Are ‘restructuring professionals’ covering up a wide variety of sins?

In ACN 093 117 232 Pty Ltd (In Liq) v Intelara Engineering Consultants Pty Ltd (In Liq) [2019] FCA 1489, the Court determined that a transaction described as a ‘legal phoenix’ by the advising practitioner was, in fact, an uncommercial transaction and an unreasonable director related transaction.

The company formerly known as Intelara Pty Ltd (“Intelara”) operated an engineering consultancy business and owned certain plant and equipment and intellectual property with over 30 employees. It’s banking facilities were secured in part by personal guarantees given by its two directors.

In late 2015, after experiencing financial difficulties, Interlara’s directors obtained restructuring advice. That advice included a plan to implement a “legal phoenix” through a newco to which the assets and employees of the existing business would be transferred. A liquidator would then be appointed to wind up Intelara and the remaining assets used to discharge major creditors, including the bank and the tax authorities.

When the the restructuring was implemented on 7 December 2015 two things occurred: Intelara entered into an asset sale agreement with Intelara Engineering Pty Ltd (“Engineering”). Intelara was then placed into liquidation by a resolution of its members. Engineering had the same directors (who were also the ultimate shareholders) as Intelara.

A special purpose liquidator (“SPL”) had previously been appointed over Intelara to investigate and pursue any claims arising in relation to the asset sale agreement.

So what happened?

The asset sale agreement included terms that:

  • The purchase price was $1;
  • Settlement would take place on 7/12/2015;
  • Plant and equipment, fixtures and fittings, intellectual property and work in progress were transferred to Engineering; and
  • Engineering agreed to acquire employees entitlements of 26 employees and the directors in the sum of $459,574.61.

Just 44 days later, Engineering was itself then placed into liquidation by a resolution of its members.

The SPL sought declarations under the voidable transactions regime of the Corporations Act 2001 (Cth) regarding the asset transfers.

Decision

Leave was granted to proceed against Engineering, despite it being in liquidation, and the proceeding was not defended by Engineering’s liquidator.

Whilst that meant the proceedings were uncontested, the judge, Derrington J, commented that the strength of the evidence gave him no cause for concern in exercising the Court’s discretion and making the declarations sought. In fact, many of the points of fact relied on by the SPL had been admitted by the directors in the course of public examinations.

The Court found that the asset sale agreement was:

  1. An uncommercial transaction pursuant to section 588FA of the Act;
  2. An insolvent transaction pursuant to section 588FC of the Act;
  3. An unreasonable director-related transaction pursuant to section 588FDA of the Act; and
  4. A voidable transaction pursuant to section 588FE of the Act.

In finding that the transaction amounted to an uncommercial transaction, the Court noted that Intelara’s assets were transferred for effectively nil consideration – that there was no real benefit to Intelara, but a substantial benefit was afforded to the directors by reason of the release of their personal guarantees given to the bank.

The judge found that the disposition of the company’s property be to a director or for the benefit of a director was sufficiently made out because the benefit conferred on the directors from the release of their personal guarantees – akin to preference issues under S239 IA86 in England and Wales.

The Court also ordered that the former employees who had been transferred under the asset sale agreement may prove in the winding up of Intelara for the entitlements owing to them as if their employment had been terminated at the time of the winding up.

In Derrington J’s previous decision to appoint the SPL, he commented on the word ‘restructure’ was being used to cover a variety of sins in the insolvency and restructuring industry. With the further evidence adduced in this application he also found it was unbelievable that the ‘restructuring’ plan was described by the relevant practitioners as a ‘legal phoenix’.

The Court was evidently highlighting to insolvency practitioners that when operating in the restructuring and pre-appointment advice space and the market more generally, that creative behaviour like this will not be tolerated, whilst transactions entered into by those that are qualified to give it are not protected from scrutiny simply because they were entered into with the benefit of professional advice.

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