In this CMN Insolvency case note we review the:
- background to the Anti-Phoenixing Provisions and new creditor-defeating disposition provisions introduced by the Treasury Laws Amendment (Combatting Illegal Phoenixing) Act 2020 and
- implications of the first decision relying on new creditor-defeating disposition provisions as handed down by Associate Justice Gardiner on 11 May 2022 in Intellicomms Pty Ltd (In Liquidation) & Ors v Tecnologie Fluenti Pty Ltd [2002] VSC 228.
In this case the liquidators were successful in setting aside a sale of business agreement that had been entered into hours before the company was placed into creditors’ voluntary liquidation.
Background to the Anti-Phoenixing and Creditor-defeating disposition legislative framework
In 2020, sections 588FDB, 588FE(6B) and 588GAC were inserted into the Corporations Act 2001 (Cth) (Corporations Act) as a result of the enactment of the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth) (Anti–Phoenixing Act).
The Anti-Phoenixing Act sought to introduce a new voidable transaction specifically designed to tackle illegal forms of phoenix activity through the implementation of a creditor-defeating disposition into the existing Corporations Act.
The intention of the Anti-Phoenixing Act is to penalise individuals making or facilitating creditor-defeating dispositions and allow both liquidators and ASIC to recover property of the company disposed of in this fraudulent way for the benefit of its creditors.
What is a creditor-defeating disposition?
Broadly speaking, a creditor-defeating disposition occurs when a company, that is being wound up, transfers property or other assets for much less than the current market value (or the best reasonably obtained value) of those assets, to the detriment of creditors in any subsequent liquidation. Typically, it is facilitated by transferring the assets to a different entity shortly before a liquidator is appointed, leaving no assets available to creditors.
Section 588FDB of the Corporations Act defines a creditor-defeating disposition as a disposition of property if the consideration payable to the company is less than its market value or the best price reasonably obtainable having regard to the circumstances existing at that time, that has the effect of preventing, hindering or significantly delaying the property from becoming available for the benefit of the company’s creditors in its winding up.
What do the new Anti-Phoenixing Provisions mean for creditor-defeating dispositions?
The new Anti-Phoenixing provisions carry civil and criminal penalties for company officers who fail to prevent the company from making a creditor-defeating disposition and third parties involved in controlling or advising the directors and engaging in or facilitating such dispositions.
What remedies are available to liquidators if a creditor-defeating disposition has occurred?
Should it be deemed that a creditor-defeating disposition has occurred, a range of remedies are available to liquidators and creditors including:
- declaring the disposition voidable;
- recovery of property;
- damages in restitution; and
- monetary compensation.
Additionally, the liquidator may request ASIC make an order that the property involved be returned/restored at an amount that fairly represents the proceeds paid.
When is a creditor-defeating disposition voidable?
A creditor-defeating disposition is voidable by the introduction of subsection 6B into section 588FE of the Corporations Act which deals with voidable transactions.
Section 588FE(6B) provides that a creditor-defeating disposition is voidable if it – or an act giving effect to it – occurs when the company was, or became, insolvent within the 12 months before the relation-back day, or an external administration occurs less than 12 months after the creditor-defeating disposition is made.
Significantly, liquidators do not need to prove that the company was insolvent at the time. Further, if the company fails to retain adequate records about the disposition it may be presumed that the transaction was less than market value and the best price reasonably obtainable.
When is a creditor-defeating disposition not voidable?
Transactions done as part of a ‘safe harbour’ restructuring are protected from being recovered. Also, a disposition of property is not voidable if it is undertaken by an administrator or liquidator (including a provisional liquidator) or done under a deed of company arrangement or by way of a compromise or arrangement approved by a Court.
How can liquidators recover a creditor-defeating disposition?
A liquidator may seek to recover a creditor-defeating disposition by applying to the Court for an order to make the transaction voidable or requesting ASIC to make an order in relation to the disposition. If it is established that the relevant transaction is voidable under section 588FE(6B), the Court has jurisdiction under section 588FF to make one or more of the orders prescribed by section 588FF(1).
Like other voidable transactions, the liquidator has the later of three years after the relation-back day or 12 months after the appointment to apply to the Court to void a creditor-defeating disposition.
First decision on Anti-Phoenixing Provisions: Intellicomms Pty Ltd (In Liquidation) & Ors v Tecnologie Fluenti Pty Ltd [2002] VSC 228
As the Anti-Phoenixing Act is relatively recent¹ there were no authorities dealing with the operation of the Anti-Phoenixing Provisions until now.
By originating process filed on 4 October 2021, the liquidators of Intellicomms Pty Ltd (In Liquidation) (Intellicomms) made an application under ss 588FB, 588FDA, 588FDB, 588FE and 588FF of the Corporations Act for relief in relation to a sale agreement between Intellicomms Pty Ltd and the defendant, Tecnologie Fluenti Pty Ltd (TF), involving the sale of certain business assets of Intellicomms to TF.
Anti-Phoenixing Provisions: Requirement of establishment of actual value
The ultimate question for the Court in this case, was whether the liquidators had established that the amount payable under the sale agreement was less than the lesser of the market value and the best price reasonably obtainable for those assets (within the meaning of section 588FDB).
TF submitted that in order for the sale agreement to be a creditor-defeating disposition, the liquidators must establish sufficient evidence upon which the Court could determine an actual monetary value as to each of the market value of the assets and the best price reasonably obtainable for the assets, and that in each case those actual values must be higher than the consideration payable to Intellicomms by TF for the assets.
The liquidators submitted there was no requirement in the wording of section 588FDB that they establish an actual monetary value for each of the market value of the assigned assets, and the best price reasonably obtainable for those assets. They submitted that such an obligation would impose too high an evidentiary hurdle on the liquidators, but in any event there was sufficient evidence before the Court to enable it to establish the value of the assets.
The Court rejected TF’s submission that the liquidators have the onus of evidencing the actual market value of and the best price reasonably obtainable for the assets and held that the liquidators are only required to establish that, on the balance of probabilities, the consideration payable under the sale agreement was less than both of those.
Anti-Phoenixing Provisions: Best price reasonably obtainable
His Honour accepted the liquidators’ submissions that the purchase price under the sale agreement was less than the best price that is reasonably obtainable in the circumstances
The relevant circumstances included that:
- the director of Intellicomms took no steps to ascertain whether the assigned assets could be sold to a third party other than TF;
- the director caused the company to go into liquidation at a shareholders’ meeting that she convened without informing those who would be interested, including a shareholder and one of its major creditors (QPC) that she had executed the sale agreement only minutes before the shareholders’ meeting;
- the primary intention of the transaction was to ensure that the business was not purchased by QPC prior to Intellicomms entering into liquidation;
- TF is a company presently owned by the sister of the sole director of Intellicomms and was incorporated only two weeks prior to when the sale agreement was entered into;
- there was a short period of time between when the sale agreement was entered into and the shareholders of Intellicomms resolved to place Intellicomms into liquidation;
- there was no legitimate urgency for Intellicomms to sell the assets without testing the market; and
- there was a knowledgeable entity who was willing to purchase the assigned assets for an amount that was significantly higher than the purchase price under the sale agreement.
In addition, the liquidators identified various deficiencies in TF’s expert report which included unreliable revenue forecasts provided by management, overstatement of working capital requirements and the director made no attempt to value Intellicomms’ intellectual property and software.
What the findings in the first Anti-Phoenixing decision mean for liquidators
In handing down his decision, his Honour Justice Gardiner stated:
“I consider that the Sale Agreement has all the features of what has become known as a phoenix transaction; indeed, it is a brazen and audacious example. The effect of the Sale Agreement was to strip Intellicomms of what assets it had to satisfy the claims of its creditors and transfer them to an entity which was closely associated with its director, Ms Haynes. Shortly afterwards, Ms Haynes was instrumental in placing Intellicomms into voluntary liquidation with debts in excess of $3.2 million. No explanation was given as to why it was necessary to urgently sell the business rather than leave the process of the sale of what assets the company had to the liquidators.”
His Honour considered the sale was designed to deprive QPC of having the opportunity to purchase the assets of the company from a liquidator or voluntary administrator and held that it was notable there was no attempt by Intellicomms to put the sale to an open-market, considering the second limb of section 588FDB (best price reasonably obtainable).
To the contrary, the sale was negotiated in secret where it was readily apparent that QPC was in a position to purchase the assets for an amount that was significantly higher than the sale price under the sale agreement. In the circumstances, his Honour accepted that this suggests that the purchase price under the sale agreement was less than the best price that is reasonably obtainable in the circumstances.
His Honour held that the director varied the forecasted revenue inputs at her whim in an attempt to arrive at what she considered to be an acceptable valuation and TF’s expert did not conduct any independent investigations as to the accuracy of the information provided by the director. Indeed, TF’s expert accepted in cross-examination that he “had plucked those figures out the air” based upon his own experience and the limited information with which he had been provided.
His Honour considered the liquidators’ criticisms and deficiencies in TF’s expert report had considerable force but said it was not practicable to quantify the effect of the acceptance of these criticisms and held that, on the balance of probabilities, the effect of them is that the market value of the assigned assets was significantly more than the value placed on them by TF’s expert.
Although the market value of the assigned assets was never tested, his Honour said it was very clear that they had a unique value to QPC which would have been prepared to pay considerably more than the consideration under the sale agreement had it been given the opportunity to do so.
His Honour declared the sale agreement was a creditor-defeating disposition under section 588FDB and voidable pursuant to section 588FE(6B).
In a win for liquidators, the first decision on Anti-Phoenixing Provisions clarifies the law
This decision should serve as a warning to anyone involved in acting or advising on the transfer of businesses.
Liquidators may void creditor-defeating dispositions if they were entered, or some part of it was done, within 12 months before the company becomes insolvent or is the subject of external administration.
The power to void this type of transaction sits in conjunction with the existing voidable transactions that liquidators can void which are set out in Part 5.7B of the Corporations Act.
¹ it only applies to transactions entered into, on or after 18 February 2020