The plaintiffs were appointed voluntary administrators of the Black Stump Group which comprised nine companies. During the period of administration the administrators formed the view that the Group's affairs were hopelessly intermingled such that it was not possible, except at great expense, to identify the assets and liabilities of each company within the Group. As a consequence the administrators recommended that the companies be wound up and in their report to creditors they advised creditors that they intended to apply for orders pooling the assets of the companies for the purposes of the liquidations.
At the second meetings of creditors, the administrators again informed creditors of their intention to seek pooling orders from the Court. Although no formal resolution was passed by creditors at the meetings, no creditor objected to the pooling arrangement.
Following the winding up of the companies the administrators made an application to the Supreme Court for pooling orders. Prior to making the application the administrators again notified creditors by letter of their intention to seek pooling orders. The notice accompanying the letter stated that “any creditor who is opposed to the pooling application must indicate their opposition in writing to the liquidators.” No creditor objected.
The Court at first instance identified five possibilities for giving effect to the pooling arrangement. They were:
The plaintiffs made their application pursuant to a sixth possible route, namely, sections 477(1)(c), 506(1)(b) and 511(1) and (2). Barrett J. found that a liquidator could resort to the s477(1)(c) power made applicable by s506(1)(b), but held that s477(1)(c) was not binding on any creditor who did not actively assent to the proposed compromise or arrangement. In respect of s511 Barrett J. held that the section could only be of relevance if the creditors had given their unanimous assent to the pooling arrangement.
Although the liquidators had notified the creditors on several occasions of the pooling proposal, Barrett J. did not consider the notifications to be a sufficient basis to imply unanimous creditor consent and concluded that without such unanimous consent, in the terms of s511(1)(a), there was no question arising in the winding up, a positive determination of which by the Court would cause the creditors' legal rights to be varied. He therefore dismissed the liquidators' application.
On appeal, Justice Barrett's decision was upheld. Young CJ in Eq. held that the Court has no power to order the pooling of assets in a winding up, no matter how commercially expedient such an action may appear to be. Whilst recognising that there are a number of ways to achieve pooling, Young CJ. found that "what has happened is not one where one can say that there has been consents or assents by any of the creditors to waive or vary their rights. Nor has there been the facts which would show that there has been a compromise or arrangement between the creditors and the liquidators." The Court of Appeal held that although the liquidators advised creditors on three occasions in broad outline that they intended to make an application for pooling and did not receive any objection to such notices, this did not constitute sufficient waiver or assent from the creditors. Without unanimous creditor assent, it was the Court’s opinion that the liquidators' application must fail. It is relevant to note that ASIC, who appeared as amicus curiae on the application considered that the notices were sufficient to properly inform creditors of their rights in relation to the pooling application such that a lack of objection to pooling must really have equalled assent.
The decision of Young CJ. sits uneasily with earlier pronouncements he made in two other decisions. In Re Charter Travel Co Ltd (1997) 25 ACSR 337 his Honour indicated the availability of an additional course to the five procedural possibilities identified by Barrett J. That course relies on s511(1)(a) being the ground under which the plaintiffs had made their application. His Honour relevantly said: “It would be possible for the Court to advise a liquidator in a court winding up that he should consolidate debts, but it would be unlikely that the court would do so unless every creditor agreed or a regime was put in place for creditors to object.”
His Honour went on to state: “if no creditor objects and it is impracticable to keep the assets and liabilities of different companies separate, and the consolidation is for the benefit of creditors generally, then the court might advise the liquidators concerned that they would be justified in consolidating the administration. Again there would be cases where the consolidation could be considered as a compromise between the two liquidators and the various creditors of the companies under section 477(1)(c) of the Corporations Law.”
Perhaps most significantly, Young CJ. opined: “So long as there is a power under the Corporations Law or otherwise available to the Court, the Court is anxious to see that liquidations are conducted with commercial efficiency and will not allow any technical rules to frustrate that attempt.”
In attempting to pool the assets in the Black Stump liquidations, the liquidators were concerned to achieve an outcome falling squarely within the legal principles identified by Young CJ. in Re Charter Travel including the Court’s anxiety to see that liquidations are conducted with commercial efficiency. This latter objective reflects the broader principle that Courts are anxious to ensure the quick, just and cheap disposal of litigation.
In Black Stump, both the Court at first instance and the Court of Appeal recognised the general merits of a pooling order and yet felt constrained to make such an order as the application did not strictly fall within one of the five gateways identified by Justice Barrett.
This was despite the fact that both the Court at first instance and the Appeal Court recognised that “in a general sense the situation appears to be one which would benefit from some sort of consolidation and pooling.” (per Barrett J.) Similarly, Bryson JA in the Court of Appeal held “I feel a strong impulsion to find a pragmatic solution to the situation of the companies and their liquidators…” Whether the Court indeed had the power to order pooling or not also seemed uncertain to Bryson JA who held: “It is not clear that the Court has any such power. I do not have a clear view to the contrary effect, that is, that there is no such power.”
It is somewhat anomalous that the Court of Appeal should have applied a strict, literalist interpretation of section 511 as a potential gateway to obtaining a pooling order, having regard to his Honour’s earlier liberalist approach referred to in Re Charter Travel. Whilst the Court was focused on the need for unanimous assent, the Court failed to consider the alternative possibility, namely, a regime for objection. In Black Stump such a regime clearly existed.
The concept of a regime for objection was not adverted to at all by the Court in Black Stump. This concept indeed sits more comfortably with decisions such as Dean Willcocks –v- Soluble Solution Hydroponics Pty Ltd (1997) 42 NSWLR 209. In that case the court ordered pooling in a winding up by resort to the extensive jurisdiction created by section 447A, notwithstanding that s447A generally is of no application to a company in liquidation as opposed to voluntary administration. Further the court made the pooling orders despite the lack of consent having been obtained from one major creditor. s447A was held to be applicable in Soluble Solution because creditors had passed a resolution during the voluntary administration approving pooling. No such resolution was passed in Black Stump. But one has to question why this should matter. The fact that a resolution was passed does not indicate unanimous consent but merely that a majority of creditors attending in person or by proxy, both in number and value, voted in favour of the resolution. It is also suggested that despite there being no formal resolution in Black Stump, it remained open for both the Court at first instance and the Court of Appeal to have ordered pooling by resort to s447A on the basis that no creditors objected to such a course when the issue was raised at the second creditors’ meetings. Furthermore it was open for the court to have adopted a similar safeguard as they did in Soluble Solution which was to order the liquidators to serve all creditors with notice of the pooling order and to permit any creditor to approach the court to discharge the order.
Whether Soluble Solution even remains good law is now in doubt as a result of the court’s decision in Black Stump. In Black Stump, Young CJ questioned whether 447A can be used where companies are no longer in administration. His Honour held: “There were a lot of other matters which were canvassed before us, such as whether s447A can come into play, even though the company has passed into liquidation. Generally my view is that one cannot utilise s447A for making retrospective orders except for the rather odd situation such as in Australasian Memory Pty Ltd v Brian (2000) 200 CLR 270, but it is not necessary to go into that at all.”
It is unfortunate that the courts chose to adopt such a restrictive approach to the application that was before them in Black Stump particularly having regard to past judicial authority approving pooling. As a matter of commercial practicality, had the court adopted the Soluble Solution approach by making orders under s447A, or alternatively exercised its powers under s511 in light of the comments made in Re Charter Travel the liquidators would have been able to quickly pay a dividend to unsecured creditors without the need to now unnecessarily incur further cost and expense to the detriment of unsecured creditors in bringing about a pooling arrangement by adoption of the rather cumbersome method laid down in Re Switch Telecommunications Pty Ltd; ex parte Sherman (2000) 35 ACSR 172.
It is worthwhile speculating whether any creditors will ultimately object to the making of pooling orders. Only time may prove the adage that sometimes not saying “No” really does mean saying “Yes”.
The decisions in Black Stump clearly demonstrate the need for urgent law reform to permit liquidators to pool in appropriate cases. It is therefore timely to note that on 13 November 2006 the draft Corporations Amendment (Insolvency) Bill 2007 and Corporations and ASIC Amendment Regulations 2007 were released by the Parliamentary Secretary to the Treasurer, the Honourable Chris Pearce MP, for public comment.
To facilitate the external administration of corporate groups, the draft legislation introduces a statutory ‘pooling’ mechanism. This will provide for pooling in a winding up which can be made:
(a) by the liquidator with the unanimous consent of eligible unsecured creditors; or
(b) by the liquidator approaching the court for a pooling order without first seeking the creditors’ consent.
Given the present difficulties involved with pooling in liquidations the introduction of the draft legislation amending the existing insolvency laws will no doubt be greeted positively by liquidators of insolvent corporate groups.
Written by Marc Ryckmans