“Legal Phoenix” – The burdens and benefits of professional advice

In ACN 093 117 232 Pty Ltd (In Liq) v Intelara Engineering Consultants Pty Ltd (In Liq) [2019] FCA 1489, the court considered whether a “legal phoenix” arrangement entered into after receiving professional advice was in fact a voidable transaction.

The facts

Intelara Pty Ltd (OldCo) operated an engineering consultancy business and after experiencing financial difficulties in 2014 sought professional advice concerning the potential restructure of the company.

The advice, provided by two separate consultancy firms, included a restructure by way of a “legal phoenix” by:

• establishing a new corporation to which the assets of the company would be transferred, along with the employee entitlements and liabilities; following which
• a liquidator would be appointed to wind up the company with the remaining assets used to discharge the major creditors including liability to the Commissioner for Taxation.

On 7 December 2015, OldCo entered into an Asset Sale Agreement with the new entity Intelara Engineering Consultants Pty Ltd (NewCo) on the following terms:

• the settlement date was 7 December 2015;
• the purchase price was $1.00;
• NewCo agreed to purchase certain assets from OldCo including plant and equipment, fixtures and fittings, intellectual property and work in progress; and
• NewCo agreed to acquire certain employee entitlements and liabilities owing to employees in the amount of $459,574.61.

Immediately following entry into the Asset Sale Agreement, the members of OldCo resolved that it be would up.

On 22 January, 2016, the shareholders of NewCo resolved to wind up the company. A special purpose liquidator appointed by the Court to OldCo brought an action against NewCo claiming that the transaction by which OldCo sold its business and assets to NewCo constituted a voidable transaction.

Decision

As a preliminary matter, the special purpose liquidator of OldCo sought leave to proceed against NewCo pursuant to section 500(2) of the Corporations Act 2001 (Cth) (the Act). The Court held that leave was warranted in the case as NewCo was a willing participant in the scheme and the proceedings raised a serious matter of corporate conduct. As proceedings had already been commenced, the order was made nunc pro tunc.

Ultimately, the Court found that the Asset Sale Agreement was:

• an uncommercial transaction pursuant to section 588FA of the Act;
• an insolvent transaction pursuant to section 588FC of the Act;
• an unreasonable director-related transaction pursuant to section 588FDA of the Act; and
• a voidable transaction pursuant to section 588FE of the Act.

The Court held that the Asset Sale Agreement was not an agreement which a reasonable person would have entered into as OldCo’s assets were transferred for effectively nil consideration. Further, the assets of OldCo were made available to pay the secured creditor National Australia Bank rather than discharging employee entitlements – while there was no benefit to OldCo, there was a substantial benefit afforded to the directors of OldCo being released from their personal guarantees to the National Australia Bank.

In considering whether the Asset Sale Agreement amounted to an unreasonable director-related transaction, the Court considered that the wording of section 588FDA(1)(b)(iii) of the Act is intended to be wide and the phrasing indicates that if the disposition is made to another for the benefit of a person being a director, that is sufficient.

The Court ordered that former employees of OldCo whose employment was transferred to NewCo may prove in the winding up of NewCo for their employee entitlements.

Key takeaway

This decision serves as an important reminder that transactions are not protected from scrutiny on the basis that the transaction was entered into after receiving the benefit of professional advice. Despite the advice provided, the Asset Sale Agreement was an insolvent transaction to a related entity and was determined to be a voidable transaction within Section 588FE of the Act.

Authored by:

Susan Forrest, Partner
Catilin Milligan, Solicitor