It’s a much-vexed question in modern commercial practice; “can I trade out of a debt laden entity through a new structure?” Those at the regulatory end of the business spectrum are often quick to quip “No! That’s a phoenix.” – as though the mere mention of the name ‘phoenix’ invokes an evil connotation equivalent only to being diagnosed with the plague, or other similarly ghastly illness.
The analogy is drawn from the mythical bird that arose from the ashes of its predecessor to live anew. However, businesses that continue from the ruin of their forebear seem to attract the moniker in a cynical context. Like most decisions in business, it’s the motivation of the players that ultimately validates their actions.
There is nothing intrinsically wrong with rescuing a business through the creation of a new entity. In many instances it’s the only way of perpetuating value. The justification of the title ‘phoenix’ (or not), comes through an analysis of the transaction (or series of them), through which the latter entity came to be operating the business of the former.
A legitimate transition of business, between old and new entities, often occurs via an informal scheme or through a properly structured Deed of Company Arrangement (following a period of Voluntary Administration) under the Corporations Act 2001. Here, the decedent entity (and/or its associates) provides valuable consideration to its creditors over and above a simple liquidation outcome. It is at this point the question of value becomes paramount – is it enough to merely provide one dollar more, or should there be an objective assessment of the consideration provided in return for transaction? What is the appropriate measure of value? An added disadvantage, often highlighted by creditors, is the arbiter of that position is the incumbent insolvency practitioner.
Despite this criticism, creditors should be heartened by the attention ASIC pays to such arrangements, particularly in cases such as Storm Financial and QBI Corporation, where deeds were either effectively challenged or their promotion denied by the Court for lack of value. The seminal ‘phoenix’ case remains ASIC v Sommerville & Ors,1 in which a solicitor was found in breach of the Corporations Act by aiding and abetting directors of failed entities to transfer assets for little or no consideration. That case highlights the role played by advisors, and signals to those proposing a transition of business to carefully consider their actions.