Time For A Splash! Court Grants Pooling Order In Watch Works Australia And Cobbler Plus Winding-up -

This week's TGIF article considers the case of Re Watch Works Australia Pty Ltd (in liq) & Anor; Ex Parte Francis & Ors [2020] WASC 6, in which the Supreme Court of Western Australia determined two linked companies were to be a 'pooled group' in order to satisfy the external debts payable by both companies.

What happened?

Watch Works Australia Pty Ltd (Watch Works) and Cobbler Plus Services Pty Ltd (Cobbler Plus) (together the Companies) both conducted a watch and shoe repair business, operating between them a total of 120 outlets across Australia. Although operating under different trading names, the Companies both provided cobbler, watch repair and key cutting facilities to customers.

In addition to providing similar goods and services, the Companies shared a number of similarities including:

the same sole director;
the Watch Works and Cobbler Plus branded stores were managed by the same area and store managers;
all employees of the Companies were employed by Watch Works; and
stock-in-trade held and used by the Companies' business was controlled by another company, Soderberg Group Pty Ltd (in liq), which provided a head office function to both Companies.

Although the Companies maintained a number of bank accounts, all revenue funds were routinely swept into a single Watch Works bank account which was routinely used to pay both Companies' operating expenses. The Companies' records also did not delineate between creditors of each company. The result being it could not be discerned with certainty which assets were owned by, and which liabilities are attributable to, one or both Companies.

The Companies went into administration and subsequently into liquidation in August 2019 after their creditors passed resolutions the Companies be wound up.

What issues were before the Supreme Court?

The plaintiff liquidators sought orders pursuant to section 579E(1) of the Corporations Act 2001 (Cth) (Corporations Act) that Watch Works and Cobbler Plus are pooled as a group for the winding-up. The plaintiff liquidators also sought a further ancillary order under section 579G(1)(d) to modify the operation of the Corporations Act in relation to the winding-up so that the assets of a trust, of which Watch Works was trustee, became available to meet each debt payable by, and each claim against, the Companies.

What is a pooling order?

A pooling order is a decision to treat the affairs of a group of companies as if it were a single external administration.

Section 579E(2) of the Corporations Act outlines the consequences of a pooling order. First each company is taken to be jointly and severally liable for each debt payable by and claim against each other company in the group. Second, each intra-group debt and claim is extinguished.

A liquidator may make an application to the court for a pooling order under section 579E(11) of the Corporations Act.

Section 579E of the Corporations Act sets out a number of matters which should be taken into account when deciding to grant a pooling order, including:

whether it is just and equitable in the circumstances; and
the extent to which creditors of any of the companies in the group may be advantaged or disadvantaged by the making of the order.

Under section 579E(10)(a) the court must not make a pooling order if it is satisfied that it would materially disadvantage an eligible unsecured creditor where that creditor has not consented to the making of the order.

Relevantly, section 579E(1)(b)(iv) of the Corporations Act provides that where the court is satisfied two or more companies are being wound up and one or more companies in the group "own particular property that is or was used, or for use, by any or all of the companies in the group in connection with a business...carried on jointly by the companies in the group," the court may determine the companies are a pooled group if it is satisfied that it is just and equitable to do so. This means the available assets in each winding-up can be used to satisfy the external debts of all the companies in the pooled group.

What did the Court decide?

The common management, accounts and processes for dealing with creditors led Justice Vaughan to find the Watch Works and Cobbler Plus store branded businesses were carried on jointly by the Companies and met the legislative requirements for the grant of a pooling order.

His Honour found, with some reservation, that there would be no material disadvantage to Cobbler Plus' unsecured creditors if the pooling order was made. If a pooling order was made Cobbler Plus' ordinary unsecured creditors would receive nothing. If the order was not made they would receive 1.47 cents in the dollar, as an optimistic upper estimate. The average value of Cobbler Plus unsecured creditors' claims was $87,747. Based on the 1.47 cents per dollar estimate, the average dividend distribution would be around $340. There was also a realistic chance the return would be lower than 1.47 cents per dollar, or nothing at all. His Honour concluded this low return, which in itself was uncertain, was not material so did not materially disadvantage Cobbler Plus' unsecured creditors for the purposes of s 579E(1)(a). His Honour noted that "the law does not bother with small and insignificant matters". Though the priority unsecured creditors of Watch Works, the employees of the Companies, would be afforded an advantage over the ordinary unsecured creditors of Cobbler Plus, and despite the Cobbler Plus' unsecured creditors not consenting to the order, his Honour concluded that it was just and equitable to make the pooling order in the circumstances.

However Justice Vaughn did not agree with the plaintiff liquidators' characterisation of the "particular property" for the purpose of section 579E(1)(b)(iv) of the Corporations Act. His Honour found the relevant particular property was not the funds paid into the Watch Works liquidation account, but rather the bank account itself as a chose in action. Despite the disagreement on what constituted the particular property, the existence of the particular property meant that section 579E(1)(b)(iv) of the Corporations Act was satisfied.

The ancillary order sought under section 579G(1)(d) in this case was novel. The liquidators "presented an elaborate argument" that the section was broad enough to modify the application of the Corporations Act so as to permit what is otherwise precluded under general law, specifically to allow trust assets to be used to meet non-trust liabilities. His Honour dismissed this argument and declined to make the order as being unnecessary on the evidence before the court.

Key takeaways

Factual circumstances will be closely scrutinised by the courts when deciding to grant a pooling order. Close attention will need to be paid to what is a material disadvantage to creditors and whether any disadvantage will meet the threshold.
Courts will be reluctant to interpret provisions modifying the application of the Corporations Act broadly.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.