Anti-phoenixing laws demystified: The Victorian Supreme Court considers the creditor-defeating disposition regime

In Re Intellicomms Pty Ltd (in liq) [2022] VSC 228, it was determined that a sale agreement was a creditor-defeating disposition within the meaning of section 588FDB of the Corporations Act 2001 (Cth) (Act) and voidable pursuant to section 588FE(6B) of the Act.

The Court held that, the consideration payable by the transaction was less than the market value of the assets and the best price that was reasonably obtainable for them, having regard to the circumstance existing at the time of the sale agreement. In addition, it was considered that the disposition had the effect of preventing the property from becoming available for the benefit of the company’s creditors in the winding-up of the company and was entered into at a time when the company was insolvent.

Actions leading up to liquidation

Intellicomms Pty Ltd (Intellicomms) operated a business providing translation services to commercial enterprises.

Leading up to the appointment of liquidators:

• valuations of Intellicomms were obtained in February 2021, July 2021, August 2021, and September 2021;
• Technologie Fluenti Pty Ltd (Technologie) was incorporated two weeks before the appointment of the liquidators. The sole director and shareholder was the sister of Intellicomms’ director, previously employed by Intellicomms; and
• on 8 September 2021:
  • Intellicomms sold certain business assets to Technologie under a sale agreement (the Sale Agreement). Technologie did not assume any of the liabilities of Intellicomms, besides entitlements of employees transferring to Technologie;
  • the compliance period for a statutory demand which had been served by Callscan Australia Limited (trading as QPC), a shareholder and major creditor of Intellicomms, was to expire; and
  • the director convened a meeting of Intellicomms at short notice and the company was placed into creditors’ voluntary liquidation and liquidators were appointed.

The liquidators sought for the Sale Agreement to be set aside by reason that it is a creditor-defeating disposition within the meaning of section 588FDB of the Corporations Act 2001 (Cth) and a voidable transaction within the meaning of section 588FE(6B) of the Act.

Anti-phoenixing laws

This is the first decision to rely on the Treasury Laws Amendment (Combatting Illegal Phoenixing) Act 2020 (Cth), which took effect from 18 February 2020 and introduced section 588FDB to the Act.

Section 588FDB(1) of the Act deals with creditor-defeating dispositions and section 588FE(6B) provides that a transaction will be voidable if it is a creditor-defeating disposition.

The explanatory memorandum described a common characteristic of phoenix activity as stripping and transferring assets from one company to another entity. The legislation was designed to:

1. prohibit creditor-defeating dispositions of company property;
2. penalise those who engage or facilitate such dispositions; and
3. allow liquidators and ASIC to recover such property.

The Sale Agreement

Technologie admitted that the Sale Agreement prevented the property from becoming available for the benefit of the Intellicomms’ creditors in the winding up and that the Sale Agreement was entered into when Intellicomms was insolvent. Further, it was conceded that the circumstances in which the Sale Agreement was entered into were ‘undoubtedly unattractive in the extreme to those with any affinity with insolvency law’.

Associate Judge Gardiner concluded that, “The Sale Agreement has, to my mind, all the hallmarks of a classic phoenix transaction, i.e., it involves the transfer of the assets of an insolvent enterprise to an entity controlled by persons closely associated with it, leaving behind significant liabilities with no means to satisfy them”.

Was Intellicomms sold for an undervalue?

As the Sale Agreement demonstrated a straightforward phoenix transaction, the crux of the decision was whether the value of the business sold for an undervalue within the meaning of section 588FDB of the Act.

Technologie submitted that the transaction could not be rendered voidable as the Liquidators for Intellicomms were required to establish sufficient evidence upon which the Court could determine two limbs, as at 8 September 2021:

1. the market value of the assets in question; and
2. the best price reasonably obtainable for the assets.

The Liquidators on the other hand submitted that there was nothing in the wording of section 588FDB of the Act requiring them to establish the two limbs and in any event, there was sufficient evidence to enable the Court to perform that task.

Decision

The Court held that the Liquidators were only required to establish that, on the balance of probabilities, the consideration payable under the Sale Agreement was less than both of the limbs in section 588FDB.

Addressing the first limb, his Honour noted that over a short period of time, the director of Intellicoms commissioned several valuations of Intellicomms and with each subsequent valuation and the closer in time to the company being placed into creditors’ voluntary liquidation, the inputs for the valuation reflected an increasingly pessimistic outlook for the company. This was done so that the valuation minimised the consideration payable by Technologie and did not represent the market value of the assets.

Regarding the second limb, his Honour could not find an explanation given as to why it was necessary to urgently sell the business rather than leave the process of the sale of the assets to the Liquidators. Further, QPC and Intellicomms were negotiating a proposed debt capitalisation, and in that time Intellicomms made no attempt to put the sale to an open-market, which may have satisfied the second limb.

With this in mind, his Honour found in favour of the plaintiffs’ submission that the best price reasonably obtainable for the assigned assets was not less than the market value. The Sale Agreement was therefore, a creditor-defeating disposition under section 588FDB and a voidable transaction under section 588FE(6)(B).

Key takeaway

Where there is a clear example of a phoenix transaction, any party seeking to establish the transaction as a creditor defeating disposition will need to show that, on the balance of probabilities, the consideration paid was less than both of the limbs found in section 588FDB of the Act.

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Authored by:

Scott Couper, Partner
Alicia Auden, Director
Caitlin Miller, Graduate