention that precluded any extension of time in which a liquidator could bring an application under s 588FF(1) except in accordance with s 588FF(3). They held (at 486–487 [22]–[23]):

[22] Section 588FF(3) provides that an application under s 588FF(1) “may only be made” within the periods set out in paras (a) and (b) of s 588FF(3). The phrase “may only be made” should be read with both paragraphs. So understood, the term “may only” has the effect of defining the jurisdiction of the court by imposing a requirement as to time as an essential condition of the right conferred by s 588FF(1) to bring proceedings for orders with respect to voidable transactions. An element of that right is that it must be exercised within the time specified (David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265 at 277). This is what is conveyed by Gordon v Tolcher.[(2006) 231 CLR 334]

[23] The only power given to a court to vary the para (a) period is that given by s 588FF(3)(b). That power may not be supplemented (37), nor varied, by rules of procedure of the court to which an application for extension of time is made. The rules of courts of the States and Territories cannot apply so as to vary the time dictated by s 588FF(3) for the bringing of a proceeding under s 588FF(1), because s 588FF(3) otherwise provides. It provides otherwise in the sense that it is inconsistent with so much of those rules as would permit variation of the time fixed by the extension order.

(emphasis added)

74    Their Honours arrived at this construction having had regard to the legislative intention of balancing in a liquidation the competing interests of creditors and those who dealt with the company who might be the subject of proceedings under s 588FF(1), by specifically limiting the time in which such proceedings could be brought. However, their Honours were not, of course, concerned with a deregistered company in the current situation.

75    Recently, in considering the operation of s 601AH(3)(d), Mossop J referred to Pagnon [2001] 2 Qd R 492 in Saba Bros Tiling (ACT) Pty Ltd v Australian Securities and Investments Commission [2021] ACTSC 47 at [50]. He noted that was a case that dealt with an order sought against, rather than by, a company to be reinstated. In obiter dicta, his Honour referred to the principle of statutory construction, that a specific provision, such as that contained in 588FF(3), should not be read down or put to one side by a more general provision in the same statute that Gummow J (with whom Brennan CJ, Dawson, Gaudron and McHugh JJ agreed) explained in David Grant & Co Pty Limited v Westpac Banking Corporation (1995) 184 CLR 265 at 277. Gummow J identified the general principle in what Gavan Duffy CJ and Dixon J said in Anthony Hordern & Sons Limited v The Amalgamated Clothing and Allied Trades Union of Australia (1932) 47 CLR 1 at 7, namely:

[w]hen the Legislature explicitly gives a power by a particular provision which prescribes the mode in which it shall be exercised and the conditions and restrictions which must be observed, it excludes the operation of general expressions in the same instrument which might otherwise have been relied upon for the same power.

76    However, in David Grant 184 CLR 265, the Court was concerned with the general dispensation power in s 1322 of the Corporations Act that applied to all situations. Gummow J held that the specific time prescribed in s 459G for applying to set aside a notice under s 459E of the Act could not be extended under s 1322. The position here is slightly different from those cases. First, s 601AH(3) has been amended several times since the decision in Pagnon [2001] 2 Qd R 492 and a provision, now in the terms of s 601AH(3)(d), has been retained. That provision enables the Court to deal specifically with the situation of a company that, at relevant times, has not existed while a limitation period would be running. It may well be possible for the Court to exercise the specific power in s 601AH(3)(d) to prevent a statutory limitation provision running where it would be just to do so.

77    Secondly, as Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ said in The Owners of the Ship “Shin Kobe Maru” v Empire Shipping Company Inc (1994) 181 CLR 404 at 421:

It is quite inappropriate to read provisions conferring jurisdiction or granting powers to a court by making implications or imposing limitations which are not found in the express words.

78    It may be open to argue that the specific power in s 601AH(3)(d) is within that principle in its application to the similarly specific limitation period in s 588FF. However, it is not necessary for me to resolve this issue now. I think the appropriate order to make is that after reinstatement, the liquidator may apply for an order under s 601AH(3)(d), provided that he gives notice to any person against whom he seeks that a limitation period not run against him or SAM, so that the matter can be fully argued on its merits at that time.

Should an order be made reinstating SAM?

79    That takes me to the criteria on which the Court makes an order under s 601AH(2). In essence, the Court must be satisfied that it is just that the company’s registration be reinstated. There are two classes of persons who can be applicants for such an order, namely a former liquidator, such as Mr Morgan, or a person aggrieved by the deregistration. Here, no person appears to be aggrieved by the deregistration, and Mr Morgan is, therefore, the only person able to bring the application. The Parliament must have understood that a former liquidator may still have fees outstanding in a liquidation where, at the time of the dissolution, there were insufficient funds to continue the liquidation or bring a proceeding on a cause of action that the company or liquidator could have pursued, had funds to do so been available.

80    MIH’s argument, that Mr Davis’s statement in the form 578 that the affairs of SAM were fully wound up was somehow preclusive or suggestive of negligence on behalf of the former liquidators, ignored the practical reality that there were no funds in SAM. As at April 2018, the state of accounts between it and SAP suggested that it owed SAP over a $1 million and SAM had no assets. As Mr Donnelly accepted, a liquidator does not have to incur expenses when there are no funds in the company and he or she had spent or expended considerable time and effort up till then in reporting to ASIC and the creditors as the Act requires.

81    The meaning of the expression “finally wound up” is dependent on the context in which it is used. In Oreb v Australian Securities and Investments Commission (No 2) (2017) 247 FCR 323 at 334 [39], Rares, Davies and Gleeson JJ approved the explanation of the expression “was wound up” that James LJ gave in In re London and Caledonian Marine Insurance Company (1879) 11 Ch D 140 at 143–144:

We must put some practical and sensible meaning on the words, and in my opinion they mean "as far as the liquidators can wind them up;" that is, when the liquidator has done all that he can to wind up the company, when he has disposed of the assets as far as he can realize them, got in the calls as far as he can enforce them, and paid the debts as far as he is aware of them, and has done all that he can do in winding up the affairs, so that he has completed his business so far as he can, and is functus officio.

(emphasis added)

82    Here, at the time of the lodgement of the form 578 on 5 April 2018, the liquidators stated that they had done all that they were aware was required to be done to wind up SAM and that there was no more money available to them to pursue the liquidation further. There was no suggestion from the time that they wrote their 11 May 2017 report that any creditor had come forward with an offer of funding or other assistance for the liquidators to carry out any further tasks.

83    In Hall v Poolman (2009) 75 NSWLR 99 at 134–135 [128]–[129], Spigelman CJ, Hodgson JA and Austin J noted the public interest in a liquidator bringing recovery proceedings, such as proceedings against directors for breach of duty, insolvent trading and proceedings for recovery of unfair preferences. They said that this aspect of the public interest is an important factor to be considered in the exercise of some judicial discretions, although it is not one that overwhelms all other relevant matters.

84    Here, there is a public interest in SAM being reinstated so that it can pursue the claims that Mr Morgan wishes to bring with SAP under a pooling order, if that is otherwise an appropriate order to make so as to seek to recover the amounts paid out by the FEG scheme, as Mr Donnelly’s calculations showed was possible, and, potentially more, if Mr Morgan’s more optimistic calculations were achieved. The public interest will be served if Mr Morgan and or SAM can bring proceedings that may result in the FEG scheme recovering some of its outlay for the unpaid entitlements of many employees of SAP brought about by its demise if SAM is reinstated and a pooling order is made.

85    In those circumstances there is no reason to think that Mr Morgan will not be able to pursue the liquidation of SAM adequately and appropriately if he were reappointed. For these reasons, subject to determining that a pooling order should be made, I am satisfied that it is just that SAM’s registration be reinstated and that Mr Morgan be appointed as its liquidator.

The gateway issue – the parties’ submissions

86    The parties engaged in substantive arguments as to whether either of the jurisdictional conditions in s 579E(1)(b)(ii) or (iv) for a pooling order was satisfied. Mr Morgan contended that, despite his rejection of MIH’s proof of debt in SAP’s liquidation, I should find that SAM and SAP, as the companies in the group, are jointly liable for one or more debts or claims the subject of that proof of debt. As I pointed out during argument, that position, on face value, is somewhat incongruous.

87    First, the liquidator claimed that s 579E(1)(b)(ii) was satisfied because SAP and SAM was jointly liable to MIH under the MIH facility. MIH asserted in its written submissions put by senior counsel for the purposes of this hearing, that it is a creditor of SAM. However, MIH has filed and, to date, maintained its appeal to the Court against Mr Morgan’s rejection of its proof of debt against SAP seeking a declaration that it is owed over $2.1 million, by SAP under securities that make both SAM and SAP jointly and severally liable to it. Yet, it says, because Mr Morgan, as liquidator of SAP, has rejected MIH’s proof of debt, the Court cannot be satisfied that both companies are jointly liable for its claim.

88    The liquidator argued that I should ignore his rejection. He said that he rejected it because MIH had not provided any substantiation, and, on his view, MIH owes money to SAP, by reason of its conduct in relation to the payment to MGS by Print Warehouse in relation to sale of SAP’s and SAM’s business as a payment to MIH. He contended that the amount of $1,062,675.17 that Mr Warner had certified, in his 6 November 2017 report, as still owing under MIH’s securities, showed that MIH’s claim was overstated.

89    Alternatively, the liquidator seeks to establish satisfaction of the condition in s 579E(1)(b)(iv), namely:

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;

(emphasis added)

90    Mr Morgan submitted that the claim he wishes to bring on behalf of, or through, SAP and SAM is that each of them is jointly or severally entitled to the chose in action to receive the proceeds of the $330,000 that Print Warehouse paid MGS on 5 May 2016, being money that ought to have been available at that time to reduce their indebtedness under the MIH facility and or the Westpac assignment.

91    MIH argued that the liquidator’s proposed claim to recover the $330,000 that Print Warehouse paid to MGS was not for “any particular property”. MIH contended that the process of realisation of the chose in action that the liquidator wishes to pursue to recover the undervalue realised on the sale of both companies’ business would not suffice to meet the criterion in s 579E(1)(b)(iv). It relied on Re Watch Works Australia Pty Ltd (In Liq); Ex parte Francis [2020] WASC 6.

The gateway issue - consideration

92    The parties accepted that the expression “debts or claims” in s 579E(1)(b)(iv) ought be construed consistently with the definition in s 553(1) of a debt or claim provable in a winding up. That must be so because, first, s 553(1) provides that, subject to Div 6 and Div 8 (s 579E is in Div 8), “all debts payable by, and all claims against, the company (present or future, certain or contingent, ascertained or sounding only in damages), being debts or claims the circumstance giving rise to which occurred before the relevant date, are admissible to proof against the company” (emphasis added). The relevant date here for both companies is 7 April 2016, being the date of the deemed creditors’ voluntary winding up of SAM and, also of SAP by following the Byzantine provisions of ss 91 and 513C.

93    For the reasons that follow, it is not necessary for me to resolve the parties’ somewhat bizarre disagreement as to whether SAM and SAP are jointly liable on a debt due to or claim by MIH.

94    The onus is on the liquidator to establish that the pre-condition in s 579E(1)(b)(ii) has been established. I am inclined to think that the inference should be drawn that MIH is unable or unwilling to establish its claim that it is a creditor of SAP. It has given no explanation of why it has not yet provided the liquidator with the material to support its proof of debt the subject of the order made on 3 September 2021, now, more than two months later than its previous position in its solicitors’ letter of 5 October 2021 that said its preparation was well advanced. However, I will refrain from making a finding about whether, SAM and SAP are jointly liable to MIH for one or more debts of claims. That is because I can find that s 579E(1)(b)(iv) is satisfied.

95    In Re Lombe (2011) 87 ACSR 84 at 96 [53]–[57], Barrett J held that a chose in action in the form of a right to sue is capable of being “used”, within the meaning of s 579E(1)(b)(iv) by the company entitled to exercise the right which was one of a group, the members of which had given cross guarantees to a creditor. His Honour held that (at 97 [61]) “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”. Barrett J held that because another of the companies and cross guarantors could require the company with the chose in action to sue so as to utilise its right of subrogation, the right to sue was “particular property” used by a company in the group in connection with a business, venture or undertaking carried on jointly by companies in the group. His Honour said (at 96 [58] and 97 [63]):

[58] But 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.

…

[63] I 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 [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.

(emphasis added)

96    In Re Watch Works [2020] WASC 6 at [40]–[45], Vaughan J referred to decisions that gave s 579E(1)(b)(iv) a limiting effect so that surplus money merely held after a sale would not be classified as presently existing “particular property” within the meaning of subpar (iv). However, his Honour concluded that the purpose for which certain money had been deposited into a liquidation account was to enable the businesses of the two companies to be carried on until a sale was completed. Therefore, Vaughan J was satisfied there that the account itself was “particular property” and held that purpose met the conditions in s 579E(1)(b)(iv): Re Watch Works [2020] WASC 6 at [70]–[74].

97    Here, Mr Morgan identified that both SAP and SAM have jointly and severally a present chose in action, as the former owners of the business that Mr Warner sold to Print Warehouse pursuant to the direction of MIH and or Mr and or Ms McMillan to accept the reduced purchase price, in circumstances where it appears that MGS, as a related company of MIH, received $330,000 contemporaneously in relation to the very business that was being sold but not accounted for in reduction of the secured debt that SAM and SAP owed to MIH. Mr Morgan, SAM and SAP 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 of the companies in connection with their undertaking carried on jointly to discharge their debts and conduct recovery of their assets which, Mr Morgan contends, should have been brought to account in their favour at the time of the sale of their business in 2016. The chose in action comprised the claim on behalf of both SAM and SAP to recover monies that allegedly were wrongfully paid to MGS, a company associated with MIH by Print Warehouses, as purchaser, instead of to the companies.

98    I am satisfied that that chose in action is “particular property” owned by both SAM and SAP that is used, or for use, by them in connection with an undertaking carried on jointly by them as companies in the group: Re Lombe 87 ACSR at 96–97 [55], [63], within the meaning of s 579E(1)(b)(iv).

The material disadvantage issue

99    There is no evidence that any unsecured creditor of a company in the group would suffer any material disadvantage if a pooling order is made. Indeed, the evidence is all the other way. Thus, s 579E(10) does not preclude the making of a pooling order.

The just and equitable issue

100    MIH contended that, in effect, there was no real or substantive intermingling for the purposes of s 579E(12)(d) and that the companies had arranged their affairs so that SAP would be the effective business and SAM would simply hold its own assets. MIH argued that having regard to the requirements of s 579E(12), it would not be just and equitable to make a pooling order because I could not be satisfied about the extent to which the activities and businesses of the companies had been intermingled.

101    In my opinion, MIH’s argument has no substance. It is as plain as a pikestaff that the companies’ affairs were intermingled. They both obtained finance, jointly and severally, to carry on the group’s business by entering into the MIH facility, the arrangements with Westpac the subject of the Westpac assignment, and gave Westpac cross guarantees of one another’s debts and liabilities. Moreover, their affairs were intermingled because SAP was using SAM’s secured lines of credit with suppliers, such as each of Heidelberg, BJ Ball and KW Doggett, to obtain supplies to enable SAP to conduct its printing business. SAP does not appear to have rewarded SAM for that use of its property and credit facilities, at least so far as the material in evidence at the moment shows.

102    Looking at the criteria under s 579E(12), SAM and SAP were both in a group. They had common officers, namely Mr Mangos, Mr Wallace and, according to Mr Morgan’s allegations, Mr and Ms McMillan were shadow directors and at relevant times involved in the management of the operations of both companies. They presented outwardly to creditors that they were in a group, given that SAP was able to secure the supply of all the necessary printing supplies from Heidelberg, BJ Ball and KW Doggett, using SAM’s secured lines of credit.

103    The circumstances that gave rise to the winding up were, clearly enough, that both companies were trading while insolvent and were unable to pay their debts through the apparent acts or omissions of their directors, Mr Mangos and Mr Wallace, and, if Mr Morgan can establish his claims of them being shadow directors, Mr McMillan and Ms McMillan.

104    I am satisfied that the activities of the businesses of both companies were intermingled. As a pooling order would only advantage creditors of both companies, the case for a pooling order is compelling. The effect of the pooling order will eliminate the intercompany balances and claims between SAM and SAP for the use of each company’s property. The result of the intercompany balances disappearing, as Mr Donnelly’s summary that I have set out at [543] above shows, is that, on his estimated return for a low prospect of success, there will still be a significant recovery for the pooled group.

Conclusion

105    For the reasons above, I will make orders that SAM be reinstated, Mr Morgan appointed its liquidator and SAM and SAP will be a pooled group pursuant to s 579E(1).

Associate:

Dated:    23 February 2022