Whilst these relatively new provisions under the Corporations Act 2001 (Corporation Act) concerning creditor-defeating dispositions came into effect on 18 February 2020 and were introduced into the Corporations Act 2001 by way of the Treasury Laws Amendment (Combatting Illegal Phoenixing) Act 2019 (Cth), they have rarely been utilised, most likely due to the fact that the corporate insolvency world has been subject to government moratoriums and lockdowns. This would appear to be changing.
Why Were these Provisions Introduced?
Illegal phoenixing activity is still rife in the Australian corporate world and poses threats to revenues of businesses and governments at all levels as well as the integrity of the Australian Corporate System.
The aim of the provisions is to give liquidators another avenue in pursuing assets. These provisions are aimed to prevent these dispositions of property assets, as well as providing remedies and increasing ASIC’s powers.
Definition of Creditor-Defeating Dispositions
Pursuant to section 588FDB of the Corporations Act, a disposition of property is a creditor-defeating disposition if:
- The consideration payable to the company for the disposition was less than the lesser of the following at the time the relevant agreement for the disposition was made or, if there was no such agreement, at the time of the disposition:
- 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.
- The disposition has the effect of preventing the property from becoming available for the benefit of the company’s creditors or hindering/significantly delaying the process of making the property available for the benefit of the company’s creditors.
- The transaction, or the act done for the purpose of giving effect to it, was not entered into, or done:
- Under a compromise or arrangement approved by a Court; or
- Under a deed of company arrangement executed by the company; or
- By an administrator of the company; or
- By a restructuring plan made by the company; or
- By a restructuring practitioner by the company; or
- By a liquidator of the company; or
- By a provisional liquidator of the company.
- The consideration payable to the company for the disposition was less than the lesser of the following at the time the relevant agreement for the disposition was made or, if there was no such agreement, at the time of the disposition:
Duties of Company Officers
The Act sets out the following new duties to prevent creditor-defeating dispositions:
An officer of a company must not engage in conduct that results in the company making a creditor-defeating disposition of property of the company;
A person must not engage in conduct of procuring, inciting, inducing or encouraging the making by a company of a disposition of property that results in the company making the disposition of property.
Recent Case Law
The first case has been decided under Australia statutory powers to set aside “creditor defeating dispositions”.
In Intellicomms Pty Ltd (In Liq) VSC 228, Associate Justice Gardiner of the Victoria Supreme Court considered a transaction involving a business sale agreement entered into minutes before Intellicomms Pty Ltd (Intellicomms) passed a resolution to enter into voluntary liquidation. The sale was to a related entity of Intellicomms director and was for approximately $20,000 (significantly less that the amount a creditor was willing to pay to acquire the business).
In his decision, AJ Gardiner described the transaction as featuring “all the hallmarks of a classic phoenix transaction” and made orders setting the business sale agreement aside as a “creditor-defeating disposition” pursuant to sections 588FDB(1) and 588FE(6B) of the Act.
ASIC’S powers on Creditor-Defeating Dispositions
The ASIC may also make an order setting aside a creditor defeating disposition (without the involvement of the Court) under section 588FGAA.
Pursuant to section 588FGAA of the Act, ASIC may make an order to request that property involved in a creditor-defeating disposition be returned/restored, at an amount that fairly represents the proceeds paid.
If you are advising clients with respect to the solvency of their business or a transaction which may have the hallmarks of a creditor-defeating disposition and require advice, please do not hesitate to contact us to discuss the situation. We anticipate that the use of these provisions will be more prevalent by liquidators through the Courts and the ASIC given the current economic climate.
Article by Michael Carrafa (Executive Director) – SV Partners Melbourne