Illegal phoenixing is essentially when a new company (Company B) is created to continue the business of a previous company (Company A) that has gone under, leaving unpaid debts, taxes, liabilities and employee entitlements with Company A. Company B ‘rises out of the ashes’ so to speak, and has usually been transferred all the assets of Company A without paying true or market value for those assets.
Creditor Defeating Disposition
A creditor defeating disposition is a central part of the anti-phoenixing reforms. It essentially occurs when a company disposes of company property (e.g. company assets) for less than market value, to prevent, deter and/or knowingly delay property of the company from becoming available for the benefit of creditors in the winding up of a company. These kinds of transactions fall under sections 588FDB and 588FE(6B) of the Act.
It is an offence for company officers and other persons (such as advisors) to engage in conduct which results in a company making a creditor defeating disposition where the company is insolvent or becomes insolvent because of the disposition. This clearly has wide reaching implications and can touch even advisors.
Intellicomms was a company that provided translation services to commercial businesses in Australia and New Zealand.
Intellicomms entered into a transaction with Tecnologie Fluenti Pty Ltd (Tecnologie) for the sale of Intellicomms property to Tecnologie on or around 8 September 2021. Not long after the transaction, on the same day, the sole director of Intellicomms convened a meeting, without giving notice to some key members and creditors of the company, and the company was placed into a creditors’ voluntary liquidation.
During the course of the liquidators’ investigations into the affairs of Intellicomms, they investigated the sale of property to Tecnologie, made on 8 September 2021.
It was discovered by the liquidators that Tecnologie had been set up (prior to the appointment, but not too long prior) for the key purpose of buying the property of Intellicomms and operating its business.
Furthermore, it was discovered that the directors of Intellicomms and Tecnologie were siblings, and the transaction was entered into when the company was insolvent.
Accordingly, the liquidators sought orders to declare that the sale agreement between Intellicomms and Tecnologie was a creditor defeating disposition and voidable against the liquidator under the anti-phoenixing provisions in the Act.
Up until this matter, there were no authorities which provided clear guidance on the creditor defeating disposition provisions under the Act.
The liquidators had to establish, on the balance of probabilities, that the property of Intellicomms sold to Tecnologie was sold for under market value or less than the best price obtainable for the property.
Circumstances such as the company’s financial situation and the reasonableness of the Company’s conduct in the sale of the property were important considerations.
Ultimately, the Court:
held that the sale of the property was a creditor defeating disposition on the basis that the sale was for less than market value and less than the best price obtainable; and
declared the sale to be void.
It was sufficient for the liquidators to merely establish, ‘on the balance of probabilities’, that the consideration afforded under the sale agreement by Tecnologie was less than both market value and best price obtainable and they were successful in doing this.
The Court also noted that the transaction was a ‘brazen and audacious example’ of illegal phoenixing activity.
The anti-phoenixing provisions are in place to combat and crackdown on illegal-phoenixing activity, mainly for the utilisation of liquidators, ASIC and creditors.
The decision in Intellicomms shows that combatting of such activity can be possible and can actually be effective for liquidators. The decision provides useful guidance and may be the first of many.
It is important for all companies, directors, advisors and stakeholders to take care when selling assets and engaging in dealings in distressed situations to avoid potential illegal-phoenixing activity and ensure that transactions are occurring properly and legally.
The team here at Hicksons are on deck and ready to provide expert support and advice on distressed situations, transactions and anti-phoenixing situations for all stakeholders.
Post by Hicksons Partner, Marc Rossi and Senior Associate, Roxanna Lam.