Progress on Phoenix Activity

Articles, Restructuring + Insolvency

A recent decision of the Federal Court of Australia, ACN 093 117 232 Pty Ltd (in liq) V Intelara Engineering Consultants Pty Ltd (in liq) [2019] FCA 1489, will give cause for thought to those involved in the “restructuring” industry.

The Court considered a circumstance in which the consideration paid for the transfer of a business and assets was the assumption of employee liabilities owed by the seller.

It has long been considered that the assumption of such liabilities can constitute payment if not in whole at least in part, of the purchase price for assets transferred. In simple terms the assumption of the liability can be thought of as improving the balance sheet of the selling company by ensuring, at least in theory, that the buyer is responsible for meeting employee entitlements which would otherwise constitute a priority liability in a winding up.

In Interlara, Justice Derrington looked at the circumstances behind the transfer in detail and took into account that what had really occurred was simply a reordering of priorities to ensure that the Company’s secured creditor was able to be paid out of assets which may otherwise have been subject to the priority claims of employees. This occurred in circumstances where those liabilities had been guaranteed by the company’s director.

His Honour noted that in these circumstances the person truly benefiting from the transaction was the Company’s director who had paid no consideration for that benefit. His Honour held that there was no real benefit to the Company in entering into the transaction and that the assets were transferred for what was “effectively a nil consideration”.

there was no real benefit to the Company in entering into the transaction and that the assets were transferred for what was “effectively a nil consideration”

Reading between the lines the case seems to be one in which the liquidator again benefited from the involvement of FEG. It seems from the judgment that FEG was called upon to meet unpaid employee entitlements in this instance and based on our experience we suspect FEG funded the liquidator to take these proceedings.

If our suspicion is right FEG is to be applauded for again being active in its continuing attacks on those involved in Phoenix activity. We have little doubt that FEG’s involvement and willingness to fund such matters will in the long run have a significant impact on the pre-insolvency industry and for one we applaud the Department in these initiatives and its ongoing efforts.

The case is of interest as the use of employee entitlements to pay what has been considered value for the transfer of assets is a common feature in the Phoenix industries. This decision suggest the Courts may be looking at this area anew and prepared to look beyond the surface at the substance of such transactions.

If followed the approach will represent a very real and significant attack on those involved in the Phoenix Industry.

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