The recent Supreme Court of Victoria decision in Lofthouse v Environmental Consultants International Pty Ltd & Ors  VSC 416 outlines the factors the Court will take into account when considering whether to make a pooling order and considers when a liquidator may be remunerated out of the assets of pooled companies.
On 19 June 2008, Lofthouse was appointed as liquidator of the Environmental Consultants International Pty Limited (in liquidation) (ECI) and the ECI group of companies (ECI Group).
In December 2006, the directors of the ECI business (which until that time had operated through one entity) were advised to incorporate a series of companies to run the various parts of the business. That advice was acted on and the various companies comprising the ECI Group were incorporated. However, the liquidator’s investigations revealed, amongst other things, that:
- the ECI business continued to operate as if it was a single enterprise;
- the creditors and debtors of the ECI business were not advised of the incorporation of the ECI Group companies; and
- ECI effectively operated as a treasurer of the group, with almost all payments being made to that entity.
The liquidator’s investigations also revealed that whilst consolidated accounts were prepared, no individual financial records had been maintained by the individual ECI Group companies.
Since his appointment, the liquidator had successfully realised some returns for creditors. Most of the funds realised had been paid to Environmental Consultants International (NSW) Pty Ltd (ECI NSW) and absent a pooling order, the creditors of that company stood to receive a dividend of approximately 15 cents in a dollar..
The liquidator sought a pooling order pursuant to s579E of the Corporations Act 2001 (Cth) on the basis that:
- the financial records of each individual ECI Group company were hopelessly inadequate and the likely cost to recreate those records would consume the entirety of the funds realised by the liquidator to date;
- the liquidator was not satisfied that the funds received by ECI NSW rightly belonged to that company; and
- the liquidator was also concerned that he could not accurately assess whether creditors that had proved in the ECI NSW liquidation were rightly creditors of that company (or whether they may in fact be creditors of another ECI Group company).
Her Honour Justice Ferguson granted a pooling order under s 579E of the Act. Her Honour found that in the circumstances a pooling order was just and equitable and unlikely to materially disadvantage any unsecured creditor on the basis that:
- the companies never operated independently of one another but rather acted as one entity;
- even though on its face, it appeared that the creditors of ECI NSW may be disadvantaged by the pooling order, this was not the case, as the financial records were unlikely to be an accurate reflection of the true assets and liabilities of that company;;
- a pooling order would likely bring forward the payment of a dividend to the creditors and bring the liquidations to an end much sooner.
One consequence of the pooling order was that the liquidator was entitled to have his fees paid as a priority expense out of the pooled funds. In this case, the liquidator proposed to cap his fees in order to ensure that a modest dividend was paid to all unsecured creditors.
This decision emphasises that the Courts will look to substance, not form when determining whether a pooling order should be made.
It also highlights that the question of “material disadvantage” needs to be considered in the context of all of the relevant facts. A pooling order is likely to be permissible if the costs of regularising the accounts would erode any dividend that would otherwise be payable.