TGIF - Court declares a clear creditor-defeating disposition under new anti-phoenixing legislation - Corporate Crime

This week's TGIF considers In the matter of Intellicomms Pty Ltd (in liq) [2022] VSC 228, in which Associate Justice Gardiner found that a Sale Agreement disposing of key assets to a related entity on the day of appointment of liquidators constituted a creditor-defeating disposition and therefore able to be set aside.

Key takeaways

This is the first decision on section 588FDB of the Corporations Act 2001 (Cth) (the Act), introduced by recent anti-phoenixing legislation. It clarifies the test for a creditor-defeating disposition which does not require an actual monetary market value for each of the assets and the best price reasonably obtainable for them.
Placing a company directly in liquidation instead of considering the appointment of voluntary administrators may bring with it extra scrutiny of any transactions completed prior.
It is best practice to place any asset dispositions in the hands of voluntary administrators when the company is in financial distress to avoid the appearance of impropriety.

The facts

Intellicomms Pty Ltd (Intellicomms) operated a business providing translation services to businesses under the trading name 'ezispeak' in Australia and through a wholly-owned subsidiary, Intellicomms NZ Ltd, in New Zealand.

Its sole director was Ms Rebeca Haynes. Over the period from June 2020 to September 2021, Ms Haynes obtained a series of valuations for the company providing increasingly pessimistic projections which were reflected in progressively reduced valuations.

On 8 September 2021, Ms Haynes caused Intellicomms to enter into a Sale Agreement with Technologie Fluenti Pty Ltd (TF) that was incorporated two weeks prior with Ms Haynes' sister as its sole director and shareholder. The purchase price payable after deduction of employee entitlements of transferring employees was A$20,727.17.

The Sale Agreement contemplated the sale of: the business of Intellicomms and assets including business records, goodwill, intellectual property, shares in Intercomms NZ, office equipment and computers.

Minutes later, Ms Haynes called a members' meeting at short notice, at which Intellicomms was placed into a creditors' voluntary liquidation. Interested parties, including a major creditor of Intellicomms, Callscan Austalia Pty Ltd (QPC), were not made aware that the Sale Agreement was entered into, nor the terms of the sale. This was despite the fact that Intellicomms was in discussions with QPC regarding further investment from QPC in the business. QPC subsequently made an offer to purchase the business and assets on 4 October 2021, for an indicative purchase price between A$500,000 and A$1 million.

The appointed Liquidators commenced the proceedings on 4 October 2021, seeking relief in relation to the Sale Agreement.

The new provision

Section 588FDB of the Act was introduced via the Treasury Laws Amendment (Combatting Illegal Phoenixing) Act 2020 (Cth) and took effect from 18 February 2020. Until this decision there had been no authority considering its operation.

There are two key tests to satisfying section 588FDB:

that the consideration payable to the company for the disposition is less than the lesser of the market value of the property or the best price reasonably obtainable in the circumstances; and
that the disposition has the effect of preventing the property being available to creditors in a winding up, either absolutely or by delaying or hindering the process.

The Defendants ran an argument on the operation of the first test that would have required the liquidators to come to a specific amount for each of the comparator amounts (market value and best price). His Honour disagreed that this was required and clarified that what is required is that, on the balance of probabilities, the consideration payable under the Sale Agreement was less than both of the limbs contained in section 588FDB.

His Honour further explained that the Sale Agreement had all the hallmarks of a classic phoenix transaction at which the provision is directed: it involved the trasfer 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.

Trial in the Supreme Court of Victoria

The Liquidators were seeking relief such that the Sale Agreement would be set aside by reason of being a creditor-defeating disposition and a voidable transaction.

Of particular interest is discussion around the creditor-defeating disposition prohibition in section 588FDB of the Act. His Honour considered the ultimate question for consideration to be 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. If this was answered in the affirmative then the relief sought by the liquidators ought be granted.

The Court found that:

the transaction had all the features of a phoenixing transaction pursuant to a carefully designed ploy to limit recovery of creditors in the winding up;
the transaction was designed specifically to limit the ability of QPC, as the largest creditor and a shareholder, from being able to purchase the assets from a liquidator or appointed administrator;
there was no attempt to put the sale out to the open market to try to obtain the best price possible, instead it was negotiated in secret, based on valuations with increasingly pessimistic inputs;
there was nothing improper about QPC funding the proceedings as a shareholder and largest creditor. Having the Sale Agreement set aside would enable QPC to make an offer for the assets when they are returned to the Liquidators and QPC would only be entitled to proceeds of the sale according to its position in the priority waterfall; and
the best price reasonably obtainable for the assets was not less than the market value, while the purchase price payable under the Sale Agreement was less than the best price that is reasonably obtainable in the circumstances.

Ultimately, the Sale Agreement was a creditor-defeating disposition within the meaning of section 588FDB of the Act and, therefore, voidable pursuant to section 588FE(6B) of the Act.

Conclusion

While this was an egregious example of intentional phoenixing activity, the decision draws our attention to the two values relevant to determining if a transaction is a creditor-defeating disposition.

When conducting a sale of assets of the company, it is prudent to ensure the purchase price is defensible as at least the market value or the price reasonably obtainable in the circumstances. Getting this wrong may result in the transaction being voidable should the company enter insolvency processes within the time limits prescribed in section 588FF(3) of the Act.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.