Pooling arrangements for companies under administration

Corporations Act 2001 (Cth) (Act)

Notwithstanding that the Act makes no provision for the pooling of assets and liabilities of a group of companies in administration, Courts have sanctioned the use of pooling arrangements for groups in administration proposing to execute a pooled Deed of Company Arrangement (DOCA).

Pooling can provide cost benefits to the creditors of a group of companies if the group:

• operated as a single entity with commonality of staff and resources;
  
  
• intermingled assets between the group creating uncertainty as to the true beneficial owner of the assets;
  
  
• operated as a single entity for tax purposes;
  
  
• was perceived by its creditors to be a single entity or the creditors cannot distinguish which entity they contracted with; or

• had detailed or complex inter-company loans (which could only be re-constructed if significant time and cost was invested by the administrators, to the detriment of creditors’ claims).

Additional factors supporting a pooling arrangement are groups in which one entity:

• holds all of the group’s assets depriving creditors of the non-asset holding entities of funds which would otherwise be available to meet their claims; and
  
  
• incurred all the group’s liabilities depriving creditors of that particular entity of funds which would otherwise be available to meet their claims.
  
  

A pooled DOCA will be persuasive if the return to creditors of the group as a whole will provide greater return than if the individual entities ratified separate DOCAs or were placed into liquidation.

Detail is key - putting the proposal to creditors

The administrators’ section 439A report must clearly outline the benefits of a pooling arrangement to a group’s creditors, as compared to the likely return to them under the alternatives of single DOCAs and liquidation.

Particular emphasis should be placed in the section 439A report on:

• outlining the intermingled state of the group’s operations, assets, resources and staff (as appropriate);
  
  
• whether the pooling arrangement favours or disadvantages particular classes of creditors -  the analysis should ideally be supported by comparative tables of the likely return to each class of creditors, particularly if a certain class of creditors may be disadvantaged under the pooling arrangement;
  
  
• ensuring any creditors likely to be disadvantaged under the pooling arrangement have actual knowledge of the nature and extent of the disadvantage (in some instances, issuing the section 439A report to the affected creditors may not be enough);
  
  
• the costs of the administration to each entity within the group to date;
  
  
• the costs of the administration to each entity if the group’s administrations are pooled; and
  
  
• the costs of the group’s administrations to each entity if not pooled or placed into liquidation - costs must be clearly allocated to each administration.

Court order

The Court can ratify a pooling arrangement upon application by the administrators under section 447D of the Act.  Generally, the application is made after the second creditors’ meeting and once the creditors have resolved to execute a pooled DOCA.  The resolution of the group’s creditors will be persuasive to the Court’s ratification of the pooled arrangement.

In making an order to sanction a pooled DOCA, the Court will consider the degree of information given to the creditors, including in the section 439A report.  The greater the detail of the benefits and disadvantages (if any), the less likely the Court will find against the proposal.

The Court’s ratification is not required as a matter of course, though provides comfort to the administrators by minimising the prospects of future successful challenges to a pooled DOCA and, in those circumstances, minimising any criticism by the Court in relation to the administrators’ conduct.

Lavan comment

Pooling can provide significant benefits to creditors of a group of companies under administration.  Whether the Court’s sanction is sought or not, the devil is in the detail and the better informed the creditors are, the less likely a pooled arrangement will be successfully challenged.  In time, it is hoped the Act will be amended to expressly provide for pooling in administration.

For further information please contact:
Alison Robertson, Partner, on (08) 9288 6872 / alison.robertson@lavanlegal.com.au or
Claire Petersen, Associate, on (08) 9288 6746 / claire.petersen@lavanlegal.com.au.