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Pre-pack or phoenix?

Insolvency Law News | April 2015

A common enquiry we receive at Forum Law is where a company is placed in liquidation and then a director or directors that company commence trading again under a new company.

There are two scenarios to this type of activity.

  1. A legitimate attempt by a struggling company to continue to trade to preserve some value in a business, and enable that business to pay creditors and staff. This is often referred to as a "prepack" arrangement and sometimes occurs under a Voluntary Administration. In this scenario the struggling company will sell its business and assets to a new company for "valuable consideration" so the struggling company can pay its debts, or a significant portion of those debts.
  2. Not so legitimate – and the cause of grave concern for our clients – is where a "struggling" company transfers its assets including its business to a new entity for little or no consideration (payment), leaving creditors and staff with no relief. Often referred to as "phoenix activity", this is of great concern to the government and regulators, with constant discussion about the need to reform the law to prevent it.

There has been a recent decision in ASIC v. Franklin (liquidator) in the matter of Walton Constructions Pty Ltd [2014] FCAFC 85 where both scenarios have appeared to overlap. In this case the liquidators facilitated the pre-pack sale of a business and assets to a new entity, but the concern here was that the said liquidators had a prior relationship with the purchaser of the business where that purchase appeared to be undervalue. The purchaser was assigned a loan from the old company worth about $18.9 million for a mere $30,000! Whilst the court did not make a finding on the transaction, the court did make a finding that the said liquidators did have questions to answer in respect of their relationship with the purchaser.

If you have concerns regarding the transparency of transactions between related entities or entities which have a history of having prior relationships, where you may be disadvantaged because of the transactions then please contact Annette at Forum Law Solicitors on +61 2 9560 3388 to discuss.

Forum Law is an active member of several reputable law and industry associations. We have recently obtained ISO9001 accreditation.