ASIC Proceedings Against Insolvency Practitioner for Illegal Phoenix Activity

By Maxim Oppy, Law Clerk and Alicia Hill, Principal, MST Lawyers

In a recent decision of the Federal Court, ASIC v Bettles [2020] FCA 1568, the Australian Securities and Investments Commission hit a road bump in its claim that Worrells partner Jason Bettles (Mr Bettles) aided and abetted illegal phoenix activity in 2016. ASIC’s pleadings being struck out as ‘incoherent’ is a victory for Mr Bettles, but the proceedings are far from over.

Facts

In November of 2019, ASIC initiated proceedings against Mr Bettles, a liquidator with Worrells Queenland, alleging that he was involved in breaches of Corporations Act director’s duties.

The claim arose out of Mr Bettles’ involvement in the liquidation of the Members Alliance Group in 2015 and 2016. Mr Bettles was appointed the liquidator of 18 companies in the Members Alliance Group, who collectively owed over $17 million to the ATO. ASIC alleged that Mr Bettles attended meetings where plans were made to transfer the companies’ assets and redirect income streams to new entities, removing these from the reach of creditors including the ATO. The ATO claimed that this amounted to ‘illegal phoenix activity’ – the process by which new companies are created to carry on the business of an existing company which is then liquidated to avoid payment of creditors.

ASIC sought orders deregistering Mr Bettles by lodging a Concise Statement and a Supplementary Concise statement with the Federal Court under section 45-1 of the Insolvency Practice Schedule. Concise statements are intended to allow applicants to expeditiously bring key issues to the attention of the court. However, as this decision shows, they must still precisely identify the substance of the claim.

 The Law

Sections 180, 181 and 182 of the Corporations Act provide that directors owe duties of care and reasonableness, good faith and use of position to their companies. It is these provisions that were alleged to have been breached by the directors of the Members Alliance companies through illegal phoenix activity. It is important to note the illegal phoenix activity is not a distinct breach, but rather describes behaviour that is likely to contravene various duties under the Corporations Act.

Section 79 provides that a person is involved in a contravention if they, inter alia, aid, abet or counsel a contravention. ASIC allege that Mr Bettles breached this by aiding the Members Alliance companies’ illegal phoenix activity.

The Decision

Associate Justice Greenwood struck out ASIC’s Concise Statement and Supplementary Concise Statement, holding that the documents did not contain a coherent claim which Mr Bettles could reasonably respond to. ASIC must now lodge a Statement of Claim which sets out clearly the material facts and the how these amount to contraventions of the Corporations Act within 28 days to continue the proceedings.

His Honour held that the facts pleaded were insufficiently connected with the contraventions alleged.

In particular, ASIC relied heavily on describing the conduct of the Members Alliance Group directors as ‘illegal phoenix activity’. However, this is not a standalone contravention under the Act.

His Honour stated that, while ‘illegal phoenix activity’ was a useful short-hand description of certain wrongful conduct, numerous academics have noted that it cannot be precisely defined. In many cases, the difference between legal and illegal phoenix activity can come down to whether there was a deliberate intent of directors to avoid debts owed to creditors. The facts which were claimed to constitute the illegal phoenix activity were insufficient to make out this differentiation.

Associate Justice Greenwood also considered that the factual situation was complex, involving more than 50 companies in the Members Alliance Group. Further, the allegations against Mr Bettles were very serious, as losing his liquidator registration could jeopardise his livelihood. In such circumstances it is vital that the regulator precisely outline the contraventions alleged, rather than rely on analogical terms.

ASIC was ordered to re-plead its Concise Statement.

Conclusion

ASIC’s proceedings against Mr Bettles are ongoing.

This decision appears to be an example of the ASIC’s attempt to take a ‘why not litigate?’ approach to enforcement.

It also demonstrates the complexity of the insolvency regulatory regime in respect of illegal phoenix activity.

It is a reminder of:

• the care insolvency practitioners, legal practitioners and financial advisers must take to avoid the assertion under the new provisions and the aiding and abetting provisions of providing advice which can be categorised as illegal phoenix activity;
• the interest of the ATO in reducing the circumstances when it and indirectly the Commonwealth, bear the majority of the loss on the failure of a company, where the business of the company appears to be continuing to trade under the control of a different entity but with substantially the same ownership or controlling interests; and
• the financial and reputational harm that can result from regulatory litigation.

While the proceedings against Mr Bettles are far from over, we will continue to monitor this case as it may provide useful judicial commentary that will help clarify the interpretation of what constitutes and will not constitute phoenix activity as opposed to legitimate financial restructuring.

Please contact Alicia Hill on (03) 8540 0200 or Alicia.hill@mst.com.au if you have any questions regarding this article or require any advice relating to insolvency.