Federal Court of Australia

Australian Securities and Investments Commission v Bettles [2020] FCA 1568

ORDERS

THE COURT ORDERS THAT:

1.    The Concise Statement and the Supplementary Concise Statement are set aside.

2.    The plaintiff file and serve a Statement of Claim in the proceeding within 28 days.

3.    The costs of and incidental to the defendant’s Interlocutory Application are reserved for later determination.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

GREENWOOD ACJ:

1    These proceedings are concerned with an interlocutory application by the defendant, Mr Jason Bettles, for an order that the Concise Statement and the Supplementary Concise Statement of the plaintiff, the Australian Securities and Investments Commission (“ASIC”), be struck out on the footing that the two documents fail, it is said, to make sufficiently clear the case to be asserted against Mr Bettles.

2    The contention is that although a sequence of facts are set out in the two documents, those facts are asserted at a general level of abstraction from the particular or precise conduct on the part of Mr Bettles which is said to give rise to conduct on his part which would render him a person involved in a contravention of provisions of the Corporations Act 2001 (Cth) (the “Act”) for the purposes of s 79 of that Act.

3    This is said to be particularly so in relation to conduct described as “illegal phoenix activity”.

4    By the Concise Statement, it is said that Mr Bettles knew about “this activity” on the part of the controllers of a group of companies called the “Members Alliance Group” (the “MA Group”) and that Mr Bettles “aided and abetted the controllers in designing and implementing that strategy”. Mr Bettles says that the allegations of fact do not identify conduct or knowledge on his part which would give rise to a conclusion that he was involved in any conduct in contravention of the Act. He says that he does not understand what is intended to be conveyed, so far as his conduct is concerned, by the taxonomic phrase “illegal phoenix activity” and nor does he understand what facts or features of the facts individually or in the aggregate are said to give rise to a contravention which falls under the rubric “illegal phoenix activity”.

5    I will return to the concept of illegal phoenix activity and the difficulty inherent in attributing content to that phrase in the circumstances of a particular case, later in these reasons.

6    The claims in relation to illegal phoenix activity fall under the heading “Phoenix Conduct” and “Redirection of Income and Sale of Client Book”. There are five other categories of conduct set out in the Concise Statement. Each of them, as framed, is criticised by the defendant.

7    Before examining the criticisms made by the defendant of both the Concise Statement and the Supplementary Concise Statement, it is necessary to identify the case sought to be made against Mr Bettles reflected in those documents.

The Originating Application and the Concise Statement

8    ASIC’s application is made under clause 45-1 of the Insolvency Practice Schedule (Corporations) which is Schedule 2 to the Act, given effect by s 600K of the Act. Clause 45-1 is in these terms:

CLAUSE 45-1    COURT MAY MAKE ORDERS IN RELATION TO REGISTERED LIQUIDATORS

45-1(1)    The Court may make such orders as it thinks fit in relation to a registered liquidator.

45-1(2)    The Court may exercise the power under subsection (1):

   (a)    on its own initiative, during proceedings before the Court; or

   (b)    on an application under subsection (3).

45-1(3)    Each of the following persons may apply for an order under subsection (1):

   (a)    the registered liquidator;

   (b)    ASIC.

45-1(4)    Without limiting the matters which the Court may take into account when making orders, the Court may take into account:

(a)    whether the registered liquidator has faithfully performed, or is faithfully performing, the registered liquidator’s duties; and

(b)    whether an action or failure to act by the registered liquidator is in compliance with this Act and the Insolvency Practice Rules; and

(c)    whether an action or failure to act by the registered liquidator is in compliance with an order of the Court; and

(d)    whether any person has suffered, or is likely to suffer, loss or damage because of an action or failure to act by the registered liquidator; and

(e)    the seriousness of the consequences of any action or failure to act by the registered liquidator, including the effect of that action or failure to act on public confidence in registered liquidators as a group.

45-1(5)    This section does not limit the Court’s powers under any other provision of this Act, or under any other law.

[emphasis added]

9    Accordingly, the source of the orders sought by ASIC is clause 45-1(1) in the context of the other subclauses of that clause.

10    The Originating Application recites that the proceeding concerns the conduct of the defendant “in connection with the performance of his duties as Registered Liquidator” of a particular company and other companies identified in the Schedule. The application recites that on the facts stated in the Concise Statement, ASIC seeks, relevantly for present purposes, the following three grounds of relief:

1.    An order that the Defendant’s registration as a Registered Liquidator be cancelled.

2.    An order that the Defendant be prohibited from reapplying for registration as a Registered Liquidator for such period as the Court considers appropriate.

3.    An order that the Defendant be prohibited from consenting to any appointment and acting as a Liquidator for such period as the Court considers appropriate.

[emphasis added]

11    The Concise Statement recites that it sets out the “important facts giving rise to the claim”. In the introductory seven paragraphs, ASIC recites the matters described at [12] to [15] of these reasons.

12    The defendant is a registered liquidator and has been a partner of Worrells Solvency & Forensic Accountants (“Worrells”). He has been a registered liquidator since 28 August 2002. Between 22 July 2016 and 25 August 2016, Mr Bettles was appointed the liquidator of 18 companies of a group of more than 50 companies. Twenty-three of those companies in the group are said to be relevant to the proceeding and they are set out in the Schedule to the Concise Statement. The companies were members of the MA Group located on the Gold Coast. The MA Group provided investment and financial advice to retail clients focusing on residential property investment opportunities. Iridium Holdings Pty Ltd (“Iridium”) was the ultimate holding company for most of the companies in the MA Group. On 28 November 2014 (for GST purposes) and 2 March 2015 (for income tax purposes), 18 companies within the MA Group were registered with the Australian Taxation Office (the “ATO”) as a consolidated group for taxation purposes. Iridium was registered as the head company of the “GST and income tax consolidated groups” (the “Tax Consolidated Groups”).

13    Mr Richard Marlborough and Mr Colin MacVicar each owned 50% of the issued shares in Iridium through entities controlled by them. Mr Marlborough’s entity, holding the shares in Iridium, was Astro Holdings Pty Ltd (“Astro”). Because Mr Marlborough and Mr MacVicar each owned 50% of the issued shares in Iridium, it seems to be clear enough that the references in the Concise Statement to the “controllers of the MA Group” is a reference to Mr Marlborough and Mr MacVicar.

14    At 4 March 2015, the MA Group had debts of $25M including a debt of $18M owed to the ATO.

15    Between 5 January 2016 and 8 July 2016, the ATO issued statutory demands to companies within the MA Group amounting to more than $17M. This total debt included a statutory demand of more than $2M to Iridium on 23 June 2016.

Phoenix Conduct

16    The next section of the Concise Statement asserts facts under the heading “Phoenix Conduct”. That conduct is put this way at para 8:

8.    In June and July 2016, the controllers of the MA Group devised a plan to engage in illegal phoenix activity. The Defendant knew about this activity – among other things, he had been at meetings held on 8, 14 and 16 July 2016 (the July 2016 Meetings) with Marlborough, representatives of the MA Group’s accountants (WMS) and/or representatives of its lawyers (Ramsden) where the strategy was designed – and he aided and abetted the controllers in designing and implementing that strategy.

[emphasis added]

17    The strategy referred to at para 8 is described at para 9 in these terms:

9.    The strategy included creating a number of “newco” companies to take over the business of the MA Group, providing it with capital via one or more of five companies within the MA Group (19 to 23 in Schedule A) which had realisable assets and/or ongoing income streams (the MA Trading Companies), the management of those assets and/or income streams by the newcos, and the liquidation of the relevant companies of the MA Group.

[emphasis added]

18    As to the July 2016 meetings, para 10 says this:

10.    At the July 2016 meetings, the Defendant became aware (if he had not known before):

   (a)    of the fact that there were Tax Consolidated Groups;

(b)    that Iridium Holdings was the sole shareholder of the MA Trading Companies; and

(c)    that the MA Group’s accountants and lawyers (among others) would shortly be entering into arrangements with a view to securing payment of their fees.

[emphasis added]

19    As to the strategy mentioned in paras 8 and 9, para 11 says this:

11.    The strategy was executed in quick succession, as follows:

(a)    on 13 and 21 July 2016, the professional advisors to either the MA Group or its directors (including WMS and Ramsdens) lodged security interests for registration against one or more of the companies in the MA Group (including the MA Trading Companies) to secure their professional fees. Those securities were executed by Marlborough, on behalf of the MA Group.

(b)    on 15 July 2016, Liam Young (the MA Group Internal Legal Counsel) incorporated the “newco” companies: Benchmark Private Wealth Pty Ltd (BPW); Benchmark Private Wealth Holdings Pty Ltd; and Benchmark Wealth Property Services Pty Ltd (Benchmark Property) (together, the Benchmark Group). Braiden Marlborough (the son of Marlborough) and the Marlborough family held a 95% beneficial ownership of the Benchmark Group.

(c)    by deed dated 19 July 2016, MacVicar agreed to resign as director of the Iridium Group of companies (that is, the MA Group), in return for payment of $250,000. That payment was to be made upon a land resumption compensation payment (of $450,000) being paid to SS Residential NSW Pty Ltd (SS Residential), one of the MA Trading Companies (the SS Residential Deed).

(d)    On 22 July 2016, 14 companies in the MA Group were placed into voluntary liquidation, with a further four companies placed into voluntary administration. On 22 and 25 August 2016, those four companies were placed into liquidation (by creditors). The Defendant (together with Rajendra Khatri from Worrells) was appointed as liquidator to each of these companies (1 to 18 in Schedule A).

(e)    from on or about 25 July 2016, BPW became the recipient of the income stream of the MA Trading Companies (see heading Redirection of Income and Sale of Client Book, below).

(f)    from on or about 1 August 2016, BPW immediately employed no fewer than 33 staff who had previously been employed by entities within the MA Group.

[emphasis added]

Re-direction of Income/Client Book Sale

20    The next topic addressed by the Concise Statement concerns the redirection of income streams and the sale of a valuable client book. The factual matter set out at para 12 is this:

The Defendant prepared, or knew of, management deeds between various entities in the MA Group which redirected income streams, making those funds unavailable to creditors, and did not oppose the sale of a valuable client book by two companies in the group (Capricorn Securities Pty Ltd (Capricorn) and Iridium Financial Planning Pty Ltd (Iridium FP)) in an uncommercial transaction and at a serious undervalue.

[emphasis added]

21    As to that allegation, the Concise Statement recites a series of “circumstances”. The first is this at para 12(a):

(a)    from early August 2016:

(i)    BPW and the MA Trading companies entered into agreements which confirmed the re-directing of the income streams of the MA Trading Companies to BPW (Management Deeds). All but one of the Management Deeds (being a deed between PPI and Benchmark Property (which was never executed)) were executed in October 2016.

(ii)    the commencement date of each of the Management Deeds was backdated to 25 July 2016.

(iii)    one of the Management Deeds, between BPW and MM Prime Investment Pty Ltd (MM Prime), entitled BPW to receive 100% of the first $550,000 of work in progress, otherwise payable to MM Prime, in return for providing “management services” (MM Prime work in progress).

(iv)    the Defendant was involved in the preparation of the Management Deeds or, alternatively, had knowledge of them prior to their execution.

[emphasis added]

22    The second matter is this at para 12(b):

(b)    two members of the group (also two of the MA Trading Companies), Capricorn and Iridium FP, operated a financial planning business, the main asset of which was their client book. It entitled them to annual trail income. On or about 2 December 2016, Capricorn and Iridium FP sold their business (that is, the Client Book) to Crest Wealth Pty Ltd (Crest) for $900,000 (Client Book Sale). As part of the Client Book Sale, a [consultancy] agreement was entered into (on the same day) between BPW and Crest, pursuant to which BPW agreed to assist Crest in the ongoing management of the financial planning business acquired by Crest via the Client Book Sale, for a period of 2 years for an amount of $440,000 (including GST). The Defendant advised that he did not oppose the Client Book Sale, prior to the Client Book Sale.

[emphasis added]

23    The third matter which seeks to identify the basis upon which the Client Book Sale was uncommercial is put this way at para 12(c):

(c)    the Client Book Sale was uncommercial because, inter alia:

(i)    the valuer of the business was Aaron Lavell (Lavell) of WMS. Lavell’s valuation was sought both by Crest and by the Defendant prior to the completion of the Client Book Sale. WMS had become a secured creditor of Iridium FP on 15 July 2016.

(ii)    in April 2016, Lavell advised the ATO that the business had a value in excess of $3.75M.

(iii)    Peter Chesterton (Chesterton) was a shareholder of Crest. Chesterton was the MA Group’s former accountant, via his firm, Crest Accountants. Crest Accountants had become a secured creditor of Iridium FP on 21 July 2016. Chesterton had also assisted MacVicar in the negotiations leading to the SS Residential Deed.

(iv)    the Client Book Sale resulted in significant payments to the secured creditors of the MA Group (including WMS and Ramsdens) with $Nil proceeds being distributed to Iridium Holdings (the sole shareholder of Capricorn and Iridium FP).

(v)    BPW provided no services to Crest under the consultancy agreement and did not receive the monies payable under that agreement; rather those monies were redirected to Marlborough.

24    At para 13, the Concise Statement recites that the MA Trading Companies (see [17] of these reasons; five companies) were each placed into liquidation between January and May 2017 and that the defendant was appointed as liquidator of three of those companies: SS Residential on 11 January 2017; Capricorn and Iridium FP on 10 February 2017.

The legal basis for relief

25    As to the conduct described at paras 8 to 13 of the Concise Statement (being those matters described at [16] to [24] of these reasons), ASIC says that this conduct was “illegal phoenix activity, conducted by at least Marlborough and MacVicar in contravention of Part 2D.1 of the Act”: para 25.

26    At para 26, ASIC says this:

26.    The Defendant (a)  by his attendance at the July 2016 meetings, knew of the strategy to transfer the business of the MA Group to BPW; (b)  knew of, and was involved in, the preparation of the Management Deeds; (c)  knew of the Client Book Sale and the SS Residential Deed; and (d)  chaired or attended meetings, on 5 September, 19 September, 6 October and 26 October 2016 wherein the progress of each of the matters referred to herein was discussed. By reason of at least these matters, the Defendant knew of the illegal phoenix activity.

[emphasis added]

27    As to the engagement of the defendant in the asserted illegal phoenix activity, ASIC says this at para 27:

By his position as a registered liquidator of companies in the MA Group, the Defendant was in a position to influence whether or not the illegal phoenix activity occurred and the strategy of the controllers [Marlborough and MacVicar] of the MA Group was implemented. Consequently, the Defendant was involved in (within the meaning of s 79 of the Act) a contravention of Part 2D.1 of the Act.

[emphasis added]

28    At this point, it should be noted that the Concise Statement does not identify the particular sections of the Act within Part 2D.1 said to have been contravened; or the specific integers of the relevant sections engaged by particular facts; or the conduct of particular individuals by reference to those facts and integers; or the particular conduct of the defendant which constitutes the “aiding and abetting” of that conduct.

Absence of independence

29    The third topic addressed by the Concise Statement is the “absence of independence”. As to that, ASIC says this at para 14:

14.    The Defendant failed to act independently in accepting appointments as liquidator to companies in the MA Group, having given a written advice on 11 March 2015 to MacVicar regarding the implications for Mr and Mrs MacVicar should the MA Group cease to trade in a short timeframe because of an inability to pay outstanding debts to the ATO. The Defendant then failed to declare this absence of independence in the Declaration of Independence, Relevant Relationships and Indemnities signed by him on 22 July 2016 for Iridium Holdings and a number of other companies.

The legal basis for relief

30    As to that conduct, ASIC says that the primary legal grounds for relief sought in relation to that conduct is this, as set out at para 28:

28.    By the conduct in paragraph 14 above, the Defendant failed to maintain independence, or the appearance of independence, as required by the general law, and contrary to clause 6.1 of the Code of Professional Practice for Insolvency Practitioners, Third Edition, published by the Australian Restructuring and Insolvency Turnaround Association (ARITA Code). Further, the Defendant contravened clause 6.8 of the ARITA Code. By failing to adequately disclose in the DIRRI [Declaration of Independence, Relevant Relationships and Indemnities] the relationship with MacVicar and the nature of the MacVicar personal advice, the Defendant failed to comply with the disclosure requirements set out in clause 6.8.1 of the ARITA Code.

Elderton Transactions

31    The next topic addressed by the Concise Statement is the “Elderton Transactions”. At para 15, ASIC says this:

15.    The Defendant permitted funds of $240,000 owed by Elderton Holdings Pty Ltd to one company in the group, MM Prime, to be redirected to a different company, Members Alliance Incorporated (MAI). MAI was owned by Marlborough’s company, Astro. MM Prime invoiced Elderton between 17 October 2016 and 16 January 2017 but, to the Defendant’s knowledge, the funds were paid to MAI’s Westpac account between 18 October 2016 and 9 January 2017.

The legal basis for relief

32    As to the Elderton Transactions, ASIC says this at para 29:

29.    By the conduct in paragraph 15, the Defendant did not exercise the degree of care and diligence required of a liquidator because he failed to prevent the diversion of $240,000 owing to MM Prime, to the detriment of the interest of the creditors of Iridium Holdings, and by allowing MAI to receive these payments despite there being an outstanding demand for payment of $7,809.00 by Astro.

Members’ voluntary winding up of MA Trading Companies

33    As to these matters, ASIC says this at paras 16 and 17:

16.    Each of SS Residential, Iridium FP and Capricorn were part of the Tax Consolidated Groups. The Defendant knew this, and that the groups had a tax liability of about $17M to the ATO. Notwithstanding this, the Defendant lodged declarations of solvency (DOS) for SS Residential on 23 December 2016 and Iridium FP and Capricorn on 9 February 2017.

17.    These DOS permitted those companies to be wound up by members’ voluntary winding up, rather than by creditors’ voluntary winding up. This occurred on 11 January 2017 for SS Residential, and 10 February 2017 for Iridium FP and Capricorn, when the Defendant conducted the resolution to wind up the companies by members’ voluntary winding up, appointed himself liquidator and fixed his remuneration. This had the effect of, inter alia, denying scrutiny of the SS Residential Deed and the sale of Capricorn and Iridium FP’s Client Book, and the Defendant’s conduct in relation to the same.

The legal basis for relief

34    At para 30, ASIC frames the conduct in this way:

30.    By the conduct in paragraphs 16 and 17, the Defendant did not exercise the degree of care and diligence required of a liquidator because he: (i)  lodged with ASIC DOS which he knew or ought to have known were false; (ii)  caused resolutions to be passed for members’ voluntary windings up when these ought to have been creditors’ windings up; and (iii)  once appointed, did not carry out his obligations under s 496(1) of the Act.

35    The next topic is concerned with the disclaimer of onerous property.

Disclaimer of onerous property

36    ASIC relies upon the following matters.

37    On 22 July 2016, the defendant was appointed as administrator of Provincial Property Investments (Aust) Pty Ltd (“PPI”), and appointed liquidator of that company on 25 August 2016. PPI operated a “Rent Roll” managing over 200 rental properties throughout Australia (the “Rent Roll”). Under one of the management deeds, Benchmark Property would manage PPI’s Rent Roll and market it for sale. However, Benchmark Property did not hold a licence to manage and sell that part of the Rent Roll that applied to property in Victoria.

38    The defendant became aware of that matter on 23 September 2016.

39    ASIC asserts that the defendant failed to have the Rent Roll independently valued and then failed to sell the Rent Roll on commercial terms.

40    Instead, Mr Bettles permitted Benchmark Property, between 25 November 2016 and 14 December 2016, to contact at least 75 owners of property on the Rent Roll and to execute property management agreements with most of them, entitling it to receive the commission income from those properties rather than the commission income being received by PPI. ASIC asserts that at no time did Benchmark Property provide any consideration to PPI for the income stream re-directed to Benchmark Property. Further, ASIC asserts that despite Benchmark Property’s unlicensed status (in New South Wales and Victoria), the defendant, at all relevant times, allowed Benchmark Property to receive PPI’s right to commission on the Rent Roll.

41    ASIC asserts that on 13 and 14 December 2016, the defendant disclaimed 108 properties on the Rent Roll by lodging notices of disclaimer with ASIC: paras 18-22, Concise Statement.

The legal basis for relief

42    As to these matters at [35], ASIC says this at para 31 of the Concise Statement:

31.    By the conduct in paragraphs 18 to 22, the defendant did not exercise the degree of care and diligence required of a liquidator because he: (i)  allowed Benchmark Property to receive PPI’s right to commission on rental income; and (ii)  failed to obtain an independent valuation of the Rent Roll and make any proper attempt to sell it before disclaiming it as onerous property.

The books and records

43    The last topic is concerned with a contended failure on the part of the defendant to obtain books and records of particular companies. As to this matter, ASIC says this at paras 23 and 24:

23.    The Defendant lodged with ASIC reports pursuant to s 533 of the Act in respect of the companies listed at 1 to 11, 13 and 19 to 21 in Schedule A. In respect of each of those, the Defendant declared that he had obtained or inspected the company’s books and records. As to those companies listed at 3, 6, 7, 9 and 19 in Schedule A, the Defendant declared that in his opinion the books and records were adequate. He declared that the books and records of the companies listed at 1, 2, 4, 5, 8, 10, 11, 13, 19 to 21 were not adequate [it is not necessary to identify each of these entities].

24.    The Defendant was aware of no fewer than 800 boxes of records for companies in the MA Group but was unable to identify to which individual companies those records belonged. The Defendant did not obtain 16 terabytes of computer records for the companies of the MA Group.

The legal basis for relief

44    As to the conduct described at [37], ASIC says this at para 32:

32.    By the conduct in paragraphs 23 and 24, the Defendant failed to discharge his obligations as a liquidator by failing to obtain relevant books and records to conduct investigations into the affairs of the companies concerned. The Defendant breached s 1308(2) of the Act by falsely declaring that he had obtained or inspected the companies’ books and records, and making a declaration with respect to their adequacy.

45    As to all of these matters, ASIC seeks, by para 33, the relief set out in the Originating Application as set out at [10] of these reasons.

46    ASIC has filed and served a Supplementary Concise Statement in the proceeding which supplements the matters of fact recited at paras 8 to 13 and 25 to 27 of the Concise Statement. Those paragraphs address the asserted illegal phoenix activity and the legal basis asserted for relief in relation to that activity. In the Supplementary Concise Statement, ASIC says that the illegal phoenix activity was constituted by eight classes of conduct, as follows:

2.    The illegal phoenix activity was constituted by the following conduct, each item of which is described in more detail under its respective heading, below:

(a)    developing a strategy to transfer the income and assets of the MA Trading Companies to a new group of companies, the Benchmark Group;

(b)    applying for the incorporation of the Benchmark Group;

(c)    arranging for MacVicar to resign as a director of the MA Group and enter into the SS Residential Deed;

(d)    selectively placing companies in the MA Group into liquidation;

(e)    applying for the registration of security interests against one or more of the companies within the MA Group;

(f)    transferring staff from the MA Group to the Benchmark Group;

(g)    arranging for the MA Trading Companies to enter into management deeds with the Benchmark Group to the detriment of the financial interests of the MA Trading Companies and/or their unsecured creditors; and

(h)    redirecting income and entering into the uncommercial sale of the Client Book.

47    ASIC alleges that the illegal phoenix activity so constituted was conduct in contravention of ss 180, 181 and 182 of the Act.

48    Those sections of the Act are well-known. However, they are in these terms:

180(1)    Care and diligence – directors and other officers. A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:

(a)    were a director or officer of a corporation in the corporation’s circumstances; and

(b)    occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.

Note: This subsection is a civil penalty provision (see section 1317E).

180(2)    Business judgment rule. [For present purposes, it is not necessary to note the terms of the business judgment rule].

181(1)    Good faith – directors and other officers. A director or other officer of a corporation must exercise their powers and discharge their duties:

(a)    in good faith in the best interests of the corporation; and

(b)    for a proper purpose.

Note 1: This subsection is a civil penalty provision (see section 1317E).

Note 2: Section 187 deals with the situation of directors of wholly-owned subsidiaries.

181(2)    [Person involved in contravention] A person who is involved in a contravention of subsection (1) contravenes this subsection.

Note 1: Section 79 defines involved.

Note 2: This subsection is a civil penalty provision (see section 1317E).

182(1)    Use of position – directors, other officers and employees. A director, secretary, other officer or employee of a corporation must not improperly use their position to:

(a)    gain an advantage for themselves or someone else; or

(b)    cause detriment to the corporation.

Note: This subsection is a civil penalty provision (see section 1317E).

182(2)    [Person involved in contravention] A person who is involved in a contravention of subsection (1) contravenes this subsection.

Note 1: Section 79 defines involved.

Note 2: This subsection is a civil penalty provision (see section 1317E).

49    Section 9 of the Act provides that an officer of a corporation means, among other things, the following:

(a)    a director or secretary of the corporation; or

(b)    a person:

(i)    who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or

(ii)    who has the capacity to affect significantly the corporation’s financial standing; or

(iii)    in accordance with whose instructions or wishes the directors of the corporation are accustomed to act (excluding advice given by the person in the proper performance of functions attaching to the person’s professional capacity or their business relationship with the directors of the corporation); or

(c)    a receiver, or receiver and manager, of the property of the corporation; or

(d)    an administrator of the corporation; or

(e)    an administrator of a deed of company arrangement executed by the corporation; or

(f)    a liquidator of the corporation; or

(g)    …

50    Accordingly, ASIC’s Concise Statement, read in conjunction with the Supplementary Concise Statement, asserts that conduct occurred which engaged a contravention of duties and obligations arising under ss 180, 181 and 182 of the Act, and that conduct is said to attract the taxonomic label of illegal phoenix activity. Three questions arise.

51    First, whether the conduct on the part of the controllers said to contravene any one or all of ss 180, 181 and 182, arises by reason of all of the matters at paras 8 to 13 and 25 to 27 of the Concise Statement and para 2(a) to (h) of the Supplementary Concise Statement taken together, which is said to constitute the illegal phoenix activity.

52    Second, whether, and if so, what contraventions on the part of the controllers arise on those facts if made good?

53    Third, what is the conduct of Mr Bettles which demonstrated that he aided or abetted those contraventions?

54    Mr Bettles is said to be a person “involved in a contravention” by reason of s 79(a) of the Act. Section 79 is in these terms:

79    Involvement in contraventions

A person is involved in a contravention if, and only if, the person:

   (a)    has aided, abetted, counselled or procured the contravention; or

(b)    has induced, whether by threats or promises or otherwise, the contravention; or

(c)    has been in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to, the contravention; or

(d)    has conspired with others to effect the contravention.

55    The matters that need to be identified with clear precision are those facts and circumstances which demonstrate the degree of engagement by Mr Bettles in conduct which is said to constitute a contravention of the Act and the extent of his knowledge of matters relevant to that question. There needs to be a clear factual nexus demonstrated between conduct said to contravene the Act, the degree of engagement by Mr Bettles in that conduct and the state of knowledge on the part of Mr Bettles of the essential integers of the sections said to have been contravened by the controllers.

56    Because ASIC has sought to address criticisms of the Concise Statement by relying upon the Supplementary Concise Statement, it is now necessary to examine the Supplementary Concise Statement.

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.

The Concise Statement and the Supplementary Concise Statement

120    The first topic addressed by the Supplementary Concise Statement as an explanatory supplement to the allegation that the controllers of the MA Group devised a plan to engage in illegal phoenix activity and that Mr Bettles knew of this activity and aided and abetted the controllers in designing and implementing the strategy, is that on 8 July 2016, Mr Bettles attended a meeting at which the matters at [60] were discussed including the contents of a PowerPoint document containing references to the topics identified at [61] of these reasons. The discussion of those matters does not engage, and is not said to engage, by specific paragraphs of the pleading, conduct falling within the integers of ss 180, 181 or 182 on the part of particular individuals with the consequential pleading, by reference to particular conduct, that the defendant aided and abetted a contravention.

121    The Supplementary Concise Statement refers to meetings on 14 July 2016 and 16 July 2016 at which Mr Bettles was present where there was a discussion of the operations of each entity in the MA Group, a strategy to determine how the parties would proceed with a new company and a discussion of the PowerPoint presentation. ASIC asserts that by no later than 16 July 2016, the defendant was aware of the matters described at [64] of these reasons.

122    Those matters at [59] to [64] of these reasons are not said to engage conduct in contravention of ss 180, 181 and 182 of the Act on the part of particular individuals.

123    As to the second topic concerning “the phoenix conduct in which the defendant was involved”, the contention is that particular companies in the Benchmark Group were incorporated and that Braiden Marlborough and the Marlborough family held a 95% beneficial interest in the Benchmark Group. Those matters of fact do not engage with aspects of the pleading of a contravention of ss 180, 181 or 182 leading to a pleading that the defendant aided and abetted a contravention: see [66] of these reasons.

124    The third topic concerns the defendant’s role in arranging for MacVicar to resign as director and enter into the SS Residential Deed. ASIC asserts the matters set out at paras 15 to 26 of the Supplementary Concise Statement, set out at [68] of these reasons. In the result, ASIC asserts that the defendant knew particular matters and knew about the SS Residential Deed. The knowledge the defendant had of those matters might be material to a pleading that Mr Bettles aided and abetted a contravention by others to the extent that he knew about the relevant matters and did or did not do something. However, the document does not proceed on that basis. It simply asserts that Mr Bettles knew of particular matters and knew about the SS Residential Deed.

125    The fourth topic identifying “the phoenix conduct in which the defendant was involved (within the meaning of s 79 of the Act) in contravention of the Act” is selectively placing companies in the MA Group into liquidation: see [69] of these reasons. Again, those steps may be material factual matters in a sequence of facts supporting an assertion of a contravention of ss 180, 181 or 182 on the part of particular individuals leading to a further pleading that by reference to those facts, in conjunction with other facts, the defendant aided and abetted a demonstrated contravention of the Act by someone. However, that is not how the document proceeds.

126    The same difficulty arises in relation to the fifth topic: see [70] of these reasons.

127    The sixth topic concerning events said to constitute phoenix conduct in which the defendant was involved within the meaning of s 79 of the Act, in contravention of the Act, is “transferring staff from the MA Group to BPW”. Again, the act of transferring staff, as a factual matter, does not engage a contravention of the Act. However, that fact, taken together with other facts in a rational sequence of asserting or pleading facts going to a contravention of the Act, may well be relevant to conduct said to constitute the contravention. However, by itself, it is simply a factual assertion which, like many of the other paragraphs, does not fit within a coherent pleading of firstly, a contravention by identified persons of particular provisions of the Act by reference to conduct relevant to, and engaging with, the integers of one or more of ss 180, 181 and 182, and secondly, a pleading of facts which demonstrates that the defendant aided and abetted that contravention.

128    The seventh topic concerns a sequence of steps by which companies within the MA Group of companies entered into Management Deeds with BPW. Those companies were MM Prime, Capricorn, Iridium FP and Airlie Beach. Those Management Deeds, as pleaded, seem to have had a significant affect upon each of those MA Group companies. The ultimate conclusion is that Mr Bettles was involved in the preparation of each of the Management Deeds or, alternatively, was aware of their preparation. That assertion is said to flow from the material referred to at [78] of these reasons. The acts of causing the relevant MA Group companies to enter into the various Management Deeds with BPW may be thought to be important factual steps in a sequence of pleading leading to a proposition that particular persons, by causing the relevant entities to enter into the Deeds, taken in conjunction with other factual matters relating to the reorganisation of the MA Group of companies, engaged in conduct in contravention of ss 180 or 181 or 182 of the Act. That sequence of pleading might then lead to a pleading that Mr Bettles was “involved in” those critical steps which, in large part, might be said to be the critical matters exhibiting conduct characterised as aiding and abetting a contravention. That might be so if, on the entirety of the pleading, the defendant is shown to have been aware of the “essential elements” of the contended contravention. The pleading on this matter, so far as it concerns Mr Bettles, is that he did one of two things. He either “prepared” each Deed or, alternatively, he “was aware” of the preparation by, presumably, someone else. Those allegations seem to be significantly different but either way they might well form part of a pleading that Mr Bettles was aware of the essential elements of a contravention by others if the pleading properly demonstrated facts making out a contravention by others, the essential elements of which were known to Mr Bettles.

129    Similar remarks can be made about the matters concerning the eighth topic at [79] of these reasons. Those matters, however, engage much more directly with a contention that Mr Bettles, in his capacity as liquidator of Iridium Holdings, ought not to have consented to the Client Book sale having regard to the matters set out at [80] of these reasons in the context of paras 43 to 57 of the Supplementary Concise Statement set out at [79].

130    Accordingly, I am satisfied that the Concise Statement taken together with the Supplementary Concise Statement does not properly address a coherent claim in the sense of identifying a sequence of facts which, if made good, demonstrate a contravention by particular persons of one or more of ss 180, 181 or 182 of the Act leading to a pleading that the defendant was involved in a relevant contravention in the sense of aiding and abetting that conduct.

131    The defendant is entitled to have a coherent pleading in the way discussed in these reasons.

132    It may be that a coherent pleading can be developed within the framework of a Concise Statement. However, it seems to me that the best way forward is for ASIC to file a Statement of Claim. The utility of the Concise Statement is not lost because it has caused a range of information to be framed which can usefully, no doubt, be relied upon in developing a pleading which addresses the methodology described in these reasons.

133    I do not propose to examine the other criticisms made by the defendant of the other aspects of the Concise Statement and Supplementary Concise Statement. Since a pleading is to be developed, filed and served, it will no doubt take into account the criticisms which have been made of those parts of the Concise Statement. I accept that those criticisms need to be addressed.

134    The remaining matter is this. In the submissions by ASIC, the proposition is advanced that the nature of the proceedings involves an inquiry under clause 90-10 of the Insolvency Practice Schedule (Corporations). Clause 90-10 is in these terms:

90-10    COURT MAY INQUIRE ON APPLICATION OF CREDITORS ETC.

90-10(1)    The Court may, on the application of a person mentioned in subsection (2), inquire into the external administration of a company.

90-10(2)    Each of the following persons may make an application for an inquiry:

…

(d)    ASIC.

   90-10(3)    …

90-10(4)    The Court may, for the purposes of such an inquiry, require a person who is or has at any time been the external administrator of the company to:

(a)    give information; or

(b)    provide a report; or

(c)    produce a document

to the Court in relation to the external administration of the company.

   90-10(5)    ...

90-10(6)    This section does not limit the Court’s powers under any other provision of this Act or under any other law.

135    Clause 90-15(1) provides that the Court may make such orders as it thinks fit in relation to the external administration of a company and it may do so on its own initiative during proceedings before the Court on an application by ASIC (among others) under clause 90-20(1). Clause 90-15(3) sets out examples of orders that may be made and clause 90-15(4) sets out the matters that may be taken into account.

136    The difficulty with ASIC’s proposition is that a consideration of the Originating Application makes clear that the application is made under clause 45-1 as set out at [8] in the context of the relief sought as described at [10] of these reasons.

137    Absent any application for leave to amend the originating process to comprehend an application under clause 90-10, the proceeding ought to be determined according to the way in which it is framed.

138    The costs will be reserved for later determination.

Associate:

Dated:    28 October 2020