Illegal phoenixing is the practise of a dying business transferring its assets (for below market value) to a new one in an effort defeat creditors and debts. As the name suggests, the aim is to help the new business rise from the ‘ashes’ of its previous identity and attempt success again.
The Corporations Act 2001 (Cth) was criticised by liquidators for its limited ability to combat phoenix activity, which led to the changes introduced by the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (“Act”).
What are the new laws?
The Act amended the Corporations Act 2001 (Cth) at sections 588FDB and 588FE(6B) which now provide liquidators with new tools to recover assets disposed of by companies for less than market value in the 12 months prior to winding up.
Section 588FDB of the Corporations Act 2001 (Cth) provides that a “disposition of property by a company” will be a “creditor-defeating disposition” if:
- the consideration payable to the company 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
- the disposition has the effect of hindering, delaying, or preventing the property from becoming available for the benefit of the company\’s creditors in the winding-up of the company.
The changes brought by the Act have now been tested for the first time in a judgement by the Victorian Supreme Court this month.
What happened in the test case?
In the matter of Re Intellicomms Pty Ltd (in liq)  VSC 228, the court was presented with the following scenario:
- On 25 August 20221, Tecnologie Fluenti Pty Ltd was incorporated as a new company
- On 8 September 2021, Intellicomms Pty Ltd sold assets to Tecnologie Fluenti Pty Ltd under a sale agreement and was then placed into voluntary administration by the sole director
- The sole director of Intellicomms Pty Ltd and the new director of Tecnologie Fluenti Pty Ltd were sisters
- The sale agreement removed a significant amount of assets from Intellicomms Pty Ltd which had numerous creditors and debts outstanding
The court considered the timing, value, and circumstances of the sale agreement, along with the relationship between the directors involved. The court subsequently determined that Intellicomms Pty Ltd engaged in phoenixing activity by selling assets for less than market value in a move to defeat creditors.
Relief was granted by directing that the sale agreement be declared void. The order has enabled liquidators to clawback outstanding debts from the new entity and provide creditors with some respite.
What does this mean for companies?
This case serves as reassurance to the creditors of corporations that debts are gaining better protection, even when assets are moved or hidden to avoid settling them.
This alert was written by GRT Lawyers, Dana Heriot (Solicitor).
Re Intellicomms Pty Ltd (in liq)  VSC 228 at , Corporations Act 2001 (Cth) ss 588FDB(1).