ACN 093 117 232 Pty Ltd (in liq) v Intelara Engineering Consultants Pty Ltd

Introduction 1 Mr Jack Robert James, in his capacity as the special purpose liquidator of ACN 093 117 232 Pty Ltd (in liq) (formerly called Intelara Pty Ltd) (Intelara) brings this action against the defendant company, Intelara Engineering Consultants Pty Ltd (in liq) (Intelara Engineering) claiming that a transaction by which Intelara sold its business and assets to Intelara Engineering on 7 December 2015 constitutes a voidable transaction. He seeks declarations to that effect and orders that certain creditors of Intelara Engineering, who are former employees of Intelara, be entitled to prove in the winding up of Intelara. 2 It is claimed that the transaction by which the business and assets were sold is both an insolvent transaction and an unreasonable director-related transaction. 3 Mr James was appointed as the special purpose liquidator by this Court on 23 November 2018. The purposes for which he was appointed included investigating the agreement which he now seeks to impugn and, if appropriate, pursuing any claim in relation to it.

The facts 4 Intelara conducted the business of an engineering consultancy and seems to have done so since around about 2001 or 2002. From about that time its directors were Mr Michael Ray Lethlean (Mr Lethlean) and Neil Frederick Burnell (Mr Burnell). 5 It appears that for a significant period Intelara had lending and banking facilities provided by the National Australia Bank Limited (NAB). Those facilities were personally guaranteed by Mr Lethlean and Mr Burnell. 6 From around early 2014 it appears that Intelara commenced to experience financial difficulties. From around 30 September 2015 until 7 December 2015, it engaged an entity called Facility Care Pty Ltd (Facility Care) to provide what are referred to as "consultancy services". Ostensibly, those services involved the provision of advice concerning the potential restructuring of Intelara in the light of its existing creditors including secured creditors. 7 In the course of its retainer Facility Care advised Intelara, amongst other things, that it should restructure its affairs and, in particular, by doing a "legal phoenix". The advised "legal phoenix" was, in effect, to establish a new corporation to which the assets of the existing business would be transferred. Although it is not entirely clear, it appears that it was part of this advice that the obligation to pay some employee entitlements would be "transferred" to the new entity as well. By this it is understood that the new entity would assume the liability to meet those obligations. Thereafter, a liquidator would be appointed to wind up Intelara and the remaining assets would be used to discharge the major creditors including the Commissioner of Taxation. It seems probable that, in part, this was to be facilitated by assets of the company having been freed of the liability to meet the employee entitlements which had been transferred to the new entity. 8 Subsequently, Intelara sought advice from a further restructuring company, AMRC Commercial Pty Ltd (AMRC). On or around 16 November 2015, AMRC, by a Mr David Rosenblum, advised that if Intelara were wound up, the directors may well subsequently face bankruptcy. Mr Rosenblum advised that the arrangement advised by Facility Care ought be adopted with the proposed new company being an entity known as Intelara Engineering Consultants Pty Ltd. A strategy was recommended to avoid any liability which might arise on a Director Penalty Notice being received from the Commissioner of Taxation as a result of the non-payment of certain tax-related liabilities. 9 Around early December 2015, Mr Rosenblum for AMRC drafted an Asset Sale Agreement pursuant to which assets would be sold to Intelara Engineering Pty Ltd. He also drafted a letter on behalf of the company to the NAB noting that currently the employee entitlements of Intelara were in the order of $1 million and the only realisable asset, being unpaid debtors, was around $900,000. The letter advised the NAB that, if Intelara failed, the employee entitlements would crystallise as a debt which would rank ahead of it in a winding up with the consequence that it would not recover any of its debt. This was, apparently, designed to encourage the bank to accede to the restructuring plan. 10 Mr James submits that the agreement had the effect of preferring and prioritising the interests of the directors, Mr Lethlean and Mr Burnell, over the interests of the company and its creditors. It is alleged that the agreement was entered into so as to allow the debt owing to the NAB to be discharged and thereby releasing the directors from their personal guarantees. As will be seen later in these reasons, there is much force in that allegation. 11 In accordance with the advice of AMRC and Mr Rosenblum, on 2 December 2015 Intelara Engineering was incorporated. Mr Lethlean and Mr Burnell became its directors. The shareholders of the company were two other corporations, Lethlean MR Pty Ltd and Capriblu Pty Ltd, owned respectively by Mr Lethlean and Mr Burnell. 12 On 7 December 2015, Intelara entered into the Asset Sale Agreement with Intelara Engineering. Relevantly the terms of that agreement were that: (a) the settlement date was to be 7 December 2015. (b) Intelara Engineering agreed to purchase from Intelara the "Assets" defined in the agreement as being plant and equipment, fixtures and fittings, intellectual property and work in progress as described in schedule 2 of the agreement. The work in progress was identified as the "earned fees minus invoice fees for the seller as at the settlement date". (c) The purchase price payable by Intelara Engineering was $1 (inclusive of GST). (d) Intelara Engineering also agreed to acquire certain liabilities owing to employees in the sum of $459,574.61. Under the agreement it purportedly accepted responsibility for those liabilities. (e) The employee entitlements and liabilities were more particularly set out in appendix II to the agreement. That schedule identified 26 employees and their entitlements as well as the entitlements of Mr Lethlean and Mr Burnell.

Winding up of the company 13 Immediately following the entry into of the Asset Sale Agreement on 7 December 2015, and, on the same day, the members of Intelara resolved that it be wound up and that Mr Dopking and Ms Dunn of FTI Consulting be appointed as its liquidators. 14 Simultaneously, the employment of those employees of Intelara who were not being transferred to Intelara Engineering was terminated. The others were immediately employed by Intelara Engineering. 15 As at 7 December 2015, it appears that the amount owing to the unsecured creditors of Intelara was approximately $1.4 million, with approximately $335,000 being owed to priority creditors. Those priority creditors were employees and the amounts were owing in respect of wages, superannuation, annual leave and retrenchment entitlements. This figure represented the quantum of employee entitlements not "transferred" to Intelara Engineering Pty Ltd. 16 A debt of approximately $600,000 was owed to the NAB. As mentioned, that debt was secured by a circulating security interest and guarantees from Mr Lethlean and Mr Burnell. 17 It also appears that the assets of Intelara totalled approximately $1.1 million. However, in the winding up it also received a distribution from the Commonwealth in the form of funds totalling $199,000 pursuant to the scheme established by the Fair Entitlements Guarantee Act 2012 (Cth).

Winding up of Intelara Engineering 18 Subsequent to its acquisition of the assets of Intelara, Intelara Engineering operated the engineering consulting business for a period of 44 days, but on 22 January 2016 its shareholders resolved to wind it up. During the period prior to winding up it operated substantially in the manner as Intelara had prior to the transfer of the business. That said, it was probably insolvent from inception. 19 On its winding up, Intelara Engineering owed $775,318.31 in accrued employee entitlements to those employees who became employed by it. However, it appears that the assets of Intelara Engineering are insufficient to satisfy all of the claims of the employees. The Commonwealth has paid an amount of $676,777.31 under the Fair Entitlements Guarantee Act in respect of unmet employee entitlements. It is now subrogated to the rights of those employees.

Procedural matters 20 In these proceedings, which were commenced on 24 July 2019, the special purpose liquidator seeks a declaration that the Asset Sale Agreement was a voidable transaction. He also seeks an order pursuant to s 588FF(1)(g) of the Corporations Act 2001 (Cth) (the Act) that the former employees of Intelara whose employment was transferred to Intelara Engineering may prove in the winding up of Intelara. 21 The proceedings were served on Intelara Engineering on 25 July 2019. Service has been established by an affidavit of Ms Harding filed on 31 July 2019. There has been no appearance by Intelara Engineering and, as a consequence, Mr James and Intelara seek judgment in default. Indeed, it is apparent that the liquidator of Intelara Engineering has indicated he neither consents nor opposes the orders sought in these proceedings.

Leave to proceed 22 As a preliminary matter the plaintiffs seek leave to proceed against Intelara Engineering. Section 500(2) of the Act provides: After the passing of the resolution for voluntary winding up, no action or civil proceeding is to be proceeded with or commenced against the company except by the leave of the Court and subject to such terms as the Court imposes. 23 There can be little doubt that leave is warranted in this case. The action against Intelara Engineering is in relation to a transaction implemented by Intelara and Intelara Engineering which appears to have been designed for the purposes of benefitting Intelara's directors at the expense of its creditors. Intelara Engineering was a willing, if not essential, participant in the scheme. In addition, the proceedings raise a serious matter of corporate conduct and that weighs in favour of granting leave. 24 A further significant matter is that, as is indicated later in these reasons, it is apparent that not only does the claim advanced have substantial merit, on the evidence which has been adduced, it is a good claim which justifies the granting of relief. 25 It might also be said that the making of the orders sought have no substantive detrimental impact on Intelara Engineering. Whilst they will permit its employees to make claims in the winding up of Intelara, of itself the declaration sought is, perhaps, neutral in the sense that it does not interfere in the orderly winding up of that company. 26 It is also relevant that the liquidator of Intelara Engineering does not oppose the making of the order for leave to proceed against that company. Additionally, it is relevant that the liquidator of that company does not resist the current proceedings. 27 In line with the principles referred to Cassegrain v Gerard Cassegrain & Co Pty Ltd (in liq) [2012] NSWCA 435, there are sufficient grounds to warrant the grant of leave to proceed against Intelara Engineering in this matter. 28 The plaintiffs ask that the order be made nunc pro tunc given that the proceedings have already been commenced. There is no reason why the order ought not be made in those terms.

Rights of plaintiffs on default 29 The plaintiffs seek judgment in default pursuant to r 5.23(2)(c) of the Federal Court Rules 2011 (Cth). 30 Although the authorities are not entirely in accord as to whether the plaintiff is required to establish their case with evidence where a defendant defaults in an action of this nature, here the plaintiffs have adduced a substantial amount of evidence. The evidence, largely contained in the affidavit of Mr James of 5 September 2019, establishes the matters contained in the statement of claim and the facts as they have been recited above. That said, the statement of claim alleges sufficient facts which are now unanswered so to warrant the relief sought. 31 There is no reason not to be satisfied that Intelara Engineering has been served with these proceedings, including the statement of claim, and has defaulted in appearing. It, by its liquidator, is aware of the proceedings and has chosen not to defend them. It is well recognised that the requirement that the Court be satisfied the applicant is entitled to relief pursuant to r 5.23(2)(c) does not require the applicant to prove its claim by admissible evidence, although such evidence may be adduced: Yeo v Damos Earthmoving Pty Ltd [2011] FCA 1129. However the Court must be satisfied that the allegations in the statement of claim are sufficient to support the relief claimed and that this Court has jurisdiction to grant the relief: Speedo Holdings BV v Evans (No 2) [2011] FCA 1227, [23]. It follows that where the unanswered statement of claim alleges sufficient facts to support the causes of action advanced and the relief claimed, judgment may be given accordingly. 32 In this case the plaintiffs rely on the allegations in the statement of claim as well as the cogent evidence in supporting affidavits to justify the orders sought.

The statutory provisions 33 For the purposes of this matter, the following provisions of the Act are relevant: 588FB Uncommercial transactions (1) A transaction of a company is an uncommercial transaction of the company if, and only if, it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction, having regard to: (a) the benefits (if any) to the company of entering into the transaction; and (b) the detriment to the company of entering into the transaction; and (c) the respective benefits to other parties to the transaction of entering into it; and (d) any other relevant matter. … 588FDA Unreasonable director-related transactions (1) A transaction of a company is an unreasonable director-related transaction of the company if, and only if: (a) the transaction is: (i) a payment made by the company; or (ii) a conveyance, transfer or other disposition by the company of property of the company; or (iii) the issue of securities by the company; or (iv) the incurring by the company of an obligation to make such a payment, disposition or issue; and (b) the payment, disposition or issue is, or is to be, made to: (i) a director of the company; or (ii) a close associate of a director of the company; or (iii) a person on behalf of, or for the benefit of, a person mentioned in subparagraph (i) or (ii); and (c) it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction, having regard to: (i) the benefits (if any) to the company of entering into the transaction; and (ii) the detriment to the company of entering into the transaction; and (iii) the respective benefits to other parties to the transaction of entering into it; and (iv) any other relevant matter. The obligation referred to in subparagraph (a)(iv) may be a contingent obligation. 588FC Insolvent transactions A transaction of a company is an insolvent transaction of the company if, and only if, it is an unfair preference given by the company, or an uncommercial transaction of the company, and: (a) any of the following happens at a time when the company is insolvent: (i) the transaction is entered into; or (ii) an act is done, or an omission is made, for the purpose of giving effect to the transaction; or (b) the company becomes insolvent because of, or because of matters including: (i) entering into the transaction; or (ii) a person doing an act, or making an omission, for the purpose of giving effect to the transaction. 588FE Voidable transactions (1) If a company is being wound up: (a) a transaction of the company may be voidable because of any one or more of subsections (2) to (6) if the transaction was entered into on or after 23 June 1993; and … (3) The transaction is voidable if: (a) it is an insolvent transaction, and also an uncommercial transaction, of the company; and (b) it was entered into, or an act was done for the purpose of giving effect to it, during the 2 years ending on the relation-back day. (4) The transaction is voidable if: (a) it is an insolvent transaction of the company; and (b) a related entity of the company is a party to it; and (c) it was entered into, or an act was done for the purpose of giving effect to it, during the 4 years ending on the relation-back day. … (6A) The transaction is voidable if: (a) it is an unreasonable director-related transaction of the company; and (b) it was entered into, or an act was done for the purposes of giving effect to it: (i) during the 4 years ending on the relation-back day; or (ii) after that day but on or before the day when the winding up began. 34 Section 513B is also relevant. It identifies that the winding up is taken to have begun or to have commenced on the date on which the resolution of the members for it to be wound up is passed. In this case that is 7 December 2015 (see s 513B(e)). 35 By s 91 of the Act the "relation back day" in relation to Intelara is the day on which the winding up was taken to have begun. 36 Also tangentially relevant to this application is the definition of "related entity". That provides: related entity, in relation to a body corporate, means any of the following: … (k) a body corporate one of whose directors is also a director of the first-mentioned body; … 37 There is no doubt in this case that Intelara and Intelara Engineering were related entities. They had the same directors.

Uncommercial transaction 38 For the purposes of the requirements of s 588FB there is no doubt that the Asset Sale Agreement was a "transaction" within the meaning of that section. It is also clear that Intelara was a party to that transaction which is a transaction "of the company". In the latter respect see Walton Construction (Qld) Pty Ltd (in liq) v QHT Investments Pty Ltd [2018] FCA 1986. 39 The remaining question is whether a reasonable person in the company's circumstances would not have entered into the transaction having regard to the specified criteria. 40 On the basis of the allegations in the statement of claim (supported by the evidence adduced) the plaintiffs' submission that the Asset Sale Agreement was plainly not one into which a reasonable person would have entered into ought to be accepted. A number of factors point to that conclusion: (a) The company's assets were transferred for what was effectively a nil consideration. The business must have had some value because it was continued by Intelara Engineering. That company was able to complete the work in progress and presumably receive remuneration for it. It also received the plant, equipment and intellectual property owned by Intelara. Whilst it is true that Intelara Engineering assumed a portion of the outstanding employee entitlement liabilities, that company had no ability to meet them. (b) The assets of Intelara, which otherwise would have been used to discharge employee entitlements, were made available to meet the demands of the NAB as the secured creditor with the consequence that it was not able to meet the outstanding employee entitlement obligations. As a consequence it was exposed to a further liability, being the resulting obligation to the Commonwealth. That is not to say that the company's liabilities were increased as much as redistributed. (c) There was no real benefit to the company entering into the transaction in terms of its liabilities, however, by engaging in the transaction it conferred substantial benefits on its directors being the release of their personal liability to the NAB. That is significant because it sought and obtained no consideration from the directors for conferring that benefit on them. A reasonable person would only have reorganised their liabilities in that way for the purposes of conferring such a benefit on third parties if those third parties provided some substantial consideration for the benefit received. That, of course, did not happen. 41 These circumstances, and in particular, the latter consideration, show that the agreement is not one which a reasonable person in the position of the company would have entered into. 42 The plaintiffs also relied upon the circumstance that the arrangement in question "transferred" the entitlement claims of the employees to Intelara Engineering and those employees were deprived of the priority they would otherwise have enjoyed over Intelara's circulating assets to meet their claims. Further, Intelara Engineering was undercapitalised and had no ability to meet those claims. However, it is not self-evident that the "transfer" of employees and their liabilities to a third party did not confer some benefit on the company. At least, it is not clear that it resulted in a detriment. There is insufficient information available to reach a conclusion as to whether the value of the business assets transferred was in any way comparable to the amount of the liabilities assumed by Intelara Engineering. That being so it is preferable to rely upon the previously mentioned matters as establishing the assets sale agreement as an uncommercial transaction.

Insolvent transaction 43 For the purposes of s 588FC it is apparent that at the time Intelara entered into the Asset Sale Agreement it was insolvent. Indeed, its directors caused it to be wound up in insolvency on the same day. The fact of insolvency was adequately pleaded in any event. 44 Further, the Asset Sale Agreement was entered into on 7 December 2015, thereby satisfying the requirements of s 588FC(a)(i) that the transaction in question be entered into whilst the company was insolvent. 45 The consequence is that the Asset Sale Agreement was an "uncommercial transaction" which was also an insolvent transaction.

Unreasonable director-related transaction 46 The liquidator also claims that the Asset Sale Agreement was an unreasonable director-related transaction pursuant to s 588FDA(1). In this respect: (a) there is little doubt the Asset Sale Agreement and its performance constituted a conveyance, transfer or other disposition by the company; and (b) the disposition was to Intelara Engineering of which Capriblu and MR Lethlean were the sole shareholders. Mr Burnell was the sole director of Capriblu and Mr Lethlean the sole director of Lethlean MR. It follows there is a reasonable argument that the disposition was made for the benefit of Mr Lethlean and Mr Burnell who are directors of the two shareholder companies. 47 A question may arise as to whether s 588FDA(1)(b)(iii) is satisfied, but it is intended to be wide and the phraseology of the section indicates that, if the disposition is made to another for the benefit of a person mentioned in subs (i), being a director, that is sufficient. In this case, although the transfer may not necessarily be seen to confer the benefit directly on the directors, that is, by receipt of the assets of the company, it certainly conferred upon them the benefit of being released from their obligations under their personal guarantees to the NAB. Certainly, that, in the circumstances, appears to be a benefit which the section contemplates. There is also sufficient evidence to infer that the disposition to Intelara Engineering was also for the benefit of Mr Lethlean and Mr Burnell whose companies controlled Intelara Engineering. 48 As has been discussed in relation to s 588FB, a reasonable person in the position of the company would not have entered into the Asset Sale Agreement having regards to the absence of benefits to the company and the benefits conferred on the directors for no consideration. This satisfies s 588FDA(1)(c). 49 It follows that there is sufficient evidence to establish the Asset Sale Agreement as being an unreasonable director-related transaction.

Voidable transaction 50 In the above circumstances the Asset Sale Agreement was a voidable transaction. In the first instance it was both an insolvent transaction and an uncommercial transaction and was entered into during the two years ending on the "relation back day": s 588FE(3). 51 The plaintiffs also submitted the transaction was voidable by reason of s 588FE(6A). That submission is also well founded. As has been identified, the transaction was an unreasonable director-related transaction of the company. In addition, it was entered into during the four years ending on the "relation back day". For that reason also the Asset Sale Agreement was a voidable transaction. 52 Although the plaintiffs did not rely upon s 588FE(4) it appears that the transaction was also voidable under that section. As mentioned, the Asset Sale Agreement was an insolvent transaction of the company. Further, Intelara Engineering is a related entity of Intelara. That is because it has common directors. Finally, the Asset Sale Agreement was entered into in the period during four years ending on the relation back date.

Conclusion as to status of the Asset Sale Agreement 53 It follows that the Asset Sale Agreement was a voidable transaction within s 588FE for the above reasons.

The declarations sought 54 The plaintiffs seek declarations pursuant to s 21 of the Federal Court of Australia Act 1976 (Cth) that the Asset Sale Agreement was an uncommercial transaction pursuant to s 588FB, an insolvent transaction pursuant to s 588FC, an unreasonable director-related transaction pursuant to s 588FDA and a voidable transaction pursuant to s 588FE of the Act. 55 One difficulty in determining whether to exercise the discretion to make the declarations sought may be the absence of an active contradictor in the proceedings and that the relief sought is consequent upon a default of pleading. Whilst these factors may, on occasion, give reason for the Court to pause before granting a declaration, it is not so in this case. Here the evidence adduced by the liquidator is cogent. Although not discussed in any detail in the above reasons, many of the facts relied upon were admitted by the directors in the course of public examinations. Moreover, here the seeking of relief is based upon evidence adduced rather than solely upon the allegations in the statement of claim. The plaintiffs have established their right to the relief sought by persuasive evidence which supports the allegations made in the statement of claim, and the declarations ought be made. In reaching that conclusion it is also relevant that the declarations will have some utility. In this case it is said that they are needed in order for the plaintiff to obtain the relief sought pursuant to s 588FF(1)(g). Although that may not necessarily be so, I will proceed on that basis. There is at least some doubt that, without a conclusion and declaration that the Asset Sale Agreement is void, an order under that section would not or should not be made. If such an order is made, those erstwhile employees and Intelara will be entitled to prove in its winding up. 56 Finally, the plaintiffs also rely upon the submission that the declarations will mark the disapproval of the Court in relation to the contravening conduct: Tobacco Institute of Australia Limited v Australian Federation of Consumer Organisations Inc (No 2) (1993) 41 FCR 89, 99-100. Whilst there may be some element of that in some cases of this nature, there is no need to rely upon it here. 57 In that respect, I should also mention that these proceedings concerned only Intelara and Intelara Engineering. Other persons who may have been involved in the Asset Sale Agreement were not party to these proceedings and they did not have the opportunity to adduce evidence or respond to the allegations. Any findings made in this case and which appear in these reasons are solely as between the parties to the action. 58 In the result the plaintiffs have established a sufficient basis to warrant the making of declarations in their favour.

An order under s 588FF(1)(g) 59 Section 588FF(1) provides: (1) Where, on the application of a company's liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, the court may make one or more of the following orders: … (g) an order providing for the extent to which, and the terms on which, a debt that arose under, or was released or discharged to any extent by or under, the transaction may be proved in a winding up of the company; 60 In this case the employees of Intelara who were "transferred" to Intelara Engineering were disadvantaged by the latter company assuming the liability for their employment entitlements although it had no capital to satisfy them. The effect of the Asset Sale Agreement was that those employees lost their ability to prove in the winding up of Intelara with the benefit of priority over the secured creditor. There is good reason for making the order sought by the plaintiffs. It will enable those employees (or the Commonwealth standing in their shoes) to prove in the winding up of Intelara for the benefits to which they would have been entitled save for the conduct of Mr Lethlean and Mr Burnell. 61 It follows the plaintiffs have established an entitlement to an order pursuant to s 588FF(1)(g) to the effect that the former employees whose employment was transferred to Intelara Engineering on or around 7 December 2015 be entitled to prove in the winding up of Intelara for the employee entitlements that would have been due to them had their employment with Intelara not been terminated on 7 December 2015.

Other matters 62 The plaintiffs are entitled to the relief claimed as the elements of each cause of action are properly pleaded. Although the pleading has structural difficulties and does not comply with the rules of pleading in all respects, it suffices to identify each element on which the plaintiffs' causes of action are founded. It follows that the plaintiffs have satisfied the requirements of r 5.23 and they are entitled to judgment in the manner sought. Orders are made accordingly. I certify that the preceding sixty-two (62) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Derrington.