The claim is that corporations will borrow money and use it to buy back shares. That's actually a nice hack - interest income is favorably treated relative to capital gains, so it's a way to turn a higher tax piece of capital (stock) into a lower tax piece of capital (bonds).
If it's advantageous to have more debt, then this is what you do. It's done by pretty much every company in the world, not just hedge funds. It's literally finance 101.
My understanding is that phones4u was paying out dividends while increasing its debt; effectively an equity-for-debt swap. The difference is that this transfers risk from the owners to the creditors, allowing the business to collapse after it's been looted.
I think there's a case to be made for a rule "always pay your creditors before your equity investors" to avoid this kind of thing.
That's how it's supposed to work. A company makes money and gives it to the shareholders. When lenders lend money to the company, they are getting a return for their risk. Companies adjust their capitalization all the time - it's a normal part of running a business. You can do it with dividends or share repurchases, and if it makes sense, you can fund either with debt. There is nothing nefarious about doing that.
Further, if you always pay your creditors first, there is no point in capitalizing with debt - you give up significant value by doing so. It is normal and healthy for some companies to finance themselves perpetually with debt.
Edit: Ok, so there are still some non-believers. Think of it this way. You own a profitable company with no debt. Your accountant tells you that you'll increase the company's value if you are 50% debt and 50% equity. This is a consequence of our tax code. Sounds like a good plan. Now what? The company already pays dividends and has as much cash as it needs for operations. You borrow money (which banks are happy to give you because you can more than afford the debt service), and pay out the proceeds as dividends. You are now have all that money in your pocket, and your company is basically worth the same amount (value = equity, which is now 1/2 what it was + debt) - a little more, actually, because of the tax consequences of the debt.
This is totally normal. Sometimes the optimal debt level is zero. Sometimes it's 90%. If companies are pulling huge amounts of cash out as a result of debt financing, it's only because they had a sub-optimal capitalization to begin with. Again - nothing nefarious here. It's all just a way of adjusting risk and optimizing returns to the shareholders.
