The Supplementary Concise Statement
57 ASIC says that the following matters address "the phoenix conduct in which the defendant was involved (within the meaning of s 79 of the Act), in contravention of the Act", supplementing paras 8 to 13 and 25 to 27 of the Concise Statement as earlier described.
58 The first topic concerns the contended involvement of the defendant in "developing a strategy to transfer income and assets of MA Group to new entities".
59 ASIC says that by no later than 1 July 2016, Mr Daniel Willis of the MA Group, Mr Marlborough and Mr Braiden Marlborough, were planning for a new company to take over aspects of the business of the MA Group. That planning is said to be evidenced by: financial analysis and modelling for "revised operations" and "a new start up" being undertaken; a document entitled "New Co Action Plan" emailed by Mr Willis to Mr Marlborough, Mr Young and Mr Braiden Marlborough on 1 July 2016; and a document entitled "New Co Staff List" emailed by Mr Willis to Mr Marlborough, Mr Young and Mr Braiden Marlborough on 1 July 2016.
60 On 8 July 2016, a meeting was held at the offices of WMS at Robina at which Mr Bettles, Mr Ramsden, Mr Jones and Mr Lavell were present. ASIC says that at the 8 July 2016 meeting, the following matters were discussed:
(a) the operations of each entity in the MA Group;
(b) that Iridium Holdings was the ultimate holding company for most of the companies in the MA Group;
(c) that entities comprising the MA Group were part of a tax consolidated group;
(d) the creation of a new company by Braiden Marlborough with Young as sole director and shareholder to take over the business of the MA Group;
(e) the need to obtain $500,000 to start the new company;
(f) arrangements for Ramsden Lawyers to take security over assets of companies comprising the MA Group for payment of its fees;
(g) arrangements for WMS to take security over assets of companies comprising the MA Group for payment of its fees;
(h) possible sources of income for the defendant's fees; and
(i) the contents of a Powerpoint document that Lavell had prepared (WS Powerpoint).
61 As to the PowerPoint, ASIC says that it:
(a) described the roles carried out by various companies within the MA Group, including project marketing, financial planning, risk services, property management, finance brokers, leaseholding and building;
(b) listed the assets of various companies within the MA Group, including their low and high values;
(c) summarised the statutory demands against various companies within the MA Group;
(d) set out a timeline for various actions to be taken, including the appointment of Worrells by 15 July and the establishment of "Newco" by 13 July; and
(e) listed the proposed staff of Newco.
62 ASIC asserts that on or about 14 July 2016, a meeting occurred at which Mr Bettles, Mr John Ramsden and Mr Oliver Hughes were present. Both Mr Ramsden and Mr Hughes were from Ramsden Lawyers. Mr Hughes was present for part of the meeting. ASIC says that, at the meeting, the operations of each entity in the MA Group and a strategy to determine how the parties would proceed with the new company, including management of the funds, management of the assets of the new company, and realising those assets, were discussed.
63 ASIC says that another meeting took place on 16 July 2016 at which Mr Bettles, Mr Lavell, Mr Justin Wowk of WMS, Mr Marlborough, Mr Braiden Marlborough and Mr Liam Young were present. At that meeting, the operations of each entity in the MA Group, and the contents of the WMS PowerPoint, were discussed.
64 ASIC says that as a consequence of the defendant's attendance at the 8 July 2016 meeting, the 14 July 2016 meeting and the 16 July 2016 meeting, Mr Bettles was, by no later than 16 July 2016, aware of the following matters:
(a) the existence of the Tax Consolidated Group;
(b) that Iridium Holdings was the holding company of the majority of companies in the MA Group;
(c) the likely insolvency of companies within the MA Group;
(d) that WMS and Ramsden Lawyers would shortly be entering into arrangements with a view to securing payment of their ongoing fees; and
(e) that there was a strategy to transfer the assets and businesses from companies within the MA Group to a new entity or entities.
65 The second topic said to constitute phoenix conduct in which the defendant was involved, in contravention of the Act, is the conduct of "applying for the incorporation of Newcos - the Benchmark Group".
66 The factual contention is that on or about 15 July 2016, each of the three companies in the Benchmark Group (BPW, Benchmark Property and BPW Holdings) were incorporated and Braiden Marlborough, and the Marlborough family, held a 95% beneficial interest in the Benchmark Group. As to this second matter, these facts should be read together with the matters at para 11(b) of the Concise Statement (see [19] of these reasons). These paragraphs do not identify actions or knowledge on the part of Mr Bettles as to these matters.
67 The third topic said to constitute phoenix conduct in which the defendant was involved is the topic of "arranging for MacVicar to resign as director and enter into the SS Residential Deed".
68 As to this topic, ASIC says this:
15. By a deed dated 19 July 2016, MacVicar agreed to resign as director of the Iridium Group of companies (the MA Group) in return for payment of $250,000, with such payment to be made within 2 business days of SS Residential receiving a land resumption compensation payment of $450,000 from the Department of Transport, NSW (SS Residential Deed).
16. By clause 4.2 of the SS Residential Deed, the payment of $250,000 was in lieu of the claim made by MacVicar that he was owed outstanding Director Fees for SS Residential and the Iridium Group since the date SS Residential was incorporated.
17. On or about 28 July 2016 at 12.23pm, the defendant made a note in Worrells' file note 304536 to the effect that he had attended on a teleconference with Ramsden and Lavell in which he was told that the only asset of SS Residential was a compensation payment from a landlord of around $400,000.
18. On or about 6 September 2016 at 11.53am, the defendant sent an email to Marlborough which listed as an agenda item "arrange for signing and lodgement of the SS Residential Deed".
19. On or about 16 September 2016 at 10.48am, the defendant sent an email to Finch (amongst others) which listed as an agenda item "update from Ramsden as to the status of the SS Residential Deed".
20. The defendant knew, by the matters referred to in paragraphs [17] to [19] above, by no later than 16 September 2016, that a payment of around $400,000 would be made to SS Residential in the near future.
21. On or about 27 October 2016, the sum of $500,492.30 was received by Ramsden Lawyers on behalf of SS Residential from the Department of Transport, NSW for the surrender fee.
22. On or about 9 November 2016:
(a) $250,000 was transferred from the Ramsden Lawyers trust account for SS Residential to MacVicar in accordance with the SS Residential Deed;
(b) the defendant received an email from Ramsden which attached an executed copy of the SS Residential Deed.
23. On or about 11 November 2016, the defendant sent a letter to Grants Law Firm requesting advice regarding, inter alia, the payment of $250,000 to MacVicar and what action (if any) should have been taken by the liquidators in their capacity as the sole shareholder of SS Residential.
24. On or about 27 March 2017, the defendant sent a letter to MacVicar which:
(a) enclosed a copy of the MacVicar - SS Residential Settlement Deed; and
(b) asked MacVicar to provide a breakup of the director's fees he claimed to be owed.
25. On or about 19 April 2017, the defendant received an email from MacVicar which attached a letter that, inter alia:
(a) listed the companies in the MA Group of which MacVicar was a director; and
(b) stated that MacVicar had acted unilaterally for the companies and did not keep detailed time costing records.
26. In the premises of paragraphs [22] to [25] above, the defendant knew about the SS Residential Deed.
[emphasis added]
69 The fourth topic is "selectively placing companies in the MA Group into liquidation". As to that matter, ASIC says this:
27. On 22 July 2016, the companies in the MA Group listed at:
(a) numbers 1 to 8, 10, 12, 15, 16 in the Schedule to the Concise Statement (Schedule) were placed into voluntary liquidation; and
(b) numbers 9, 11, 13 and 14 in the Schedule were placed into voluntary administration.
28. As at 22 July 2016, the MA Trading Companies (listed at 17 to 21 of the Schedule, namely SS Residential, Iridium FP, Capricorn, MM Prime and Airlie Beach) remained trading.
29. On 22 August 2016, the companies in the MA Group listed at numbers 13 and 14 of the Schedule were placed into voluntary liquidation.
30. On 25 August 2016, the companies in the MA Group listed at numbers 9 and 11 in the Schedule were placed into voluntary liquidation.
31. The defendant, together with Khatri, consented to and were appointed administrators of each of the companies listed at numbers 9, 11, 13 and 14.
32. Upon the defendant's appointment as administrator, he became an officer of each of the said companies within the definition of officer in sec. 9 of the [Act].
33. The defendant, together with Khatri, consented to and were appointed liquidator of each of the companies listed at numbers 1 to 16 of the Schedule.
34. Upon the defendant's appointment as liquidator, he became an officer of each of the said companies within the definition of officer in s 9 of the Act (or continued to be an officer in respect of those companies in respect of which he had been an administrator).
[emphasis added]
70 The fifth topic is "applying for the registration of security interests" and as to that matter, ASIC says this:
35. During the period 13 July 2016 to 21 July 2016, the following individuals or entities applied for registration of security interests against one or more of the companies within the MA Group including the MA Trading Companies:
(a) David Bruce Domingo;
(b) Domingo Superannuation Fund/Mellow Brae Pty Ltd;
(c) Ramsden Law Pty Ltd;
(d) WMS Solutions Pty Ltd;
(e) Crest Accountants Pty Ltd; and
(f) Members Windings Up Pty Ltd
[emphasis added]
71 The sixth topic said to constitute phoenix conduct in which the defendant was involved is the topic of "transferring staff from the MA Group to BPW". As to that, ASIC says this:
36. On or about 1 August 2016, BPW employed, or offered employment to, no fewer than 33 individuals who had previously been employed by entities within the MA Group.
[emphasis added]
72 The seventh topic is "arranging for BPW and MA Group companies to enter into management deeds". As to this topic, ASIC says this.
73 On 11 October 2016, BPW and MM Prime entered into the "MM Prime Management Deed" executed by Mr Marlborough on behalf of MM Prime. It commenced on 26 July 2016. The purpose of the Deed was to appoint BPW to manage MM Prime's business. MM Prime was obliged to pay BPW 50% of MM Prime's work in progress with BPW receiving 100% of the first $550,000, 50% of the next $1,200,000 and the remainder to be divided in the ratio 50/50. Revenue to which BPW was entitled following the initial $550,000 was to be paid directly into its bank account: para 37.
74 On 3 October 2016, BPW and Capricorn entered into the Capricorn Management Deed executed by Mr Marlborough on behalf of Capricorn. It commenced from 25 July 2016 and appointed BPW to manage Capricorn's business. Capricorn was obliged to pay BPW "all trail income received by Capricorn and 50% of all Up-Front Commissions received by Capricorn": para 38.
75 On 13 October 2016, BPW and Iridium FP entered into the Iridium FP Management Deed executed by Mr Marlborough on behalf of Iridium FP. It commenced on 25 July 2016 and provided for the appointment of BPW to manage the business of Iridium FP. The Deed was to terminate automatically upon the sale of Iridium FP's risk trail book: para 39.
76 On 20 October 2016, BPW and Airlie Beach entered into the Airlie Beach Management Deed executed by Mr Marlborough on behalf of Airlie Beach. It commenced on 25 July 2016 and provided for the appointment of BPW to manage the business of Airlie Beach. Airlie Beach was obliged to pay BPW all property management fees, 10% of the sale proceeds derived from sale of any of the assets of Airlie Beach plus all costs incurred by BPW in marketing and advertising the assets of Airlie Beach: para 40.
77 A draft Deed between PPI and Benchmark styled "PPI Management Deed" was prepared but never fully executed: para 41.
78 ASIC says that Mr Bettles was "involved in" the preparation of each of these Management Deeds or, alternatively, "was aware of their preparation" by reason of being a recipient or author of particular documents; and attendee at particular meetings; and a participant in particular telephone discussions. Those documents received by him or of which he was the author, the meetings he attended and the telephone conversations he participated in are set out at subparas (a) to (z) and then (aa) to (hh) of para 42. It is not necessary to set out that large list of documents, meetings or telephone attendances. It is simply a list.
79 The eighth topic said to constitute phoenix conduct in which the defendant was involved is the topic of "re-directing income" and entering into the "uncommercial sale" of the "Client Book". The factual matters are these:
43. Capricorn was the holder of an Australian Financial Services Licence (AFSL). Together with Iridium FP as its corporate authorised representative, Capricorn provided financial services including risk insurances and financial planning. Capricorn was the entity which contracted with Macquarie and TAL, those contracts being ones which gave rise to the two major sets of income streams for the business operated in conjunction with Iridium FP.
44. On or about 8 April 2016, in a proposal made on behalf of the Tax Consolidated Group to the ATO, WMS advised the ATO that:
(a) the annual trail income for the financial planning business of Capricorn/Iridium FP (Client Book) was $1,250,000; and
(b) the indicative value of the Client Book was $3,750,000 (ATO Client Book Value Representation).
45. On or about 16 November 2016, Advice First Pty Ltd (Advice First) made alternative offers to purchase the Client Book which were materially as follows:
(a) offer one: client book $850,000/consulting fee to key person $300,000;
(b) offer two: client book $930,000/consulting fee to key person $250,000;
(c) offer three: client book $1,005,000/consulting fee to key person $200,000.
46. On or about 17 November 2016, the defendant received an email from Ramsden to the effect that (inter alia):
(a) Peter Chesterton of Crest had made a verbal offer to buy the client book, the material terms of which were that Crest would pay $900,000 for the client book and a $400,000 consultancy fee to Marlborough and Benchmark;
(b) Ramsden was instructed to seek the defendant's approval to accept Crest's offer; and
(c) the offer from Advice First (particularly offer 3) would offer more return to the vendors.
47. On or about 18 November 2016, the defendant received from WMS a letter which contained a valuation of the Client Book at $850,000 - $1,000,000 (WMS Client Book Valuation). The WMS Client Book Valuation was not independent because WMS had previously provided taxation and business services to Capricorn and Iridium FP and, at the time of its completion, WMS was a secured creditor of Iridium FP.
48. On or about 25 November 2016, Lavell expressed his preliminary view to the defendant that while the sale contract for the Client Book should have both Capricorn and Iridium FP as sellers, all of the proceeds should be paid to Capricorn as the AFSL holder.
49. On or about the same date, the defendant received from Grants Law Firm an advice to the effect that (inter alia) (Grants Advice): enquiries should be made with Ramsdens as to how the proceeds of the sale of the Client Book would be apportioned between Capricorn and Iridium FPI; Ramsden Lawyers, amongst other entities, had securities over Iridium FP but not Capricorn; and, the details should be provided to ASIC and ASIC's advice about the proposed transaction should be sought.
50. On or about 30 November 2016 at 5.34pm, the defendant received an email from Julian Blanchard of Grants which forwarded an email that he had earlier sent to Ramsden (amongst others) to the effect that the contracts giving rise to the income stream were between Capricorn and Macquarie and TAL, not Iridium FP and those companies (Grants - Ramsden Email).
51. On or about 1 December 2016 at 3.35pm, the defendant received an email from Ramsden to the effect that (inter alia) (the Ramsden Crest Email):
(a) the purchaser was insisting on the defendant's consent to the sale of the Client Book;
(b) it was the position of both Capricorn and Iridium FP that the going concern of the business and the assets were for the benefit of Iridium FP notwithstanding that Capricorn was the entity to which the income was actually paid;
(c) the distribution of the net proceeds of the sale was still being calculated, but that secured parties would receive close to the full balance which was not retained by Crest under the sale agreement [as to which see [22] of these reasons]; and
(d) the secured parties who would be paid from the proceeds would be Crest Accounting, Members Windings Up Pty Ltd, WMS and Ramsden Lawyers.
52. On 2 December 2016, the defendant instructed Grants Law Firm to send a letter to Ramsden Lawyers communicating that the "liquidators of the shareholder company do not oppose the sale contract" [Iridium Holdings].
53. By written contract dated 2 December 2016, Capricorn and Iridium FP sold to Crest their Financial Planning Business (comprising Capricorn's Client Book, being its entitlement to annual trail income), for $900,000 (Client Book Sale Agreement).
54. By special condition 7.1 of the Client Book Sale Agreement, it was a pre-condition to completion of the Client Book Sale Agreement that Crest would enter into a consultancy agreement with [a or the] director of the seller, Members Alliance Incorporated Pty Ltd (MAI) on terms which required MAI to provide consultancy services for two years from the date of completion for the total consideration of $400,000.
55. By Deed dated 2 December 2016, Crest and BPW agreed that BPW would provide consulting services to Crest for a total fee of $400,000 (the Crest Consulting Agreement).
56. The Crest Consulting Agreement was entered into in purported compliance with special condition 7.1 of the Client Book Sale Agreement.
57. The Client Book Sale resulted in (inter alia):
(a) at least the following payments from the proceeds being made to the following secured creditors of Iridium FP:
(i) $557,568.40 to Ramsden Lawyers; and
(ii) $54,752.20 to WMS;
(b) payments of:
(i) $63,432.41 being paid on behalf of Airlie Beach to the Office of State Revenue, NSW; and
(ii) $42,300 being paid on behalf of MM Prime to the Office of State Revenue, Western Australia;
(c) distribution of the entirety of the proceeds by 6 February 2017; and
(d) $Nil of the proceeds being distributed to Iridium Holdings (as shareholder of Capricorn and Iridium FP).
[emphasis added]
80 As to these factual matters, ASIC contends that Mr Bettles, as liquidator of Iridium Holdings, ought not to have consented to the Client Book sale and puts the contention in the following terms:
58. The defendant, as liquidator [of] Iridium Holdings (being the sole shareholder of Capricorn and Crest), ought not to have consented to the Client Book sale in circumstances where:
(a) the ATO Client Book Value Representation placed a significantly greater value on the trail book than the WMS Client Book Valuation;
(b) the WMS Client Book Valuation and the defendant had not obtained any independent valuation of the value of the Client Book;
(c) the valuer (WMS) was a secured creditor of one of the vendors (Iridium FP);
(d) Chesterton of Crest had previously been the accountant for the MA Group;
(e) Crest Accounting Pty Ltd was a secured creditor of one of the vendors (Iridium FP);
(f) it was made clear in the Grants Advice, certain creditors had security over the assets of Iridium FP but not Capricorn;
(g) having received the Grants - Ramsden email, the defendant knew that Capricorn was the entity that held the income-generating contracts, not Iridium FP;
(h) having received the Ramsden Crest Email, the defendant knew that:
(i) the controllers of the vendors proposed to structure the deal in such a way that Iridium FP would be the beneficiary of the sale proceeds and not necessarily Capricorn;
(ii) consequently, the secured parties would receive close to the full proceeds of the sale; and
(iii) as a result, Iridium Holdings would receive $Nil from the sale.
[emphasis added]
81 Unfortunately, it has been necessary to set out in some considerable detail precisely how the case against Mr Bettles is presently framed. Before examining aspects of that formulation, it is useful to return to matters of essential principle.
82 The case made against Mr Bettles is a very serious matter. If Mr Bettles, as a registered liquidator, has aided, abetted, counselled or procured a contravention of the Act by others and has thus been "involved in" a contravention of the Act for the purposes of s 79(a) of the Act, in matters relating to the reorganisation, administration and liquidation of entities within a group of companies, to the detriment of creditors or other persons or entities affected by a failure of the "controllers" to comply with duties and obligations arising under the Act, and also affected by the conduct of an administrator or registered liquidator in aiding or abetting that conduct, a person in the position of Mr Bettles is likely to have his registration cancelled under s 45-1(1) as quoted at [8] of these reasons.
83 Indeed, that is the order that ASIC seeks in the proceeding: see [10] of these reasons.
84 Equally, if ASIC is in a position to prove facts which demonstrate that Mr Bettles has engaged in conduct which renders him a person involved in a contravention for the purposes of s 79 of the Act, the remedial consequences of that conduct need to be addressed.
85 It follows that it is essential for ASIC to set out all the material facts which, if proved, establish conduct on the part of particular persons (perhaps described in a definitional sense in the document which might be either a Concise Statement or a Statement of Claim, as the "controllers"), which is said to constitute a contravention of the Act. That process would begin, however, by identifying each of the material facts concerning the conduct of the controllers which will ultimately be shown to have relevance in engaging the integers of the particular provisions of the Act said to have been contravened by them. The facts set out in the document (Concise Statement or Statement of Claim) will, of course, set out the context but ultimately each material fact said to establish a contravention of a provision of the Act by particular persons must be identified.
86 It may be that the relevant conduct is said to be taking steps, for example, of the kind described at [79] and [80] of these reasons. It may be that the conduct of the controllers demonstrates an attempt to transfer or take over the business undertaking of particular entities for no value or for a gross undervalue through arrangements put in place with new entities incorporated for that purpose with no or little regard for the interests of creditors or employees (or other interests) relevant to the foundation entities. Whatever the content or character of the conduct, it must be identified with precision. The conduct so identified might then be defined (simply in descriptive terms) as "phoenix conduct". But doing so is simply a convenient label for conduct of a particular kind which is properly identified. At that point, describing conduct as "phoenix conduct" carries with it no legal significance of any kind. It is, or may be, simply a useful shorthand descriptive, taxonomic term, for conduct constituted by a particular sequence of asserted facts relevantly related to the reorganisation of a group of companies or conduct in relation to dealings in the assets of those entities.
87 The question of whether the conduct described by the shorthand phrase "phoenix conduct" is, as a "matter of law", "unlawful phoenix conduct" or "unlawful phoenix activity", is entirely determined by whether proof of the facts of the conduct makes good a contravention of a provision of the Act. There is no such thing, per se, as "illegal phoenix activity". There may be conduct of a kind capable of being described analogically by reference to the mythological phoenix as "phoenix" conduct, but such conduct can only be unlawful if the analogically relevant conduct establishes a contravention of a provision of the Act.
88 If the conduct, so described, of persons, engages a contravention of the Act, the conduct can then usefully be described as "unlawful phoenix activity". The term "illegal" is usually reserved for use in connection with conduct that is an offence, either simple or indictable, punishable on conviction. Where the conduct described as "phoenix conduct" engages conduct constituting an offence, the term is appropriate. Where the conduct is shown to be conduct in contravention of a duty or obligation arising under the Act or characterised as a contravention of a pecuniary penalty provision, the term "unlawful phoenix activity" is preferable.
89 This proceeding is concerned with a contention that Mr Bettles engaged in conduct of aiding or abetting (rather than counselling or procuring) a contravention of the Act (s 79(a)) by the controllers (and possibly persons associated with them). The contravention Mr Bettles is said to have aided and abetted, is a contravention under one or all of ss 180, 181 and 182 of the Act.
90 As to s 180, the proposition must be that a director or officer of a corporation (either or both of Mr Marlborough or Mr MacVicar, and possibly others although that it seems that the focus is upon the conduct of the controllers) failed to exercise a power or discharge a duty, required to be performed or discharged by them, with the degree of care and diligence that a reasonable person would exercise if such a person were a director or officer of the corporation in the corporation's circumstances and such a person occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.
91 If that is the contention, ASIC must identify all of the facts material to each of the elements or integers of s 180(1) said to be engaged by the conduct of the controllers and, for example, in particular, the corporation's relevant circumstances, the power or duty being exercised or discharged etc. As to the elements of s 180(1), see Cassimatis v Australian Securities and Investments Commission (2020) 376 ALR 261; 144 ACSR 107; [2020] FCAFC 52, Greenwood J; Thawley J: the majority. In Cassimatis v Australian Securities and Investments Commission [2020] HCASL 158, Gageler and Keane JJ at [1] rejected an application for special leave on the footing that there was "insufficient reason to doubt the correctness of the reasoning of the majority of the Full Court of the Federal Court".
92 If the conduct of the controllers is conduct concerning steps involving the reorganisation of the MA Group of companies where powers and duties are said not to have been exercised and discharged with the degree of care and diligence that a reasonable person would exercise if they were a director or officer of the corporation in the corporation's circumstances, and where the notional reasonable person occupied the office held by, and had the same responsibilities within the corporation as, the controllers, the Concise Statement would need to set out all of the material facts that demonstrate that the conduct (made up of the various elements constituting the reorganisation) is conduct which engages a contravention of s 180(1). In other words, what exactly did the controllers do; why is it a contravention of s 180(1)?
93 Having made out those elements, the document would then need to identify all of the material facts that prove, if made good, that Mr Bettles aided and abetted that conduct. That will involve identifying facts that prove, if made good, that Mr Bettles had knowledge of all of the "essential elements" of the contravention of s 180(1) by the controllers and either did or did not do something such that his conduct is properly characterised as aiding and abetting that contravention by the controllers.
94 ASIC contends that Mr Bettles aided or abetted a contravention by the controllers of s 181(1). That contention must be that either or both of the controllers (perhaps together with other officers of the relevant corporation) failed to exercise a power or discharge a duty cast upon them, in good faith in the best interests of the relevant corporation and for a proper purpose.
95 Again, if the conduct of the controllers (and possibly together with other officers of the relevant corporation) is conduct concerning steps taken in planning for, devising and implementing a reorganisation of the MA Group of companies with interposed "newco" entities, management deeds, a diversion of revenue streams and other conduct which demonstrates a failure to perform and discharge powers and duties in good faith in the best interests of the relevant corporation and for a proper purpose, the conduct (perhaps characterised in a definitional sense as "phoenix context") needs to be identified together with facts which demonstrate that the particular phoenix conduct is unlawful because it engages facts going to the integers of s 181(1) of the Act.
96 Once that matter is properly identified, facts need to be asserted (or pleaded) that prove, if made good, that Mr Bettles aided and abetted that contravention, that is, facts which show that he had knowledge of the essential elements of the contravention of s 181(1) by the relevant persons and that he either did something or failed to do something such that his conduct is properly characterised as aiding and abetting that contravention by the controllers.
97 Section 182(1) contains two possible contraventions. The contention might be that the controllers (and/or possibly an "other officer" or "employee") improperly used their (or his or her) position to gain an advantage for themselves or for someone else.
98 The contention might be that the controllers improperly used their (or his or her if an "other officer" or "employee" is comprehended by the conduct) position to cause detriment to the relevant corporation.
99 If either of those possibilities be the frame of reference, the Concise Statement (or Statement of Claim) needs to identify all of the material facts concerning the conduct so as to show, if made good, that the conduct relied upon gives rise to a contravention of s 182(1).
100 Again, facts must be set out that demonstrate that Mr Bettles aided and abetted that contravention which involves setting out facts that show that he had knowledge of all the essential elements of that contravention and that he did, or failed to do, something that is properly characterised as aiding and abetting that contravention.
101 It is not sufficient to set out a collection of facts over a period of time and describe conduct falling within that large matrix of fact as "illegal phoenix activity" on the footing that the matrix of fact engages contraventions of ss 180, 181 and 182. The process of setting out or pleading a case that a person is a person involved in a contravention of the Act for the purposes of s 79 of the Act involves identifying the contravention with precision and identifying the facts and circumstances which demonstrate that the relevant person is a person "involved in" that contravention because the person has aided or abetted the particular contravention. Thus, framing the case involves asking what conduct, engaging the reorganisation of the group of companies, renders the conduct inherent in the reorganisation contravening conduct of a particular section and by whom, when and how? It involves then asking what facts demonstrate conduct on the part of Mr Bettles that demonstrates that he had knowledge of each essential integer of the contravention of, in each case, as framed by the document, ss 180, 181 and 182 which will involve setting out the steps constituting the aiding and abetting.
102 These are all matters of principle in framing such a case.
103 It is now necessary to note some observations about the difficulties of framing a case as "illegal phoenix activity" without first stepping through a process of identifying conduct of a particular kind (perhaps defined in a purely definitional sense as phoenix conduct) and then identifying the elements of the conduct which engage with the integers of the particular sections of the Act which, if engaged, has the effect of rendering the conduct a contravention which, in turn, might properly result in the phoenix conduct (so defined) as being understood as, and given the label of, unlawful or perhaps illegal phoenix activity depending upon the nature, content and character of the provision of the Act engaged by the conduct.
104 In November 2009, the Commonwealth Treasury Department published a paper entitled "Action against fraudulent phoenix activity". The paper is described as a "Proposals paper". At para 1.1, the paper says this:
Fraudulent phoenix activity involves the evasion of tax and other liabilities such as employee entitlements through the deliberate, systematic and sometimes cyclic liquidation of related corporate trading entities.
…
Defining precisely what constitutes fraudulent phoenix activity is inherently difficult. This was noted by the Parliamentary Joint Committee on Corporations and Financial Services in its report on corporate insolvency laws in 2004 [Corporate Insolvency Laws: A Stocktake, The Commonwealth of Australia, Canberra, par 8.2]. However, underlying the distinction between illegitimate, or fraudulent, phoenix activity and a legitimate use of the corporate form, is the intention for which the activity is undertaken. Relevantly, ASIC draws a distinction between businesses that get into a position of doubtful solvency or actual insolvency as a result of poor business practices (for instance, poor record keeping or poor cash management practices) and those operators who deliberately structure their operations in order to engage in phoenix activity to avoid meeting obligations. The contrast between fraudulent phoenix activity and a legitimate use of the corporate form is also captured by the Australian Taxation Office (ATO) which defines phoenix activity to be:
'the evasion of tax through the deliberate, systematic and sometimes cyclic liquidation of related corporate trading entities' (emphasis added).
[emphasis added]
105 In the Treasury paper, the typical structure of "fraudulent phoenix arrangements" is described at para 1.1.2 in these terms:
In its most basic form fraudulent phoenix activity involves one corporate entity carrying on a business, accumulating debts without any intention of repaying those debts (for the purpose of wealth creation or to boost the cash flow of the business) and liquidating to avoid repayment of the debt. The business then continues in another corporate entity, controlled by the same person or group of individuals.
106 Apart from the "most basic form of fraudulent phoenix activity", the paper at para 1.1.2 also says this:
Fraudulent phoenix arrangements are, however, often more sophisticated. In the ATO's experience, a typical fraudulent phoenix arrangement would be structured as follows:
• a closely held private group is set up, consisting of several entities one of which has the role of hiring the labour force for the business;
• the labour hire entity will usually have a single director who is not the ultimate 'controller' of the group;
• the labour hire entity has few, if any, assets and little share capital;
• the labour hire entity fails to meet its liabilities and is placed into administration or liquidation by the ATO;
• a new labour hire entity is set up and the labour moved across to work under this new entity; and
• the process is repeated, with little disruption to the day-to-day operation of the overall business and the financial benefits from the unpaid liabilities are shared amongst the wider group.
107 These textual explanations and the examples contemplate conduct described as "fraudulent". The fraudulent conduct is said to involve deliberate, systematic and sometimes cyclic liquidation of related corporate trading entities, and that which makes the underlying "phoenix activity" fraudulent or illegitimate is the "intention with which the activity is undertaken".
108 In this case, activity of a certain description is said to have been undertaken in contravention of ss 180, 181 and 182.
109 In a report entitled "Defining and Profiling Phoenix Activities" dated December 2014 (by Associate Professor Helen Anderson, Professor Ann O'Connell, Professor Ian Ramsay, Associate Professor Michelle Welsh and Ms Hannah Withers), the authors observe that illegal phoenix activity engages an intention to exploit the corporate form to the detriment of unsecured creditors, including employees and tax authorities. The authors prefer the terminology of "illegal phoenix activity" adopted by ASIC rather than the ATO's terminology of "fraudulent phoenix activity". Whether the term "illegal" or "fraudulent" be used, the critical matter is identifying the legal regime which renders the conduct either unlawful or illegal or fraudulent as a particular species of illegality (in the broad sense). In the report, the authors identify five categories of phoenix conduct, two of which are said to be "legal" and three of which are said to be "illegal". The point of mentioning the Treasury paper and this report is to recognise the inherent difficulty in attributing legal character to particular conduct and the vitally important role of being able to identify whether particular conduct contravenes an identified legal norm. Identifying conduct and attaching a label of "illegal phoenix activity" to it, jumps a step in the analysis. The true analysis is to identify a class of conduct attracting scrutiny and explain why the class of conduct attracts a particular legal characterisation as a contravention of a provision of the Act or a contravention of other prohibitions arising under other legislation or according to the general law. Determining whether conduct engaging a reorganisation of a group of companies is unlawful is fact-dependent and demands demonstrating a relationship between conduct and the integers of particular provisions of the Act or other legislation or the general law which brings about a conclusionary consequence that a particular set of conduct is rendered unlawful, illegal or fraudulent, depending upon the legal regime, normative or otherwise, engaged by the conduct.
110 The questions to be answered in every case are: What precisely is the content of the impugned conduct? When and by whom was the conduct engaged in? What duties, obligations or prohibitions were engaged by the conduct to be performed or honoured by the relevant participants that were not performed or honoured such that the impugned conduct engages a contravention of the legal source of those duties, obligations or prohibitions whether under the Act, other legislation or the general law?
111 The authors at para 1.2 of the report say this:
Illegal phoenix activity is not susceptible to precise modelling, such that if certain specified conditions are present, a regulator can determine with certainty that it has taken place. It is virtually impossible to identify illegal phoenix activity from an incorporation of a successor company following a single failure in the absence of documentary evidence such as written instructions from advisors. Rather, the characterisation of illegal phoenix activity is likely to come from the external observation of the conduct of specific individuals involved in multiple corporate failures over a period of time.
112 These observations emphasise the fact-specific analysis which is necessary to identify particular conduct and its relationship with the legal regime with which the conduct engages so as to enable a conclusion to be reached that the conduct is unlawful, illegal or fraudulent depending on the legal regime engaged.
113 The authors also say this at para 1.2 of the report:
… [W]hat must be acknowledged from the outset is that even where there are multiple failures and a new company has retained the same controllers, name and/or business premises, that is not in and of itself proof of illegal phoenix activity. Where a business person has expertise in a particular field, they are likely to want to commence another business in that same field and possibly the same location if the first is unsuccessful. They are also likely to want to preserve whatever reputation and goodwill their business has generated amongst their customers by retaining a similar company name where possible. If the old company has tax losses, they may need to satisfy the same business test for the carry-forward of those losses. The illegality of phoenix activity instead turns predominantly on the intention of the company's controllers, whether the company was [subject to phoenix activity] deliberately in order to avoid debts which may include employee entitlements. The difficulty of proving this intent is the crux of the difficulty in differentiating legal phoenix activity from illegal phoenix activity.
[emphasis in bold added, emphasis in italics original]
114 The authors issued a further report in October 2015 entitled "Quantifying Phoenix Activity: Incidence, Cost, Enforcement". Professors Helen Anderson, Ian Ramsay, Michelle Welsh and Mr Jasper Hedges issued a further report in February 2017 entitled "Phoenix Activity: Recommendations on Detection, Disruption and Enforcement". Each of these reports examine in considerable detail aspects of conduct falling within and outside the rubric of illegal phoenix activity as that term is explained by the authors, and the impact of conduct falling within that characterisation by the authors.
115 In July 2018, PricewaterhouseCoopers Consulting (Australia) Pty Limited ("PWC") published a report entitled "The Economic Impacts of Potential Illegal Phoenix Activity". At para 1.1, the authors observe that it has historically been difficult to determine a single agreed definition of "phoenix activity" and what constitutes "illegal" or "fraudulent" phoenix activity in Australia. In making that observation, the authors recognise that there is a two part analysis to the question. The first requires the identification of a class of conduct which can appropriately be described as "phoenix activity" and then examining the question of what renders that conduct illegal or fraudulent. The authors understand phoenix activity, which is rendered illegal or fraudulent, as "broadly" referring to "the deliberate and systematic liquidation of a corporate trading entity which occurs with the intention to avoid tax and other liabilities, such as employee entitlements, and to continue the operation and profit taking of the business through other trading entities". The corporate form is used "to incur costs that will not be paid as the intention is to liquidate the company and for the core of the business to start again in a new corporate form, debt free, rising like a phoenix from the ashes". The authors then identify, as at 2018, the features of activity which ASIC then characterised as illegal phoenix activity and the authors also note the approach or definition adopted by the ATO. ASIC's website searched on 21 October 2020 says this (Australian Securities & Investments Commission 2020, illegal Phoenix Activity (ASIC, 2020), viewed 21 October 2020:
Illegal phoenix activity
Illegal phoenix activity is where a new company is created to continue the business of an existing company that has been deliberately liquidated to avoid paying outstanding debts, including taxes, creditors and employee entitlements.
What is illegal phoenix activity?
This illegal practice [as defined above] usually happens when company directors transfer the assets of an existing company to a new company without paying true or market value, leaving debts with the old company. Once the assets have been transferred, the old company is placed in liquidation. When the liquidator is appointed, there are no assets to sell so creditors cannot be paid. Once the assets are transferred to a new company, the directors continue to operate the business. This gives the new business an unfair advantage when competing for work, because they carry less debt and have lower operating costs.
[emphasis added]
116 By these statements, ASIC identifies what it describes as the usual features of "phoenix conduct" and focuses upon the deliberate liquidation of companies for the nominated purpose as giving the phoenix conduct the character of "illegal phoenix activity".
117 In these proceedings, ASIC asserts that contraventions of ss 180, 181 and 182 have occurred which presumably is intended to capture the element of deliberateness or intention. Section 182 is thought to have particular relevance in the context of the conduct ASIC describes as what "usually happens" because s 182 proscribes conduct of a director, secretary, other officer or employee of a corporation improperly using a position to gain an advantage for themselves or someone else; or causing detriment to the corporation.
118 The point of this discussion and reference to these various papers and reports is to emphasise the difficulty over a reasonably long period in Australia in coming to grips with the relationship between a range of conduct related to steps taken in the reorganisation of companies within a group and features of that conduct which engage duties, obligations and prohibitions under the Act, other legislation or the general law which, if not performed and honoured, render the conduct contravening conduct and giving content and definition to that which is a contravention.
119 Once that conduct is properly understood, it is then possible to give content to the question of whether a person such as Mr Bettles is a person involved in the relevant contravention on the footing that the facts asserted or pleaded demonstrate that he had knowledge of the essential elements of the relevant contravention and aided or abetted the particular contravention.