A Slam Dunk for the Liquidators in Anti-Phoenixing Win

blog__0008_A Slam Dunk

The first decision relying on the amendments to the Corporations Act (Act) introduced by the Treasury Laws Amendment (Combatting Illegal Phoenixing) Act 2020 (Anti-Phoenixing Legislation), was handed down last week in Intellicomms Pty Ltd (In Liquidation) (Company) & Ors v Tecnologie Fluenti Pty Ltd [2022] VSC 228.

The Victorian Court declared a sale agreement void (Sale Agreement) which disposed of the Company’s translation services business to a related company (TF); and, indicated making ancillary orders for the return of those assets to the Company for the benefit of all unsecured creditors. Note: the exact terms of the order have not yet been published.

In handing down the decision, his Honour Justice Gardiner was damning in his findings against the Company’s director, concluding it,

clear from the evidence that [she] had planned the sequence of events carefully in close consultation with her business management consultants.

Section 588FDB of the Act, which was introduced as part of the Anti-Phoenixing Legislation, is extensive, but for these purposes, provides that a transaction is a creditor-defeating disposition if:

  1. the consideration for the disposition was less than the market value of the property or the best price that was reasonably obtainable for the property, having regard to the circumstances existing at that time; and
  2. the disposition has the effect of preventing, hindering or significantly delaying the property from becoming available for the benefit of the company’s creditors in the winding-up.

Further, the Anti-Phoenixing Legislation made a creditor-defeating disposition voidable and gave the Court extensive remedial powers, including the power to re-transfer the tainted property, the subject of the disposition to the company.

In events that would sit comfortably with the writings of Lemony Snicket’s A Series of Unfortunate Events:

  • driven by an obvious motive to depress the value of the assigned assets, the director manipulated valuations of the Company to support the purchase price by amending cash flow forecasts;
  • by the Sale Agreement, the director stripped the Company of its assets attempting to place them beyond the reach of its creditors and in the hands of a company closely related to her (while leaving behind significant liabilities with no means to satisfy them);
  • the director relied on a valuation which made no attempt to value the chattels of the Company, including plant and equipment, computer hardware and software;
  • on the afternoon that the Sale Agreement was entered into, the director mislead its largest unsecured creditor (QPC) (who had served a creditor’s statutory demand (which was due to expire that day seeking nearly $1Million) into voting in favour of a resolution to place the Company into voluntary liquidation;
  • TL’s expert did not conduct any independent investigations as to the accuracy of the information provided by the director and, at least in one regard, plucked figures out of thin air to support his conclusions on value;
  • indeed, the Judge considered the scheme was designed to prevent QPC from having the opportunity to purchase the assets of the Company from a liquidator or voluntary administrator, and to frustrate the legitimate motives of QPC in retrieving its commercial position.

His Honour had no hesitation in finding that the Sale Agreement was a creditor-defeating disposition saying 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.

Of particular interest, the Court rejected TL’s submission that the liquidators have the onus of evidencing the actual market value of and the best price reasonably obtainable for, the assets; rather, said that liquidators need only prove that the consideration payable under the Sale Agreement was less than both of those.

This is the first outing of these new powers and this decision ought to attract the attention of all insolvency practitioners. Moreover, it should serve as a warning to those who design transactions on the eve of a company’s insolvency that their scheme will be carefully examined and potentially unwound if found to offend the Anti-Phoenixing Legislation.

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