Morgan & Ors v McMillan Investment Holdings Pty Ltd & Anor
[2024] HCATrans 43
[2024] HCATrans 043
IN THE HIGH COURT OF AUSTRALIA
Office of the Registry
Sydney No S119 of 2023
B e t w e e n -
JOHN MAXWELL MORGAN
First Appellant
SYDNEY ALLEN PRINTERS PTY LTD (IN LIQUIDATION)
Second Appellant
SYDNEY ALLEN MANUFACTURING PTY LTD (IN LIQUIDATION)
Third Appellant
and
McMILLAN INVESTMENT HOLDINGS PTY LTD
First Respondent
AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
Second Respondent
GAGELER CJ
EDELMAN J
STEWARD J
GLEESON J
BEECH‑JONES J
TRANSCRIPT OF PROCEEDINGS
AT CANBERRA ON WEDNESDAY, 12 JUNE 2024, AT 10.01 AM
Copyright in the High Court of Australia
____________________
MR M.R. PESMAN, SC: May it please the Court, I appear with my learned friend MR M.L. ROSE for the appellants. (instructed by ERA Legal)
MR B.W. WALKER, SC: May it please the Court, I appear with my learned friend MR J.T. SVEHLA for the first respondent. (instructed by Somerset Ryckmans)
GAGELER CJ: Thank you, Mr Walker. I note that there is a submitting appearance for the second respondent. Mr Pesman.
MR PESMAN: Your Honours, in the 17 years since the pooling regime was inserted into the Corporations Act, this is the first occasion on which this Court has had occasion to consider those provisions and, for that matter, the decision of the Full Court was their first occasion on which an intermediate appellate court had the occasion to consider those provisions.
We say that this appeal provides the Court with an opportunity to correct an error in the approach of the Full Court to those provisions, but also provides an opportunity to provide guidance to liquidators in relation to three particular aspects of how that regime operates. Those aspects are these: first, the circumstances in which a liquidator can lawfully continue to operate the business of the company in liquidation, and that has implications both for the pooling regime and in liquidation more generally; second, the present requirement that the particular property be in use or for use rather than the past tense requirement; and third, the requirement that that use be in connection with a business carried on jointly.
Each of those matters match the three propositions in paragraph 1 of the outline I hope the Court has received, but in the paragraph 1 of the outline each of those is specific to the circumstances presently before the Court. It is useful to commence by dealing with those provisions in a general sense by reference to section 579E. That provision is at page 117 of volume 1 of part A.
It is useful to go through it in a little detail to make good some of the propositions we advance, certainly in the outline. The Court will see that the relevant date for that question to be considered – that is, if the gateway is met – is the date on which the court makes the orders, and that appears in the words:
If it appears to the Court that the following conditions are satisfied –
being the opening words of subparagraph (1), or subclause (1). There are then two sets of conditions which must be satisfied before a pooling order can be made. The first in (1)(a) is never likely to be controversial – that is, that each of the companies in the group is being wound up – and as the Court knows, both SAP as we describe it and SAM as we describe it met that condition.
GAGELER CJ: “Group” is not defined.
MR PESMAN: No, it is not, and Justice Barrett dealt with that question in Lombe, which we might come back to, to essentially say that it has its ordinary meaning, it is not a term of art, so that a group can be any combination of companies.
GAGELER CJ: Two or more companies can be a group.
MR PESMAN: Yes. That then leads to the four conditions in subparagraph (b), only one of which must be satisfied. There is no suggestion in this case that the entities are related and that, to a degree, answers your Honour the Chief Justice’s question a moment ago. Second, there is the potential requirement that the companies be jointly liable. The Court will observe we had a notice of contention in the Full Court relating to that subject matter, but we do not seek to re‑agitate that now. What is more interesting is the third and fourth requirements, and interesting in this sense – the third requirement is that:
the companies in the group jointly own or operate particular property –
and the fourth requirement is:
one or more companies in the group own particular property –
The observation I wish to make about that is that there is no case falling in category three that would not also fall in category four. Now, that is not merely a curiosity for this reason: because it directs attention to the three requirements in subparagraph (iv), and the particular point I am making is that only the third of those requirements requires anything to be joint between SAP and SAM. That is so because only one of the companies needs to own the particular property, and second, only one or more than one of those companies needs to use that property for the particular purpose. The only aspect of the definition that is required to be joint is the last, and that is that the business be:
carried on jointly by the companies in the group –
and that will be of some significance when we come to look at the chose in action alleged by the appellants.
GAGELER CJ: Do you accept that the business or undertaking must be one that is being carried on jointly at the time of the making of the order?
MR PESMAN: No, and I will take your Honour to both Re Lombe and in Justice Yates’ decision, where he ‑ ‑ ‑
GAGELER CJ: So, the “in connection with” can be in connection with a past undertaking?
MR PESMAN: Yes. Now, that is not, to a degree, how we put the case, because we say it continues, and we will defend Justice Markovic’s reasons in relation to that.
GAGELER CJ: But if it is right, why is it not enough?
MR PESMAN: It is enough. But this – I am sorry to get slightly out of order ‑ ‑ ‑
GAGELER CJ: No, no – I am asking you questions.
MR PESMAN: No, but – I will answer the question. Your Honour the Chief Justice’s question assumes particular significance in relation to when the cause of action arises, because our position is the cause of action arises before 1 July 2016, and it is clear beyond argument that to that date – as Justice Yates and Justice Beach would describe it – the original business was still continuing at that date. So, the answer to your Honour’s question: that was a long‑winded way of saying yes.
EDELMAN J: At some stage, you are going to come and tell us what the cause of action is that arose at that time.
MR PESMAN: Yes, and I am going to – yes, and I will do that directly after I have finished with this section and two other provisions of the Corporations Act.
BEECH‑JONES J: Mr Pesman, just on your answer to the Chief Justice’s question, is that how, just in the ordinary course, you say a trade debt or a trade receivable of a group would come in under the pooling scheme? That is, one of them was acquiring the debts as the business rolled through?
MR PESMAN: Yes, but the answer is slightly more extensive because there are in the present circumstances two possibilities: first, that identified by Justice Markovic in dissent, but the business continues post‑1 July, and the second, as your Honour Justice Beech‑Jones put to me, it stops at that date but there are still debts outstanding.
BEECH‑JONES J: Yes, so it is in connection with the old business, as it were.
MR PESMAN: Yes, and pausing immediately there, although we have both at various points referred to authorities on the subject of what “carrying on business” means, the present provision is as broad as it can be in relation to that concept because of the words “in connection with”.
GLEESON J: Although it is “use, in connection with”. Could “use, in connection with” include increasing recoveries in the liquidation of the companies for the potential benefit of the business’ creditors?
MR PESMAN: I cannot see why not. Sorry, that is a bad way of saying yes, your Honour. Just to finish where I started in relation to the provisions, there are two important safeguards in relation to the pooling regime. The first is that contained in subparagraph (1), that the court must be satisfied the order is “just and equitable”, and the second is in subparagraph (10) at page 118, where a pooling order cannot be made if to do so “would materially disadvantage” one or more creditors.
GAGELER CJ: Now, Mr Pesman, the same language that appears in section 579E is replicated in 571 without at least one of those safeguards, I think, the “just and equitable” ground.
MR PESMAN: Yes, but that is the circumstance in which the liquidator does the pooling, not the court, and it has a separate protection in the requirement of the involvement of the creditors.
GAGELER CJ: Presumably, the words mean the same in the two provisions.
MR PESMAN: Yes.
GAGELER CJ: Does section 571 have any bearing on the construction of 579E?
MR PESMAN: Not for the present purposes, though I cannot say this is in the – as a matter of history, the liquidator first attempted that route and then went to the court.
GAGELER CJ: In the circumstances of this case?
MR PESMAN: Yes.
GAGELER CJ: Thank you.
MR PESMAN: Finally, before we leave the provisions, as is clear from (2), the effect of the pooling order is to make all of the assets available to meet all of the liabilities, excluding any inter‑company loan balances. Although not now particularly relevant, the obvious benefit of the regime is to promote fairness and efficiency in the conduct of the liquidations.
It is convenient now to go slightly out of order, just to draw the Court’s attention to section 493 and 477(1) ‑ ‑ ‑
EDELMAN J: Just before you do, you do not rely on subsection (iii), although you say that everything in (iii) would fall within (iv). That is ‑ ‑ ‑
MR PESMAN: The case was conducted only on – well, apart from the earlier reliance on (ii), only on the basis of (iv).
EDELMAN J: Yes.
MR PESMAN: The reason I am taking the Court to 493 and 477 is they assume some – we say – unnecessary significance in our friends’ submissions. The ultimate submission I would make is that 493 and 477 do the same thing – one being a prohibition with an exception, the other being a permission subject to conditions – so that in 493:
The company must . . . cease to carry on its business except so far as is in the opinion of the liquidator –
Continuation is:
Required for the beneficial disposal –
We say that is conceptually no different to what appears at 104 in 477(1)(a), which in more or less the same language, permits the same activities. We say they achieve the same end, and there is simply no question of primacy inconsistency between them.
Could I then refer to the first matter, and that is the question of the ability of the liquidator to continue the business of company liquidation. There are four aspects to that question.
GLEESON J: Mr Pesman, before you get to that, is the reason that you rely on subparagraph (iv) rather than subparagraph (iii) that you accept that one or both of the companies has an independent cause of action to recover the $300,000?
MR PESMAN: That is one of the reasons, yes. Could I answer that question – I am sort of circling around your Honour Justice Edelman’s question. I will answer it completely, but to the extent that one of the causes of action relied on is the breach of directors’ duties, then that can only be – then each of SAP and SAM having a separate cause of action.
I was about to list the four matters relevant to the first question. The first is, with respect, Justice Beach was not correct in saying that joint continuation of a business is not lawful post‑liquidation. And while one normally argues that kind of matter by reference to analogy, in fact the facts here demonstrate that to be incorrect because the business continued after at least SAM went into liquidation on 7 April 2016, and we know that because the business was sold as a going concern, which sale settled on 1 July 2016.
STEWARD J: Is it the same business?
MR PESMAN: Yes, and I will come to this. It is exactly the same business.
STEWARD J: There is a decision of this Court in a case called Modern Permanent Building and Investment Society (in liq) v Federal Commissioner of Taxation (1958) 98 CLR 187, where Justice Williams took the view that when a company commences its dissolution, it is not the same business as the business it formerly carried on.
MR PESMAN: Yes, but that is not this case because of the different dates for the liquidations.
STEWARD J: Well, the point of his Honour’s decision is that it is one thing to be carrying on an ongoing business, it is another thing to commence a distinctly different activity, namely that of bringing account all your debtors, paying out your creditors.
MR PESMAN: Yes, but that, in the present case, does not commence until 1 July.
STEWARD J: All right.
MR PESMAN: And that is why there is particular significance to some dates I will come to presently.
STEWARD J: Will you then deal with Justice Beach’s statement that in the SAM’s case:
SAM had ceased trading three years before it was placed into liquidation.
MR PESMAN: Yes, I will, because that cannot be right in circumstances where it is essentially agreed that SAM was providing the equipment for SAP to use in the business. I think his Honour might have intended to say “before deregistration”.
STEWARD J: He also says then:
once in liquidation, SAM had no funding, no assets and no prospects of recovery –
and it did nothing prior to its deregistration.
MR PESMAN: That, as a matter of fact, is incorrect, because it provided the assets for use in the printing.
STEWARD J: You will take us to the findings of the primary judge that demonstrate that at some point – when you get a moment?
MR PESMAN: Yes. Mr Rose will get to work now but, yes, your Honour.
STEWARD J: Thank you.
MR PESMAN: I am sorry, your Honours. The second point is that the cause of action accrued by 5 May, not 1 July, a date at which SAP was not yet in liquidation. The third point is, to say at the outset, that this issue is only relevant if I failed to persuade the Court that Justice Markovic was correct in her analysis of the carrying on of the business, because, as the Court knows, her Honour found that the business carried on, albeit in different aspects post‑1 July. Fourth, and finally, our essential point is that even if the printing business ceased on 1 July 2016, that was after the cause of action accrued, and that comes back to your Honour the Chief Justice’s question about when the business must be carried on.
I can now come to, finally, your Honour Justice Edelman’s question. Your Honours may have observed that in both the written submissions and the outlines, it is said that I did not adequately explain those causes of action in the Full Court, a suggestion that is at least plausible, and I will suffer the purgatory of having my submissions passed by Mr Walker in due course, which I will bear with such grace as I can. But the important point is not what I said, the important point is what the Full Court found about those causes of action, and that was a matter addressed by both Justice Yates and Justice Markovic.
Before I come to their discussions of those causes of action, to return to what I said a moment ago, could I just lay out all of the facts, of which there are six relevant to that inquiry.
GLEESON J: Did the Full Court have the pleading?
MR PESMAN: I do not believe so, but her Honour – there is no pleading in the Supreme Court. It has been commenced by an originating process and a supporting affidavit, though, oddly, one paragraph of Justice Markovic’s reasons does read as if the pleading was available, so I think her Honour is summarising what I said not relying on a document, and I will come to that in a moment – it is paragraph 226, but we will come to that.
Those facts or dates are these: on 7 April 2016, SAM went into liquidation; on 4 May 2016, the agreement for the sale of the business with Print Warehouse was executed, and on the same day, the invoice for $330,000 was issued by McMillan Group Services to Print Warehouse; on 5 May 2016, that invoice was paid; on 13 July 2016, completion occurred of the sale contract, which was in fact slightly before the date provided for in the contract ; on 30 July 2016 completion occurred of the sale contract, which was in fact slightly before the date provided for in the contract.
There are two additional facts, both of which appear in Justice Markovic’s decision in the core appeal book at page 80, and those are at paragraphs 176, where her Honour sets out the terms of a letter from McMillan’s lawyers to Mr Warner, who was their receiver, which included:
A much stronger offer was received from Print Warehouse Australia. This purchase price was reduced at the last minute and McMillans –
I should say that Robert McMillan and Julie‑Anne McMillan are father and daughter, not husband and wife, but the McMillans:
agreed to the reduced purchase price.
And your Honours will also see at 179 the McMillans in fact did, for the purposes of some proceedings between them and the firm of directors, allow that amount to be applied to the secured debt. What arises from all of those facts is that the Full Court, we say, understood perfectly well what the causes of action and which are now being maintained in Supreme Court. At core appeal book page 53 in the reasons of his Honour Justice Yates, your Honours see, at paragraphs 33 to 35, three causes of action are identified.
GLEESON J: Sorry, what was that reference?
MR PESMAN: Core appeal book 53, paragraphs 33 to 35. I am sorry, your Honour Justice Gleeson. The first cause of action is for breach of the – we allege that the McMillans were shadow directors for section 9 purposes of each of SAP and SAM, and we say that by causing the purchase price to be reduced and money to be diverted to MGS they breached those duties.
STEWARD J: Can I ask, what is the factual allegation that links the letter sent on 4 July, alleging the reduction in price, and the invoice?
MR PESMAN: The inference to be drawn is that because the contract of sale and the invoice are on the same day, the purchase price was reduced from $1.6 million to $1.3 million and the difference was made up by that invoice.
STEWARD J: Why do we draw that inference? We just have a bare invoice being sent. Do you allege that no services were provided or ‑ ‑ ‑
MR PESMAN: No, we allege those services were not provided and it was for that reason that ‑ ‑ ‑
STEWARD J: And what is the basis for that?
MR PESMAN: It is an inference to be drawn from what appears in the letter from the McMillans.
STEWARD J: The letter does not tell us how much it was reduced by.
MR PESMAN: No, that is an inference to be drawn from the two facts.
STEWARD J: I see. All right, thank you.
MR PESMAN: If we are ultimately wrong about that in the Supreme Court, we will look foolish, but it is not a question to be determined by this Court in what would ‑ ‑ ‑
EDELMAN J: But ultimately all the Supreme Court claims in this respect revolve around what might be described as an allegation of diversion of the sale proceeds to MGS.
MR PESMAN: Yes, I have struggled with this, as your Honour will have seen in Full Court. It is not so much the diversion of the sale proceeds, it is that the sale proceeds were not the amount they should have been because we know that Print Warehouse executed a contract with a sale price in it and we know that that sale price was paid. We could not sue Print Warehouse for not having paid the purchase price, because it did. The problem is that the purchase price was improperly reduced.
EDELMAN J: It makes it a little bit difficult, once you accurately put it in that way, to talk about money had and received.
MR PESMAN: Except that that money was for the use of SAP and SAM ‑ ‑ ‑
EDELMAN J: The money that did not exist.
MR PESMAN: The money that – MGS had received money that would otherwise have been paid to SAP and SAM, and we say that is sufficient for the money having received claim.
EDELMAN J: If a contract had been made that did not exist.
MR PESMAN: Not so much that as at the value of the business was reduced by that amount because that amount was paid out.
GLEESON J: But it also is problematic for the time of the cause of action, is it not?
MR PESMAN: We say no, because the money was already gone at 5 May. In any event, we say it is clearly on argument that the statutory duty causes of action arise as at the date of diversion, and that is enough. To return to something your Honour Justice Gleeson asked me, your Honour will see that Justice Yates, in each of 33 and 34, says:
this “property” cannot be jointly owned by SAP and SAM.
That is correct, but that is not the requirement of section 579E(1).
STEWARD J: Can I ask you one other question. I am sorry to disturb your submissions, but what do you say about the point that both SAP and SAM were independently being managed by a liquidator in one case and an administrator on the other at the time of the date of sale? Why would we infer that these independent officers would have agreed to a reduction in price? Is there something more that you need to allege?
MR PESMAN: That would require a detailed examination of the affidavits and originating process ‑ ‑ ‑
STEWARD J: Just for present purposes, do you not have to allege that, at least to one of your courses of action, that both of those subjugated themselves in breach of their duties under the Corporations Act?
MR PESMAN: Yes. Can I go out of order, because a number of these questions relate to the sale contract and it might be convenient to immediately go to it.
STEWARD J: I did not want to take you out of your order, I am sorry.
MR PESMAN: Be that as it may.
STEWARD J: This is the respondent’s book of further materials?
MR PESMAN: This is the respondent’s book at page 5. Because this exposes some of the difficulties with his Honour Justice Beach’s reasoning about the requirement that the liquidations be conducted separately. Your Honour sees at page 5 that the business is sold as a going concern, and your Honours see that SAP and SAM are jointly defined to be the “seller”, in the singular. That appears again at page 6. “The Seller”, in the recitals at A, is defined – that is, that they are both the owners of the assets – and the business is conducted by both of them, and that is in the definition at 1.1 on page 7.
The purchase price is defined at page 8 as $1.3 million, and that purchase price is not in any way divided between SAP and SAM. They have a joint entitlement to be paid the purchase price, and its division between them is a question for another day. The particular significance of that in relation to his Honour Justice Beach’s reasons is that his Honour elided two distinct concepts – and I will come back to this – being, first, that the liquidations were necessarily required by law to be conducted separately, which is plainly correct, but that had an effect that any attempt by those companies to get in assets also had to be conducted separately, and that is not correct.
So, for example, in the proceedings that the liquidators will have commenced, if they had done it without pooling, it may be that they will get a judgment for a particular amount, and that could be obtained jointly. What cannot be done jointly is the division of those assets between the two companies in liquidation. It elides those two concepts. To return, to finish the point I was making, on any view, the proceedings for the breach of directors’ duties arise as at 5 May and it is not necessary that both of the companies have both of those causes of action.
GLEESON J: Those causes of action are different particular property from the cause of action of money had and received.
MR PESMAN: Yes. One is a common law money count, the other is a claim for compensation for breach of statutory duty.
GLEESON J: I just wonder about that, and your answer to the question that you were relying on subparagraph (iv), because of those separate causes of action.
MR PESMAN: Yes. The moneys had and received action may well be joint, but it does not need to be, for my purposes.
GLEESON J: Right.
BEECH‑JONES J: Just for my purposes, for the moneys had and received, you agree there was never any moneys had?
MR PESMAN: Yes, and it is sufficient – again, it is sufficient for my purposes that one of those causes of action arise as at 5 May, it is not necessary that they all do.
EDELMAN J: And one of them being either the breach of directors’ duty or the breach of fiduciary duty in equity or this money had and received.
MR PESMAN: Yes. And to ‑ ‑ ‑
GLEESON J: But if it is the breach of directors’ duty, you do not need the pooling order.
MR PESMAN: Well, whether or not I need it, I am entitled to it.
GAGELER CJ: In respect of that cause of action alone? I mean, are we treating each of the three potential causes of action as particular property, or are you saying – are you wrapping them up and saying, well, it is enough that one of them ‑ ‑ ‑
MR PESMAN: The way it is described is the chose in action is – but that chose in action has three separate choses in action contained within it.
BEECH‑JONES J: Except this, though, the analysis of “use” and “business” may be different, depending on which it is. There might be a difference between, you took my money, and you breached a duty to the company.
MR PESMAN: Well, at a level of the theory, I accept that, but not in the particular circumstances in this case. I had said that I would provide a reference to where Justice Markovic analysed the causes of action, and her Honour does that at paragraph 226, at core appeal book 94. To the extent that I was unclear in my own description, there was no lack of clarity in what her Honour says in that paragraph.
Could I then turn to – as regards to the second and third elements with which I commenced these submissions, it is convenient to deal with them, in a sense, seriatim by going through the judges’ judgment separately, which is slightly out of the order of the outline but it avoids the need to bounce between the three judgments, and it is also convenient to start with the reasons of his Honour Justice Beach because his Honour has, in effect, decided against us for more reasons than his Honour Justice Yates.
Those reasons, relevantly – and while I am finding the page I will make this observation: although the Court has been burdened with a large quantity of material, we say ultimately the analysis of each of the judges of the Full Court and his Honour Justice Rares was brief, and appropriately brief, because, we say, the issues confronting the Court are not as complex as the volume of material suggests.
GAGELER CJ: I know you are about to take us through the detail of the judgments that you are challenging, but are you able to state in fairly short‑form what your case is positively?
MR PESMAN: Yes. First, it is permissible for a liquidator to continue a joint undertaking post the liquidation of the company of which that person is the liquidator. Second, her Honour Justice Markovic was correct, that the joint business of SAP and SAM did not cease on 1 July 2016, by reference, for example, to the bankruptcy cases, so that as at the relevant date, being 2 December 2021, the chose in action was both in use and for use by SAP and SAM.
Just pausing – I am sorry, I will come back to that after I have actually answered your Honour the Chief Justice’s question. Third, the joint business or undertaking was either the joint business concluding on 1 July, in which case the cause of action had already arisen, or, our primary position, it continued. Could I just return then to pick up on the use, or “for use”. The words “for use” – as his Honour Justice Beach, we say, correctly finds – means available for use, which does entail an element of future use.
EDELMAN J: Which does not?
MR PESMAN: Does, because the words “for use” must be adding something to the present tense.
EDELMAN J: Yes.
GLEESON J: I think it might be important to characterise the business because, obviously, the printing business was sold, and so whatever the business was after the business was sold was something different.
MR PESMAN: With respect, that is a conclusion which the majority reached with which we do not agree, for the reasons identified by Justice Markovic, which is the printing business continued in different aspect after that date and continues until all of the elements required for trading come to an end, and that had not then occurred. I will, towards the end of the submissions, take your Honours through the way Justice Markovic approached the problem. To repeat something I said at the special leave, I hope to do that in a slightly more sophisticated way than saying, she was correct for the reasons she gave.
The relevant part of Justice Beach’s decision commences at core appeal book 71, and the conclusion at paragraph 134. The essential basis for his Honour’s conclusions appears at 136, which is the conclusion we say is in error, that the choses in action arose after the companies were placed in liquidation – that is, both of them. His Honour then – and this is something that is picked up by our friends in both the written submissions and in their outline – is talking about a claim to the surplus proceeds of sale, and we say, whatever else that is, that is not a correct characterisation of what we seek.
The reason that has been latched on is that your Honours know from Australian Hotel and Re Lombe that the surplus proceeds can never be particular property, so that if the shutters have closed – everything has been sold – and all that is left is a fund in the liquidators account, that is not particular property, and we accept that, but it is not part of our argument.
GLEESON J: So, if the chose in action arose after early May, you fail?
MR PESMAN: I fail ‑ ‑ ‑
GLEESON J: Does your case depend on that?
MR PESMAN: No.
GLEESON J: All right.
MR PESMAN: That is why I described it as not our primary case. It does not fail for this reason: if Justice Markovic is correct, the date 1 July 2016 is not relevant to the inquiry. If Justice Markovic is not correct, the date 1 July assumes significance because if the cause of action arose before that date it is in connection with a business then being conducted.
To answer your Honour Justice Gleeson’s question a bit more completely, we say we win anyway, but we also win for this reason. Now, particular problems emerge in paragraphs 141, 142, and 148. This is what we say is the more general difficulty with wider application, and that is the conclusion, first at 141 in the last sentence:
Absent legislative authority, a liquidator cannot consolidate assets and liabilities of different companies and creditors can only share in the assets of the company against which they are entitled to lodge a proof of debt.
That is correct, but the problems begin at the next paragraph where his Honour says:
Absent pooling, each of the liquidations of SAP and SAM were legally required to be conducted separately by their liquidators.
That is also correct. However:
There accordingly could be no alleged joint undertaking jointly carried on by SAP and SAM.
Now, his Honour has not actually explained that conclusion, and it does not require much thought to reach the conclusion that that cannot be right. There is nothing in section 493 or 477(1) that supports that conclusion. There is nothing in the Corporations Act or authority that supports that conclusion. There is absolutely no reason in principle why a liquidator faced with a company liquidation cannot continue a joint business if that is expedient to do.
EDELMAN J: Would one not read that sentence as meaning there accordingly is no legal requirement for a joint undertaking to be carried on jointly by SAP and SAM?
MR PESMAN: Yes, were it not for what appears at the bottom of 148, over the page at 74.
EDELMAN J: Well, in the absence of any agreement, then that would fit what is said at 142. Because, in the absence of any agreement between SAP and SAM, or joint common undertaking, there is no legal requirement to do so.
MR PESMAN: But that, with respect, reverses the requirements. There is no legal impediment to two companies in liquidation carrying out a joint business, we say. His Honour has, we say, elided the two different concepts. Obviously, liquidations need to be conducted separately, but there is no reason why the separate conduct of the liquidations cannot entail the carrying on of the joint business. That is what his Honour has said in those paragraphs.
Now, I accept that it may be possible to construe his Honour’s reasons as relating something else, but that is not what the terms of those sentences say. That is a significant problem, because there are obviously advantages, in a very wide sense – for example, joint venturers – for a company in liquidation to continue a joint business. To make it more specific, if, for example, SAP and SAM had commenced the proceedings prior to the second liquidation – to either liquidation – it could not be the case that those proceedings could not be continued as a joint enterprise just because one of the plaintiffs went into liquidation.
Now, there would be complexities at the end of those proceedings when one deals with the process if they are successful, but that does not affect the anterior question of whether that can be conducted jointly – and we say it can be and it was.
STEWARD J: You will return at some point, though, to the proposition in Justice Beach’s judgment which is that factually that did not happen here.
MR PESMAN: As we continue, that is exactly where we are going, Justice Steward.
STEWARD J: Thank you.
EDELMAN J: The joint venture that you say continued here was the sale of the business.
MR PESMAN: Both the sale of the business and the trading of the business to the date of sale, because it was sold as a going concern.
STEWARD J: But that did not happen once completion took place. There was no more trading by SAP after that date.
MR PESMAN: Correct, though it did continue to – I am going to over‑complicate it. It did continue to employ the employees.
STEWARD J: It received in its bank account the $1.3 million. Was any part of that $1.3 million deployed in the liquidation of SAM?
MR PESMAN: No. It was applied to the secured debt.
STEWARD J: I see.
MR PESMAN: Which is why it is odd to talk about surplus proceeds in this context.
STEWARD J: Yes, I see.
MR PESMAN: I was just checking; there is a sea of nodding behind me. To continue with that analysis, the next point is at paragraph 146, where his Honour says that the future use was “problematic”. It is hard to read that as being consistent with what immediately comes after it, because his Honour then says:
The phrase “for use in” means available for use at the present –
That must entail the possibility that the use actually occurs in the future, because, by definition, if something is presently available for use, it is not presently being used. We, in the facts before us, say that we satisfied both, because the chose in action can be used by being held if that is the source of advantage, but we also say that it was available for use, and became used at the point in which the proceedings were commenced. Pausing there, both of ‑ ‑ ‑
GAGELER CJ: “Use” is being used in two different senses? “Use”, you say, is sufficiently satisfied by simply holding, and then the second form of “use” is what – deploying, is it?
MR PESMAN: The second form of “use” is having it available to deploy. I am not sure that is ‑ ‑ ‑
GAGELER CJ: Is that any different from holding? I mean, it seems to me to be the same thing.
MR PESMAN: To a degree, but the words “for use” must mean something, and they must mean something different to “use” simpliciter. I am sorry, I have answered that very poorly. Your Honour the Chief Justice is correct. In the particular circumstances we have here, it will be the same, but that will not always be true.
GAGELER CJ: With other forms of property.
MR PESMAN: Yes. Where his Honour Justice Rares spoke in first instance spoke about the future conduct of those litigations, he was talking about the ultimate deployment, not the statutory test. I will come to where Justice Markovic deals with that shortly.
EDELMAN J: If this argument is right, is the gateway in (iv) not a dead letter? Because there will almost always be a cause of action that is held, and if the just and equitable requirements are satisfied, that would mean that the gateway is there in every circumstance.
MR PESMAN: With great respect, that might be overstating it somewhat, but even if that were correct, given the purpose of the pooling regime, that would be a good thing.
EDELMAN J: Why have the gateways at all, then? If one of the gateways is simply that there is an individual cause of action that the liquidator can bring in circumstances where it is just and equitable to make a pooling order, then you have covered just about everything, have you not?
MR PESMAN: Except that – could I, with great respect, not agree with the premise – it is not axiomatic that there will always be a cause of action available to a liquidator.
EDELMAN J: So, the cases where you will not have the gateway in (iv) are cases where the liquidator cannot find any potential cause of action against anyone, and that is the only group of cases that will not fall within (iv).
MR PESMAN: No. With respect, no, because it still requires that it be in connection with the business, so it could not be something unrelated to the business, for example – sorry, I just need to think that through for a second. In every case where one of the companies in the group has the capacity to sue somebody in connection with the business, that test will be satisfied – yes, your Honour.
I am sorry, I need to retreat from that position slightly. The liquidator has two sources of the ability to bring claims. The first is claims in the name of the company so that – for example, the claims presently under consideration where the plaintiff is the company. There is a second species of claims, which are the particular statutory claims available to the liquidator, including unfair preferences, insolvent trading. Claims of that nature would not fall within the definition. So, if I could retreat twice from what I said a moment ago, first ‑ ‑ ‑
EDELMAN J: That is not a claim that it is particular property owned by the company.
MR PESMAN: Yes. So, the answer to your Honour’s question is twofold: first, there will not always be such a claim; second, it would only relate to a particular type of claim. So, with those qualifications, yes, your Honour. If that is the effect of the way the provision works, that is the effect of the way the provision works, and it is a provision which lends itself to a broader, rather than a narrower, construction.
I was then going to come to what I will call the evidence question, which is the last part of his Honour’s judgment, and that is SAM – and this, we say, is a distraction. Accepting that it is one of our grounds of appeal, section 601AH(5) is also something of a distraction, because the question is to be assessed as at 2 December 2021. As at that date, was this particular property for use or available for use? Answer: yes. At that point, the test is satisfied and is not to the point that nothing had happened in the period when SAM was deregistered, provided that, and it is the fact that, SAM was reregistered before the pooling order was made. To repeat something I said on another occasion in this litigation, the fact that one of those events happens immediately consequent on the other is neither here nor there.
STEWARD J: So, is your contention that, for a nanosecond after being reinstated, the joint business activities sprung up ‑ ‑ ‑
MR PESMAN: They had been revisited by reason of the operation of section 601, yes.
STEWARD J: Yes, sprung up, sufficient to satisfy the gateway.
MR PESMAN: If it does not spring up in that nanosecond, it is difficult to see how it could spring up a year later, for example.
STEWARD J: That is so, notwithstanding that a new liquidator had yet to be appointed to SAM?
MR PESMAN: That occurred on the same – I am sorry, I should have said that occurred in the same suite of orders.
STEWARD J: Okay. Thank you.
MR PESMAN: We need not go to it, but that is at core appeal book 7. Your Honour will find the primary judge’s orders. I am sorry, your Honours, I should have said there are three events that happened, one of which was the reappointment.
Could I then go to Justice Yates’ reasons. As I say, his Honour did not deal with the question quite as extensively as his Honour Justice Beach. Could I start at paragraph 62, to answer the first question I was asked in the course of this appeal, where his Honour says – I am sorry, it is page 58, where:
the “business, scheme or undertaking” carried on jointly by the companies in the group can be a past business, scheme or undertaking.
BEECH-JONES J: What paragraph was that, sorry?
MR PESMAN: I am sorry, 62, and it is the first sentence. The second aspect is what his Honour says – again, with respect, correctly – at 65:
the words “in connection with” . . . include a “use” that is ancillary or incidental –
If your Honours compare what his Honour Justice Yates says at 66, that:
Here, the alleged chose in action is not the surplus funds derived from the sale –
with what his Honour Justice Beach said at 138, here the chose in action is a claim for the surplus proceeds of sale. So, one of the difficulties we have is that the reasons of the majority are not completely consistent, so there is as question as between the majority as to what the chose in action, the surplus was about. Then at paragraph 67, his Honour says that:
this alleged right cannot be presently existing “particular property” that was used, or was for use –
And that is correct. Then his Honour says:
Even more so, the alleged right cannot be presently existing “particular property” that is used, or is for use –
His Honour then says at 68:
In this appeal, none of the parties contends otherwise.
The difficulty with that is that the contention otherwise is recorded at paragraph 72 at page 60, and if we had accepted that neither of those definitions were met, we would not be here. The principal part of his Honour’s reason appears at paragraph 70, where his Honour refers to a primary judge not dealing with a past or present joint undertaking, but a future joint undertaking. For the reasons I have already addressed, that is not the way his Honour Justice Rares analysed it, properly considered.
BEECH-JONES J: Could I ask what was wrong with the phrase “was used”?
MR PESMAN: We did not ‑ ‑ ‑
BEECH-JONES J: You did not rely on it?
MR PESMAN: We did not rely on it.
BEECH‑JONES J: Sorry, yes.
MR PESMAN: Just to deal with that last point, if I could take the Court to Justice Markovic’s decision at paragraph 250, core appeal book 100, your Honours sees her Honour’s – we say correct – explanation of what his Honour Justice Rares was saying at paragraph 97. But the principal point we make is that this was not, in that sense, a future use, it was a presently available for use or being held for use. His Honour then goes on to deal with the evidentiary matter in the same way that Justice Beach analysed that question, and I would provide the same answer that I provided to your Honours Justice Beech‑Jones and Justice Steward.
That then, oddly – to return to what was our principal position, having dealt with the alternative position that the test was satisfied as at 1 July 2016, that emerges from the reasons of her Honour Justice Markovic in dissent. The relevant part of the reasons commences at core appeal book 94, at paragraph 224. I have already directed attention to 236. But the gravamen of her Honour’s reasoning is to look at, in particular, bankruptcy cases, and her Honour has extracted, at 243, an extract from Donoghue v Russells (A Firm) [2021] FCA 798, which is in the books, but it is not necessary to go to it, because the relevant passage is set out at 243.
The first submission to be made about that is to go to the relevant provision of the Bankruptcy Act, which is in volume 2 of Part B at page 142, in particular, section 43(1)(b)(iii). The purpose of going to that provision is to say that that is, in our respectful submission, less wide than the “in connection with” use of that phrase in 579E, so, a fortiori, what her Honour says about the bankruptcy cases applies to the construction of 579E(1).
The short point her Honour makes is that the business continues until the activities identified in that paragraph are complete. And if that is so, the business continued as a joint business up until the deregistration in 2018, and started again on reregistration, and continues now. So, we say, in short, that we rely both on a present business, but if that is not right, we rely on the past business.
EDELMAN J: Why would not an action for surplus proceeds then fall within 573E(1)(b)(iv)?
MR PESMAN: To a degree, it depends on what one means by surplus proceeds, because there are surplus – I will unpack that. One does not sue for surplus proceeds, one sues for the purchase price or whatever integer there is. If, in the event it turns out, at the end of the exercise, those proceeds are greater than what is necessary to meet the obligations of the company, at that point they will be surplus proceeds to which section 579E(1)(b)(iv) applies, but that will not be right at the time the proceeds are sought to be brought in.
GAGELER CJ: So, you draw a distinction between money sitting in a bank account and trade debts?
MR PESMAN: Yes. The surplus proceeds in Lombe and in Australian Hotel were everything was finished and there was an amount of money left in a bank account. We are nowhere near that point in the present litigation.
BEECH‑JONES J: I was going to let you – you are talking about surplus to creditors.
MR PESMAN: Yes, well, it is hard to understand what surplus could otherwise mean, it has to be surplus to something, and it must be surplus to the obligations of the company. So, in the ordinary course, it would be, for example, available for distribution to shareholders.
STEWARD J: Can I ask you this question. Assuming for the moment that it is correct that liquidators may undertake an activity jointly – I will not use the word business, just “activity” – and assuming that when SAM was reinstated and its liquidator was appointed it was thereafter to continue the liquidation process of SAM, how, as a matter of fact, do we know that it was being conducted jointly with the liquidation of SAP?
MR PESMAN: I am sorry, I have lost the thread of that.
STEWARD J: I will start again, I apologise. Assume for the moment it is accepted that liquidators of different companies can undertake an activity jointly, so that Justice Beach was wrong in that passage you took us to. Your case is that upon SAM being reinstated and a liquidator being appointed to SAM, the liquidation of SAM commenced or continued at the same time SAP’s liquidation is also continuing. How do we know, as a matter of fact, that there was an activity of those two liquidations that would be done jointly?
MR PESMAN: I am struggling with the word “activity” in this. It might be better to ‑ ‑ ‑
STEWARD J: Well, use the word “business”, then.
MR PESMAN: Yes.
STEWARD J: What is being done jointly at that stage by the liquidators of SAM and SAP? Conceding that it is the same person.
MR PESMAN: What is being done jointly is the joint exercise of the chose in action, because what is being done jointly is not the ultimate distribution but the getting in of the – and it is because the purchase price is undistinguished between them in the sale contract.
STEWARD J: So, you say it is the holding of the cause of action jointly?
MR PESMAN: At that point, yes.
STEWARD J: But I thought you said earlier that you did not need to show that any asset was held jointly.
MR PESMAN: I did not need to show it was jointly for the former business.
STEWARD J: All right, thank you.
BEECH‑JONES J: So, to the extent we are talking about in connection with the past business of printing you say, look, we do not need to show that is a joint cause of action, is that right, is that what you were just saying? But if the analysis is in connection with the joint business post‑liquidation, you do need to show it is a joint chose in action?
MR PESMAN: The particular – sorry, no. The particular property does not have to be joint.
BEECH-JONES J: No, I understand that.
MR PESMAN: The business has to be joint.
BEECH-JONES J: Yes.
MR PESMAN: And the business at that point is the getting in of the assets of the printing business, which was joint. I am sorry; I will answer that slightly – not necessarily better, but more extensively. The business as found by her Honour Justice Markovic was the joint conduct of the printing business – that is, SAM provides the assets, SAP provides everything else. It is that business that her Honour finds continues beyond 1 July.
GLEESON J: Completion of the sale of the business.
MR PESMAN: Yes.
GLEESON J: Mr Pesman, a bank account could be particular property.
MR PESMAN: As it was in Watch Works?
GLEESON J: Yes. Are you able to explain why subparagraph (iii) and (iv) are framed by reference to “particular property”? What is the significance of that?
MR PESMAN: No, but again, an extended no. We have done quite a lot of work on the origins of these provisions, which date back, as I said, to the 2007 amendments to the Act. Those amendments in fact had their source in the 1997 report into the Corporations Act, and I am going to launch into something which I found interesting but not necessarily relevant to the conclusion of the appeal.
The existence of the pooling regime does not find any particular – it actually has its origins in common law bankruptcy cases where there was a power to consolidate the estates where it was convenient, or necessary where they were so intermingled. And although the provisions have existed in New Zealand since the 1950s, they do not exist in the United Kingdom, and in America there is a thing that is called substantive consolidation which is to similar effect. I have gone wildly off‑piste, but the answer to your Honour’s question is we do not know, and there is very little clue in the underlying materials. It must be accepted that, perhaps, these provisions are not as clearly drafted as they might have been. As I say, that went somewhat off‑piste.
The only other thing I wish to say in relation to the utility of the bankruptcy cases is to draw attention to two aspects of my friends’ submissions and the two High Court authorities on which they rely. If I could take the Court briefly to the respondent’s submissions, and in particular, paragraph 13. The two authorities that have been included in the joint book at the requests of the respondents are Hope v Bathurst City Council (1980) 144 CLR 1, and that appears in footnote 27, which is, as I said, in paragraph 13, and your Honour sees the reference to Justice Mason saying:
A “business” is “a commercial enterprise as a going concern” –
I just want to take your Honours to that decision, which is in Part C of volume 3, at page 149, and to make this point – and it appears from the headnote – that the particular carrying on of business that this Court was there concerned with was the carrying on of the business of grazing. That qualification takes the analysis of the Court of what is required to meet that test well out of the present discussion. And that emerges, for example, at – it is in page 153 of the volume, and the second‑last paragraph on that page, where his Honour Justice Mason, as his Honour then was, points out that “business” has “many meanings”, and the obvious point that the construction depends on the circumstance in which the word is used.
More problematic is the reliance on Smith v Capewell (1979) 142 CLR 509. That is so because that case – and in particular the judgment of Justice Gibbs, as his Honour then was – is relied on to support the proposition:
To “carry on business” signifies a course of conduct involving the performance of a succession of acts, and not simply the effecting of one solitary transaction.
However, when we go to what his Honour actually found, at page 519 – which is at page 164 of the book – his Honour says:
A single transaction may amount to the carrying on of a business, although no other transaction has so far been effected –
which is pretty much the opposite of what our friends say his Honour said. But that leads to this observation, which is one can carry on business if there is one transaction if, as in the present case, there is only one thing left to do, and it should not affect the construction of 579E if one has one cause of action to recover $300,000 or 10 causes of action to recover $30,000. It put an unnecessary and arbitrary block on the ability of that section to operate if there is some arbitrary number that is greater than one.
GLEESON J: But again, if “use” is ancillary, “use . . . in connection with a business” does not necessarily require use in the course of the business.
MR PESMAN: Yes, quite. And that is why we say the no‑evidence point by Justice Yates and Justice Beach is not correct. I should end with a whimper and say I was not correct, we did not go to creditors first, we just made the application in the Court.
Your Honours, a day will come where I speak for as long as the estimate, today is not that day, may it please the Court.
GAGELER CJ: Thank you, Mr Pesman. Mr Walker, we ordinarily take a break. We will do that now, before you commence your submissions.
MR WALKER: Thank you, your Honour.
AT 11.06 AM SHORT ADJOURNMENT
UPON RESUMING AT 11.20 AM:
MR WALKER: May it please the Court. Can I start by going through the sequence of our propositions up to 7, as quickly as convenient. Turning, then, to dealing with the suggestion that the “connection” referred to in subparagraph (iv) can be a connection with a business long gone from the entities in question, and the “use” being – as it were – a pursuit of the value or consideration said to be inherent in that now‑gone business, hence the reference at various times – and with never, I am afraid, Bullen & Leake‑style precision – to claims to proceeds of sale, or part proceeds of sale, or diversion of value.
Because, we accept, after this morning, that although the parties have, to a degree, reflected what had happened below in their respective outlines of submissions, there is a focus this morning, given some answers by our friend to some of your questions, to whether there can be that severance between chose in action – whatever it may be – and the carrying out of the printing business, which is factually not contentious, for the purposes of the requisite connection.
Now, the propositions, however, upon which we rely, and which find reflection in the common ground of the majority reasons, start, obviously, with what we call in our proposition 1 the need for identification of presently owned particular property. The emphasis is on the need to identify it. I think, as Justice Gleeson pointed out to my friend in question, you will need to identify in order to answer questions about use, and the answer is yes, that is plain to demonstration from any available reading of the provisions to which I am going to come.
In propositions 2 and following – I hope not by any pedantic parsing and analysing, far from it – but by an attempt to tease out from the record, including record of argument in the Full Court, what it is we have as the somewhat moving and nebulous target concerning the particular property. There is no dispute between the parties, there is no difficulty in a chose in action constituting particular property. It may be that some choses in action will not constitute particular property, but for different reasons.
Classically, the chose in action represented by credit at bank following the final disposal of the company’s assets – or, in this case, the group’s assets – will obviously, and on authority, and it being common ground in this case, not constitute particular property. Now, one of the reasons for that being so obvious is that that money is simply going to be dealt with as the accounts of the winding‑up will require by law.
Creditors, rateably, on a deficiency; creditors in full; or, even more happily, creditors in full plus shareholders, rateably. And no one has ever, we think, dared to suggest that that is “in connection with” the carrying on of the business. Can you posit a connection? Of course you can. It is the carrying on of the business that ultimately produced the return which crystallised in the bank account.
EDELMAN J: And there may be a dispute as to how those proceeds be distributed.
MR WALKER: Quite so, quite so. The fact that there may be litigation about it does not mean that it:
is or was used, or for use . . . in connection with a business . . . carried on jointly –
BEECH‑JONES J: Mr Walker, what about a trade debtor of the printing business from, say, 2014? Would that be particular property for use, or do you want to take that on board as you come through your propositions?
MR WALKER: No, I will answer that directly. We do not need to go to the detail of the transaction documents, but it suffices to say that this was a business that had factored its book debts. So, you have other persons involved who are involved in – if I can use a neutral and lay expression – deploying the chose in action, which is the trade debt. In the context of this case, there never would arise the possibility of such a book debt being one about which you would ask the definitional question, is it, was it, used or for use in connection with the business jointly carried on?
In our submission, it would be a remarkable proposition if simply the subsistence of, arguably – and that is all it needs to be – arguably‑unpaid liabilities by customers, book debts, receivables, was in and of itself satisfaction of subparagraph (iv), because they are not being used, they are being collected, that being the liquidator’s main function: getting in the debts.
Now, getting in the debts stands apart from the continuing of the business, and it is not the case that you continue the business in each and every way in which that phrase might be deployed in provisions such as subparagraph (iv) simply because the liquidator is pursuing those who owe the companies in liquidation money. Or, to put it another way, it cannot be said that that chose in action, the common or garden book debt, is one which is capable of being described as one that was used when they were running the business, because we are not talking about the liquidator. It was used or for use by any of them in connection with a business carried on jointly by them. It is simply the product of the carrying on of the business that there are receivables to be got in.
STEWARD J: So, do you say, Mr Walker, that the statutory function of the liquidator to take possession of the assets and to collect the debts and pay out creditors is a distinctly different activity from the business that was formerly carried on prior to the appointment?
MR WALKER: Yes. That is fundamental and explicit in the provisions that we have both drawn to attention that regulate the right – power – of liquidators to carry on businesses.
STEWARD J: That is the point of Sir Dudley Williams’ judgment at in Modern Permanent Building and Investment Society.
MR WALKER: Exactly so. That is why we have drawn to attention, and we happen to use the phrase in section 493 which is used elsewhere as well, if the liquidator forms a liquidator’s opinion – and that is for the purposes of winding up, not for the purpose of carrying on a business; far from it. But if he or she forms that opinion that sale as a going concern would be what the statute calls a “beneficial disposal”, then there is a power to carry on the business. Otherwise not. So, what the liquidator is doing in getting in debts is obviously his or her prime function with a trading concern, and it stands explicitly – not least by reference to provisions such as 493 to which we have referred – apart from the business which has, but for such a liquidator’s opinion, stopped. Now, there is more in this case.
EDELMAN J: That proposition does require the words “in connection with” to be read in a restrictive way, rather than the broad sense in which that phrase would usually be used.
MR WALKER: As your Honour might expect, I will not agree with “restrictive”, but I will say that contextually it cannot be so broad as to comprehend within the requisite relation every sentence in which you can mention the business and the piece of property without committing absurdity. Of course you can say that every chose in action that has any connection – that is that word – with the history of the corporation, including its eventual sale of its business, of course that will be as a matter of language a connection. You can trace through steps of connection. But that would utterly defeat, in our submission, a purposive and contextual understanding of what subparagraph (iv) is doing. Can I perhaps digress to say something about that.
BEECH-JONES J: So, is that saying, if you adopt that approach, what you are actually saying is, any asset of either company where they operated a joint business in the past?
MR WALKER: That is right. In our submission, what that does – I think this is to borrow – I hope, properly – to understand Justice Edelman’s reference to a dead letter, it really is to mean that the gate swings open all the time. You do not even have to put your shoulder to it, it just opens as you approach, and it is all about just and equitable. Now, that might be seen by some people as a desirable piece law reform, but it is, with great respect, beyond what your Honours should do as a matter of interpretation. You should try to give subparagraph (iv) some real meaning.
Now, we say this about all of subparagraphs (i), (ii), (iii) and (iv), they being the suite from which one or more must be shown in order to enliven the discretion to reach a conclusion as to what is just and equitable concerning the making of a pooling order. When one looks in particular at (iii) and (iv), one is looking at a state of affairs ex hypothesi after liquidation has occurred, but by reference to the history up to liquidation, because after liquidation, but for the exercise of liquidator’s powers, business is not being carried on. So, we are looking at a biography of the business – or the corporation, I should say – by reference to a business which is described as one carried on jointly by the companies in the group. The premise is that we have already reached the position of regarding them as companies in a group. Now, there is going to be a deal of circularity, factually, often, in inquiring as to whether a company is one of a group, but mercifully none of that arises in this case.
GAGELER CJ: So, you are saying that the words “carried on jointly” necessarily refer to carried on jointly in the past?
MR WALKER: Yes, and, as it happens, I have to deal with my learned friend’s introduction – I do not know whether it is a revival or a fresh addition – of this notion of a former business. There is a lot in that epithet. It is correct to say that the printing business was a former business of the companies, but it is not correct to say that it disappeared upon liquidation. That is because there was the exercise pursuant to the requisite opinion by the liquidators to continue – or the receivers and the liquidators to continue for everyone’s benefit, of course, because sale as a going concern was, understandably, understood to be more likely than break up and garage sale of apparatus.
GLEESON J: The purpose of 579E, is it something more specific than facilitating recoveries for unsecured creditors in circumstances where corporate structures might get in the way of that?
MR WALKER: Your Honour, at a certain level of generality, that entirely describes the purpose of not just 579E but a great deal of the statute. It addresses the particular aspect, familiar in commercial courts, of groups, collectives of corporations, organising their activities in such a way that there is a greater hole than the endeavours of any one of them. There are very highly formal groups which have accounting and tax consequences, of course, familiar in the construction of business models which have a treasury company, a labour hire company, a management company, an engineering company, et cetera, all directed to the enterprise of building oil refineries in Southeast Asia, for example.
There is that highly formal overt example of a group on the one hand, and then there is something less formal on the other hand. And (iii) and (iv) are, as it were, looking to what has happened, and they do it not by reference to conduct or activities as such, but by reference to identified particular property – you have to be able to describe the property to answer the next questions – about which one can ask this: in (iii), is it jointly owned or operated – operation; there is a reference to what you are actually doing with something – very difficult to apply to chose in action.
And (iv) is as to whether one or more omit. Then comes the common feature in (iii) and (iv), which will give rise to a power in the court, if thought just and equitable, to make a pooling order. This is a very important provision, not an incidental, not something that should go without consideration in substance of the facts of the case. In other words, it is not to be a dead letter, it is opening up a reversal of what would otherwise be separate corporate personality as governing the way in which liquidations are conducted.
GLEESON J: Just when you mentioned operate particular property in subparagraph (iii), would not an example of that be operate a joint bank account?
MR WALKER: I think that is probably right. I do not think there would be any difference between owning or operating a joint bank account – or not a difference that would appear to have much purposive significance in the statute. We are obviously focussing on choses in action in this case, but a bulldozer is an obvious example of particular property that companies in a group may jointly own or may jointly operate. Obviously, enough chattel leases and the like are good examples of how such things can turn out.
The purpose, evidently, of (iii) and (iv) is to make available this power – potentially beneficial power – of pooling, which does, Justice Gleeson asked me, have an effect on the recoverability for certain creditors, who may otherwise be looking only to the least‑monied member of the group. Because of what must be understood to be underlying this as a matter of policy – and I am not looking at any extrinsic material, just looking at the language of (i), (ii), (iii), and (iv) – in (iii) and (iv), the evident policy is that the business has benefited from or has been conducted by the use of this property.
There is the link that stands functionally in the same justification for a power of pooling to exist, as you see in (i), which is related body corporate – or (ii), joint liability for one or more debt or claim. In other words, your fortunes have been linked – and in the past, because the court is always looking at the past. Obviously not looking to anything that is going to happen in the future.
BEECH‑JONES J: So, do you read “for use” as for use but for being wound‑up?
MR WALKER: That is right.
BEECH‑JONES J: So, if you got the combine harvester the day before you were being wound‑up, but never actually used it ‑ ‑ ‑
MR WALKER: But if the liquidator decides, looking at the weather report, better keep operating this business, then there will be a future – but that is easily and unremarkably contained within the language of “for use”, meaning, if you like, available, but also intended for.
BEECH‑JONES J: Or, if they do not, but it was at one point intended for use ‑ ‑ ‑
MR WALKER: That is right.
BEECH‑JONES J: Right.
MR WALKER: That is right. So, it is a matter of history, that does not mean that there may not be, in the liquidation at the behest of the liquidator, future use – that is neither here nor there. It only emphasises that there has to be a history, because the liquidator does not get to conduct new businesses, it can only continue to carry on the business carried on by the company in liquidation. That is what those powers do. They stop the company in liquidation unless, in the liquidator’s opinion, the liquidator should carry on that business – not a new one. And it is not a new business for a liquidator to be doing what liquidators do, that is, get in.
It is for those reasons that this concept of a former business or some new business is completely at odds with basic lineaments of corporate winding‑up, particularly with the statutory provisions to which we have drawn attention. Now, that is why, in answer to Justice Edelman, I say “in connection with” must be referring to a relation between that piece of property and the business that was carried on. The business has to have been carried on jointly, that is, by companies pre‑liquidation.
Of course, the liquidators may do things jointly thereafter. The only one that matters would be to carry on the business because they had formed the opinion, under 493, that they should. And they did, in this case. It was sold as a going concern. But it still requires, with respect to the particular property, that you can look back and say, this:
is or was used, or for use, by any or all of the companies –
We are not talking about liquidators:
by any or all of the companies . . . in connection with a business . . . carried on jointly by the companies –
and that ‑ ‑ ‑
GAGELER CJ: And you accept, I think, Mr Walker, that the proceeds of sale would answer the description of particular property that had that connection with the business of the companies?
MR WALKER: If your Honour is talking about the price to be received from the purchaser, I do not accept in this case, because what was being sold was the business. I do not accept at all. Indeed, I think our success below, and that we urge again here, is based upon an argument that says, when you are selling the business – when you have sold the business – and you receive the proceeds, neither the chose in action to enforce receipt payment of the money nor the chose in action at bank to get the deposit is particular property that is or was used or for use by any or all of the companies in connection with that business which has been sold, because it never was.
That, almost by definition – it is a paradox; the idea that the money left over after you have sold a business is money used in the business or for use in the business. It is a paradox. You have got rid of the business, you have liquidated it, you have realised it. Someone else is carrying on the business if they bought it as a going concern. You have not heard anything, of course, from a friend about the business as it was carried on by its purchaser, because the business was sold – this was not an abortive sale.
Can I come back to what I was saying about our propositions. I am sorry if it appears that we are over‑fastidious with respect to identifying a chose in action, but first you have to identify property. Second, with the concession that that can be a chose in action, one moves to understanding which one that is. Because, as the Chief Justice’s question to me raises, depending upon how you frame it, a chose in action will either obviously not be one which was ever used or for use in connection with the business, because it exists only after business is no longer being carried on by the companies, or ‑ ‑ ‑
GLEESON J: But you accept it would be for use by any or all the companies in the group?
MR WALKER: When you say “it”, your Honour, that is why I ‑ ‑ ‑
GLEESON J: The process.
MR WALKER: I will try to drill down into what “it” is. I do not want to repeat all the detail that we have tried to capture in the propositions we put and the references to submissions there set out in our outline – 2, 3, 4 and 5 ‑ ‑ ‑
BEECH-JONES J: If your business was debt factoring, you might be getting close to a chose in action that was used in the business, might you not? Not this case, of course.
MR WALKER: No. I am chary of uttering generalities as if they are axiomatic concerning something as fact‑specific as the existence of a chose in action and its relation – I am trying to avoid the word “connection” at the moment – to one of its owners or its owner and a business carried on by two or more companies in a so-called group. But we can say this about this case, that we do not think your Honours are being pressed with a chose in action on the contract of sale for an unpaid purchase price. We do not think you are being pressed with that.
The courts below have had that raised from time to time, and it is not entirely expunged from the writing, but one can readily see that would not, in any event, avail – to enforce the contractual promise to pay the full price is, with respect, not a claim, not a chose in action which was itself used in the past or being used in the present, or, for that matter, for use in connection with the business carried on jointly by the corporations. But in any event, we do not have that straightforward, I was promised 1.6 and I only got 1.3 – they do not do that. Neither has the word “rectification” crossed my friend’s lips, so it is not said that the contract was really a contract for 1.6. Money had and received is a furphy. That is a claim ‑ ‑ ‑
EDELMAN J: It is a form of action, not a cause of action.
MR WALKER: There is that, for a start. We are simply trying to posit what I am going to call the money trail necessary for such litigation falters completely, it will not work. In particular, the notion of raising that on the basis – and I quote my friend this morning – that the money was already gone by 5 May, as if that money were money that the companies had paid away, is, in our submission, just completely counterfactual. It will not go anywhere.
We think that which remains on its feet in the fight is the notion of company officers – it does not matter, de facto or not – being involved in some way as to give rise to litigable claims against them with respect to the management, as it might be called, of the companies’ affairs – that is plural, companies’ affairs – so as to have produced this bifurcated realisation of value – 1.3 under the sale of the business, and I stress, the whole business went, and 300 plus GST for services with respect to printing machinery, et cetera.
So, if we are to understand that as the claim, then the chose in action seems to be one or other or both of the familiar statutory – query common law, but certainly fiduciary – obligations with respect to those company officers enforceable by the companies to whom they owed those duties. Now, however, and we think that is as close as one can get to claims by the companies to this amount of money, which, as your Honours will have noticed, is utterly immaterial for any creditors in any of these windings‑up. It is not enough to pay off the secured creditor. This is all done as a platform for something else.
When one enquires of that cause of action for what is colloquially and unhelpfully called the diversion of value, one may or may not come with the trappings of saying, well, there is something wrong with that contract for services because the services were not provided – that is not before this Court, and you can pay in advance for services, of course – or that there was some other vitiating feature about there having been this bifurcation of a realisation, et cetera.
It does not matter how one tracks that, they all come back to this: they arise from – they are in connection with – the finishing off, the ending, of the connection of those companies with the business by reason of its sale. All of them arise not in connection with the business carried on but in connection with the sale of that business, which, in our submission, is something which would defeat the evident purpose of this foundation for the pooling order power to be available by reason of totally looking beyond the history, the era, when the business was carried on.
You cannot say the asset existed while that business was being carried on by the companies, you cannot say that it was for use, because it did not exist whilever the business has been sold. It is for those reasons, in our submission, that the majority below was correct in trying the best they could to ascertain how the other side was putting the case about a chose in action being particular property and then bearing the relation which the “in connection with” phrase focuses on.
What we wish to do is to ensure that “in connection with”, with its potential great width, does not become an inappropriate reading of the whole provision. We suggest that the best way to do that is to ensure that the collocation always includes “used, or for use” in connection. When an appropriate focus is given on the composite notion of use in connection with a business carried on jointly by companies, then that collocation involves an understanding of that property and the history – as I have called it – of the business carried on before the liquidators may or may not choose to continue it.
My definition – given what we know factually – that simply did not exist so as to be put to any such use at all. Were it otherwise, then the breadth of “in connection” would simply mean that all and any claims of any kind arising by way of grievance – and it could be a grievance arising or having its roots after the commencement of the winding‑up, for example – would be opening the gate to a pooling order where you would not ever be able to look back at the history and say: here are two or more companies – a group – who have actually used either their own joint property or they jointly used the property of one of them in connection with the carrying on of the business.
There is the reason why the court should be able to look at whether it is just and equitable to make a pooling order. That will be completely severed if there is not an observance of what we submit is a contextual and purposive reading of the phrase “in connection”.
GAGELER CJ: Mr Walker, how do you articulate the purpose? Of course, we always try to give a purposive reading to evaluative language such as “in connection with”. How do you state the purpose?
MR WALKER: In a number of different ways. Can I start at what I call a functional level. The purpose of the provision is to provide a substantive prerequisite for the existence of a power – it is at that functional level. And that is, we think, incontestable. But I want to give emphasis to the word “substantive”, it should not be – to use Justice Edelman’s phrase – a dead letter.
The next point, referring to the role in winding‑up, is that the purpose of the pooling order provisions is to reverse, radically, to alter what is otherwise the consequence of separate corporate personality and individual liquidations and matters of property. And so, there is a radical reordering being done.
The next answer concerning purpose is that (i),(ii), (iii) and (iv) in (b) have the purpose of providing a justification for the court then to go on to consider whether a pooling order would be just and equitable, and each of them, in the way that I have already argued, demonstrate that the purpose is rooted in the history of the companies’ relations: first of all, formally – that is subparagraph (i); with respect to liability, that is subparagraph (ii); and then (iii) and (iv) by reference to “a business . . . carried on jointly” by them. And the purpose, then, is one which requires a justification, in the case of subparagraphs (iii) and (iv), by reference to the deployment of an asset.
It is for those reasons that one would see that purposively you would not find justification for the radical realtering by a pooling order unless it can be said these are companies, the financial state of which, now in liquidation, with the sufficiently broad brush that the Parliament can wield, can be regarded as sufficiently, due to activities which includes them being hand-in-hand with respect to the use of that asset, that we now should pool all their assets in order to meet all of their liabilities.
It is a very large thing, a pooling order. Our answer to the Chief Justice’s question is that the purpose is to ensure that there is a substantively sensible, schematically intelligible reason, among subparagraphs (i), (ii), (iii) and (iv) for such a large thing to be done, and (iii) and (iv) involve, as I say, this historical deployment of an asset.
GAGELER CJ: Holding is not enough, on your submission?
MR WALKER: I am sorry?
GAGELER CJ: To hold the asset is not to use the asset.
MR WALKER: No – I am obliged to your Honour. Holding an asset is, of course, something only lawyers can dwell on, because if you own it, you own it. Strikingly, the authority used, as your Honours have seen in the written submissions, to contemplate mere holding – that is, doing nothing but own – is a case which is so bizarrely different in terms of its setting and the questions at hand, the Royal Newcastle Hospital Case concerning whether land is used when it is, in effect, a buffer for the peace and quiet of the convalescents.
I mean, it has nothing whatever to do with the question of holding a chose in action, whatever that means. You either have a chose in action or you have not, it may or may not be worth anything, but talking about holding it is really very artificial. It is not, for example, holding as opposed to brandishing, although one would have thought that the use to which a chose in action can be put will often be a letter of demand and a compromise that follows.
GLEESON J: But it has to be owned and there has to be a concept of ownership, or operation and a separate concept of use.
MR WALKER: Yes. Of use, yes, and one cannot skate over the use and simply concentrate on the connection. Connection is too easily satisfied in a completely hollow way by being able, sensibly, to mention the two things in the one sentence – that is not going to do. In our submission, then, mere holding is something which, on the authorities – and they are exiguous, I mean, for a start, they have this basis in land use which is really neither here nor there.
Second, they contemplate, in the abstract – nothing very concrete, nothing concrete at all – the idea that there may be cases where the mere holding provides an advantage, supplies an advantage. But you have not heard a word about that in this case, not surprisingly, because one of the owners of this chose in action, or one of the owners of such a chose in action, was dead to the world for years after being deregistered.
You have not been shown anything in any of the judges’ reasons below, or in the materials which were before the Court factually, or as a matter of reasoning from section 579E itself as to what advantage there was for a chose in action that took a long time to be adumbrated at all in terms which lend themselves to legal articulation, and, in our submission, therefore you can put to one side as of potential interest in a future case but with no footing in the facts or, for that matter, the properly articulated argument in this case, there is no mere holding of a chose in action that bestowed any advantage at all, or one collapses it simply to say that the advantage you have from holding a chose in action is that you may enforce it and it may be valuable. But that is entirely circular, it is entirely tautologous; it is simply saying a chose in action is a chose in action.
Your Honours, as you know, there was a deal made below in relation to – and now in this Court – ways in which, in other statutory provisions, and the Bankruptcy Act provisions that Justice Markovic adverted to, are said to cast some light on the necessary temporal connection – historical, we say – of the owned particular property used or for use in connection with a business carried on jointly, et cetera. And, for the reasons that we have written, those are provisions that have nothing to do with that subject matter.
They have to do with location in law, and it is for those reasons that, as we have drawn to your attention in our proposition 8, you could go to a rather different regime in the Corporations Act – we have supplied a copy of section 21 to your Honours, I do not want to dwell on it in detail. It is partially cognate, we accept, and what its purpose, again, locational, is – it excludes the collecting of debts and other things, which are not a million miles away from that, as enough to locate a business as one carried on in Australia.
These are simply statutory choices in particular situations, they do not supply any assistance to understanding what is meant by the collocation upon which we lean, namely, a particular property used or for use by any of the companies in connection with a business carried on jointly by the companies. Justice Markovic was, with respect, drawing on material which is simply incapable of providing any assistance on the matters at hand.
That then leaves a question about what we call the statutory fiction – the effect of so‑called reinstatement. My learned friend has not addressed on it, I should not spend any appreciable time on it myself. But could we simply draw to your Honours’ attention the way in which, in our written submission, we refer to authority which, in our submission, is very soundly based on a reading of the very provisions for reinstatement which show how, bereft of any textual support – that is, no reason in principle – to invent the doings of a corporation during the period in which it was, in fact, deregistered, which meant it did not exist in law, as Justice Basten points out, it does not mean the directors were in office – they were not.
It does not mean the liquidator remained in office – it does not. It does not mean the property was owned by the company – it was not. How on Earth one would, therefore, talk about such a defunct being as one that uses or holds for use, let alone in relation to a business that had long since ceased to be carried on jointly by the companies, including itself, before it became defunct – is beyond any understanding. It is not a matter which, in our submission, assisted any part of the analysis of the case. As we understand it, our friends walk away from it, because they do not need it, because they say everything fell into place at an earlier stage, before the deregistration.
BEECH-JONES J: And the same for you, because you say – you, in a sense, join in this idea that the focus of the section is back to the business, the printing business. Is that right?
MR WALKER: Yes.
BEECH-JONES J: And you say, but the relevant asset is one that came into existence ‑ ‑ ‑
MR WALKER: That is right.
BEECH-JONES J: ‑ ‑ ‑ after that business was ceased to be carried on, in effect, or just sold.
MR WALKER: By reason of its realisation by the liquidator exercising a liquidator’s power to carry on for the purpose of beneficial disposal.
BEECH-JONES J: And not carrying on a business?
MR WALKER: That is right. So, it is a familiar case where parties, for their opposite purposes, can be rude about the draftsmen. Yes, the phrase “in connection with” is one that we have to confront, and that is why I have concentrated on that in our address, which is otherwise finished.
May it please your Honours.
GAGELER CJ: Thank you. Mr Pesman, do you have a reply?
MR PESMAN: Five matters, three of which are in reply and two of which are dealing with my failure to answer two questions your Honour Justice Steward asked me. The first of those questions is in relation to the significance of Modern Permanent Building and Investment Society v Federal Commissioner of Taxation (1958) 98 CLR 187. That is a nine‑paragraph decision of Justice Williams, and it was a slightly unusual situation in which the Building Society, because it was lending money within itself to its members, was not carrying on business at all.
That took as its starting point an earlier decision of the High Court in – I am just going to have to give your Honours the references at this point – Commissioner of Taxation (WA) v Newman (1921) 29 CLR 484, which deals with the subject matter of – while the transaction for the sale of the business is not the carrying on of the business, what we say here is that the activity between the contract for sale and the completion of the sale was the carrying on of the business.
STEWARD J: I think the law was that when the company went into liquidation, all gains and losses became on capital account, and that is why the Act was changed – introduced what used to be section 47, and so on.
MR PESMAN: I am grateful to your Honour, because this has caused us to have a look at the application of that in more recent years. Can I give the Court a reference to a decision of the Full Court in Commissioner of Taxation v Ashwick(Qld) No 127 Pty Ltd 192 FCR 325, the medium neutral citation is [2011] FCAFC 49. Picking up what your Honour has just put to me, at paragraph 33 Justice Edmonds says this:
Even where a company has gone into liquidation and the liquidator realises its stock in the manner that it has hitherto done, and even when the liquidator does not carry on other activities, such as manufacturing, that the company has hitherto carried on, the acts of the liquidator will be regarded as the continuation of the company’s business, albeit that it is only carried on for the purpose of winding up –
And then his Honour goes on to refer to both Newman and Modern Permanent.
STEWARD J: Who was the judge, again?
MR PESMAN: Justice Edmonds. And that is, in effect, precisely the point I have been trying to make, which is we are not speaking in either the past sense or the present sense of a new business. We are speaking in both senses of the printing business, and the question is whether or not that business continued or not.
The second matter was your Honour Justice Steward asked me where in the primary judge’s decision his Honour dealt with the cause of action, or at least the factual basis underpinning it, that is in the core bundle at pages 16 to 17, and paragraphs 23 to 26 of his Honour’s decision. And there was an additional element that I failed to deal with earlier, which is what his Honour said at paragraph 26, which was that although MIH was a party to the proceeding, it chose not to give any evidence about that invoice.
STEWARD J: And were there any findings made by the primary judge about the proposition that SAM had ceased to trade three years earlier?
MR PESMAN: I think the answer to that question is no, but I might just – I have failed to answer a question for a third time, but I think the answer to that question is no. Mr Rose will confirm.
Now, more importantly – now I can turn to the matters strictly in reply – the first is that the source of the holding for advantage was not the Newcastle Case. That was a decision relied on by Justice Barrett in the course of Lombe to say that if a hospital has a pleasant piece of vacant land, it uses by it being a pleasant thing for the patients to walk on. The actual consideration in Lombe was a much more strictly – a much more similar situation to the one we have now, where some of the companies in the group had benefits of cross guarantees and the mere holding of those cross guarantees was the particular property.
Contrary to something my learned friend said, this has not really been an issue before, and it was in fact dealt with by, in particular, Justice Markovic, in three places: first, at paragraph 210, where her Honour refers to the particular passage in Re Lombe to which I just referred; then at 232, at page 96, where her Honour provides more details of nature of chose in action in that case – importantly, for present purposes, her Honour makes a specific finding at 246 that:
Here the property, being the chose in action, was held . . . In holding the property SAP and SAM enjoy an advantage –
So, the matter was litigated in the Full Court, and there was no challenge to that aspect of her Honour’s reasoning.
EDELMAN J: What is the joint advantage?
MR PESMAN: The joint advantage is that it is available to be deployed to recover the funds.
EDELMAN J: That is a several advantage. Why is that joint?
MR PESMAN: In that contract – it depends on which cause of action it is, and your Honour has already said what your Honour has said about the – but in relation to the breach of fiduciary duty case, that would be joint.
Fourth – and this is the more important point – and related to it, in answer to your Honour the Chief Justice’s question about the purpose, your Honour was essentially met with a form of floodgates argument to say that there will be a lot of cases where pooling will be available, and that – I think the phrase was – fundamentally alters the nature of the relationship, but that is in fact the purpose of the exercise. The Parliament has decided that pooling should be available if it is just and equitable and there is no disadvantage to creditors. Here we are in a slightly better position because, not only was there no disadvantage, his Honour Justice Rares found, I think at 109, that there is a positive advantage to the unsecured creditors of the companies.
BEECH-JONES J: It is right, is it not, that if you are right this pooling order will arise from actions taken by the liquidator.
MR PESMAN: Potentially, but from actions taken ‑ ‑ ‑
BEECH-JONES J: Only by that, not by anything that happened when they were running their printing business prior to one of them going into liquidation.
MR PESMAN: It depends on when the liquidation occurs, and if the chose in action has already been exercised or not.
BEECH‑JONES J: But in this case, at least.
MR PESMAN: In this case, yes. That is a function in this case of a fact that the period between the second liquidation and 1 July is very short. That will not always be the case. That particular circumstance ought not affect the general principle. The general principle is this, which is what it amounted to in an attempt to read down the words “in connection with”.
Those are, plainly enough, words of wide input. If what my learned friend puts is correct, it would necessarily lead to this conclusion: that an action to recover the sale price as it was here, or, for that matter, using your Honour Justice Beech‑Jones’ example, unpaid debts, would require a finding that those actions are not in connection with the carrying on of the business. That, with respect, cannot be correct.
May it please the Court.
GAGELER CJ: Thank you, Mr Pesman. The Court will consider its decision in this matter and will adjourn until 10.00 am tomorrow.
AT 12.16 PM THE MATTER WAS ADJOURNED
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