The Good, the Bad and the Ugly Why focus on SMEs? • Increasingly important market for all insolvency practitioners • Australia’s slow paying culture • Financing obstacles • Culture of lawlessness in some sectors Ben Sewell Principal of Sewell & Kettle Lawyers Phone: 02 8251 0075 Email: bsewell@sklawyers.com.au

1. THE GOOD, THE BAD AND THE UGLY:
THE LINE BETWEEN PRE-PLANNED
ARRANGEMENTS AND PHOENIX ACTIVITY
FOR SMES
BEN SEWELL, SEWELL & KETTLE

2. The Good, the Bad and the Ugly
Why focus on SMEs?
• Increasingly important market for all insolvency practitioners
• Australia’s slow paying culture
• Financing obstacles
• Culture of lawlessness in some sectors

3. The Good, the Bad and the Ugly
Entrepreneurship and innovation
• Allocative efficiency is a key issue with UK pre-pack justifications (don’t forget
DOCAs can save jobs too)
• Entrepreneurs develop strategy experientially and iteratively
• Work to be done linking business rescue and fostering entrepreneurship

4. The Good, the Bad and the Ugly
Basic definition of phoenix activity
• A company (Oldco) is insolvent; and then
• Oldco’s business is transferred for inadequate consideration to a related
entity (Newco); but
• This transaction is detrimental to creditors, employees and other
stakeholders; and
• There is often a cyclical element.

5. The Good, the Bad and the Ugly
What are the main penalties for phoenix activity?
Claims by liquidators:
• Insolvent trading actions against directors
• Breach of director’s duty action against directors
• Uncommercial transactions against Newco
• Unreasonable director-related transaction claims against directors
Claims by the ATO:
• Director Penalty Notice to pierce the corporate veil

6. The Good, the Bad and the Ugly
New research into defining phoenix activity
• Legal phoenix or business rescue
• The problematic phoenix
• Illegal phoenix 1: Intention to avoid debts formed as the company
begins to fail
• Illegal phoenix 2: Phoenix as a business model
• Complex illegal phoenix activity

7. The Good, the Bad and the Ugly
Where is the UK up to with pre-packs?
• Graham Report released in 2014 with supporting empirical research
• Report is broadly supportive with minor reform recommendations
• More likely to succeed than trading administrations
• Issues with transparency, marketing, valuations and viability of Newco
• Are preserving jobs and attracting overseas companies poor justifications
for pre-packs?

8. The Good, the Bad and the Ugly
What are pre-planned arrangements?
• Issue: How to enable viable businesses to continue, and maximise returns
to creditors via a sale of business negotiated prior to the appointment
• ARITA policy: Pre-positioning is advocated with checks and balances
regarding IP involvement but UK-style pre-pack is opposed
• ARITA policy: Consideration should be given to restricting the sale of
business to related entities during this pre-positioning phase

9. The Good, the Bad and the Ugly
THE GOOD: Skouloudis Group case
Focus of the case and background
• Mr S owned a Greek language newspaper through Oldco
• Transfers business to Mrs S who owned Newco whilst Oldco was
insolvent
• Action by liquidator of Oldco to void transfer as an uncommercial
transaction (i.e. undervalued transfer)

10. The Good, the Bad and the Ugly
THE GOOD: Skouloudis Group case
The transaction
• No written contract and no ascertainable sale price
• Transfer of entire undertaking of the business
• Purchase price was taking over some liabilities including staff
entitlements, rent and printing costs

11. The Good, the Bad and the Ugly
THE GOOD: Skouloudis Group case
The decision and takeaway for advisers
• Consideration paid was not of an insufficient “magnitude” to be set aside
• Courts don’t like second guessing commercial decisions generally
• A valuation and written asset sale agreement may have cured most problems
with the case
• Problematic phoenix, no intention to phoenix at start of business but
incompetent management

12. The Good, the Bad and the Ugly
THE BAD: The Somerville Case
Focus of the case and background
• The case was about breach of directors duties for phoenix transactions and
accessorial liability for their solicitor
• Multiple clients but each given identical letter of advice by their solicitor
• ASIC took legal action not the liquidators because the liquidators had settled
all claims

13. The Good, the Bad and the Ugly
THE Bad: The Somerville Case
The transaction
• The consideration was the issue of V class shares in Newco with a fixed dividend to
the value of the business
• There was no transfer of liabilities and these remained in Oldco
• Standard letter of advice provided by the solicitor and it specifically advised the
director that the payment of the dividend for the V class share was discretionary
• Liquidators of each Oldco settled all claims against Newco for a fraction of the value
of the business transferred

14. The Good, the Bad and the Ugly
THE Bad: The Somerville Case
The decision and takeaway for advisers
• Court found the arrangements were asset stripping
• Breach of director’s duties as the transfers were against the interests of each
Oldco
• Mr Somerville was also in breach as an accessory
• Illegal phoenix type 1- Intention to avoid debts via phoenix is formed as
company starts to fail

15. The Good, the Bad and the Ugly
THE Ugly: ASIC v Fiorentino
Focus of the case and background
• ASIC application to cancel or suspend liquidator’s registration to
CALDB
• Business with significant tax liabilities transfers moneys to the owners
and entire business to Newco for doubtful consideration

16. The Good, the Bad and the Ugly
THE Ugly: ASIC v Fiorentino
The transaction
• Audits conducted for payroll tax and workers compensation premiums
• Owners withdraw over $2 million in cash from the companies
• Owners transferred the business to Newco
• Liquidator entered into a Deed of Settlement and Release with the related entities
against legal advice
• Consideration for the settlement was found to be illusory
• No action was taken to claw back transactions by liquidator

17. The Good, the Bad and the Ugly
THE Ugly: ASIC v Fiorentino
The decision and takeaway for advisers
• CALB found he was not a fit and proper person to be registered a
liquidator
• Registration cancelled
• Process of prosecution issues

18. The Good, the Bad and the Ugly
Where could Australia head with regulation?
• No meaningful interest in a debtor-in-possession system
• Stronger penalties against lawyers and insolvency practitioners
• Tighter compliance processes
• No meaningful interest in more robust enforcement processes

19. The Good, the Bad and the Ugly
Questions and Comments?
Ben Sewell contact details:
Phone: 02 8251 0075
Email: bsewell@sklawyers.com.au

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