New phoenixing laws put to the test

The Supreme Court of Victoria is the first Australian court to test creditor-defeating disposition laws designed to defeat illegal phoenix activity. In this latest article, we unpack illegal phoenix activity, summarise the key takeaways from the recent case Re Intellicomms Pty Ltd (in liq) [2022] VSC 228 (Re Intellicomms), and consider implications for directors and business advisors.

Sam Kingston, Cara Thompson, Michael Wells - Maddocks Lawyers

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What is phoenix activity?

"Phoenix activity" means the illegal practice of disposing and transferring of a company’s assets to another entity for the purpose of avoiding the company’s obligations to its creditors. The Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020(Cth) (Reforms)^[1] came into force on 18 February 2020 to "combat illegal phoenix activity". The Reforms:

• introduce a new type of voidable transaction called "creditor-defeating disposition";
• provide that any person, whether a company director or business advisor, will be exposed to criminal and civil liability if they engage in conduct that results in the company making a creditor-defeating disposition (explained below);
• give ASIC the power to make orders against a person who has received property as a result of a creditor-defeating disposition to return the property to the company, pay compensation equal to the value of the property to the company or transfer other property of equal value to the company; and
• create criminal offences for officers of a company and those who procure, incite, induce or encourage creditor-defeating dispositions (e.g. financial advisors and lawyers), if the person procures, incites, induces or encourages the company to make the disposition.

What is a creditor defeating disposition?

A creditor-defeating disposition is a disposition of company property for less than its market value (or the best price reasonably obtainable) that has the effect of preventing, hindering or significantly delaying the property becoming available to meet the claims of the company’s creditors in the winding-up. The transaction may be voidable if the company immediately becomes insolvent or enters external administration within the following 12 months.

The circumstances of the disposition will be relevant to determining whether the disposition is a creditor-defeating disposition. For example, the financial circumstances of the company and the reasonableness of the steps the company took or should have taken to realise the value of the asset.

Re Intellicomms

The background to Re Intellicomms is as follows:

• On 8 September 2021 (over a year after the Reforms commenced), Intellicomms Pty Ltd (Intellicomms) entered into a sale agreement with Tecnologie Fluenti Pty Ltd (TF) and sold a number of its business assets, including its intellectual property (Sale Agreement).
• Later that same day, a meeting of Intellicomms was convened at short notice by its sole director and Intellicomms was placed into creditors’ voluntary liquidation. There was no evidence that voluntary administration was considered. Intellicomms was left with debts in excess of $3.2 million.
• Two weeks prior on 25 August 2021, TF was incorporated. The sole director and shareholder of TF was a sister of the sole director of Intellicomms and was employed by Intellicomms as its financial and payroll administrator.
• One of Intellicomms’ major creditors, who was also a shareholder, was not notified of the shareholders’ meeting proposing to appoint the liquidators. That same creditor was interested in purchasing Intellicomms’ business. However, there was no evidence that Intellicomms had taken steps to sell the business to any third party.

The liquidators of Intellicomms (Liquidators) applied to the Court for relief in relation to the Sale Agreement, claiming it was a creditor-defeating disposition and a voidable transaction.

The key issue was whether the $20,727.17 payable to Intellicomms under the Sale Agreement was less than the market value of the property or less than the best price that was reasonably obtainable for the property. The Court’s focus was on what a prospective buyer of Intellicomms would have paid for the purchase of Intellicomms’ business. The Liquidators provided evidence that a secured creditor expressed its willingness to purchase the Intellicomms business, and provided an indicative purchase price between $500,000 and $1 million – far greater than the $20,727.17 value of the Sale Agreement.

The Court was satisfied that the criteria for a creditor-defeating disposition had been met and that the disposition was a voidable transaction. The Court made orders to undo the Sale Agreement, including for the return of Intellocomms’ assets to the liquidators and transfer of any contracts entered into by TF with Intellicomms’ customers.

What are the implications for directors and business advisors?

Company directors and pre-insolvency advisors may face both civil and criminal claims against them personally if they facilitate a creditor-defeating disposition. Further, directors should be mindful that ASIC has powers to order the return of property or for the payment of compensation without Court involvement. This is a powerful tool available to ASIC in addition to its existing powers.

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Insolvency team.

More Cleardocs information on related topics

You can read earlier ClearLaw articles on a range of matters.

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