Anti-Phoenixing Laws: An Overview

Anti-phoenixing legislation

A ‘phoenix’ transaction is when a new company is created to continue the business of a company to avoid paying the debts of that company.

The Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth) came into force on 18 February 2020 to combat illegal phoenix activity.

The reforms introduced a new type of voidable transaction in the form of a ‘creditor-defeating disposition’ and provided that where a person engages in activity that results in a creditor-defeating disposition, or procured, incited, induced or encouraged a creditor-defeating disposition they can be exposed to criminal liability and/or civil penalties. This broadened the legislation to apply to not only directors but also to accountants and business advisors.

The reforms also granted ASIC the power to make orders against a person who has received property as part of a creditor-defeating disposition or pay compensation equal to the value of the property.

Creditor-defeating disposition

A creditor-defeating disposition is a disposition of property of a company where the consideration payable to the company was less than the market value of the property or the best price reasonably obtainable for the property, having regard to the circumstances existing at the time.

To constitute a credit-defeating disposition, the disposition must also have the effect of preventing, or at least significantly delaying, the property from becoming available for the benefit of the company’s creditors in the winding up of the company.

Where a company becomes insolvent or enters external administration in the twelve months following a creditor-defeating disposition, the transaction may be voidable.

To have a defence to a civil proceeding relating to a creditor-defeating disposition, a defendant must have:

1. had reasonable grounds to expect the company was solvent at the time of the disposition;
2. taken all reasonable steps to prevent the company from making the disposition; or
3. where they are a director, they must not have been part of the management of the company when the disposition was made a result of illness or other justifiable reasons.

Case: Re Intellicomms Pty Ltd

The new anti-phoenixing reforms were put the test earlier this year, when the first application by a liquidator of a company was heard in the Supreme Court. The liquidators of Intellicomms Pty Ltd (Intellicomms) applied to the Court for relief in relation to the sale of the business assets of Intellicomms to Tecnologie Fluenti Pty Ltd (TF). The sole director and shareholder of TF was the sister of the sole director of Intellicomms.

The sale resulted in Intellicomms being placed into creditors’ voluntary liquidation and left with debts in excess of $3.2 million.

The defendant sought to rely on valuations of the assets obtained prior to the sale to justify the property being sold at market value. However, the court held that the valuations underestimated the value of the assets and that the valuer did not make any comment about earlier expressions of interest in relation to the asset that were far higher than the price obtained later.

Crucially, there was no attempt to put the sale of the assets out on the open market, to try to obtain the best price possible. The court held that there was no need to determine the monetary value of the property sold, and instead determined that on the balance of probabilities, the assets were sold at below market value or the best price reasonably obtainable in the circumstances.

The court held that this was a ‘brazen and audacious’ example of a creditor-defeating disposition within the meaning of section 588FDB of the Act, and that the transaction had the effect of placing the assets of Intellicomms out of the reach of the company’s creditors. Because of this, the transaction was voidable, pursuant to section 588FE(6B) of the Act.

Conclusion

It is important when a company faces potential insolvency issues (such as having unpaid creditors) that if it decides to sell assets, the purchase price of the company’s assets should be equal to the  market value of the assets in question, or at least the best price reasonably obtainable in the circumstances. Companies should keep in mind that independent valuations obtained do not always justify that assets are sold at or above market value.

These considerations will be particularly important where a company is struggling financially, as if the company enters insolvency processes within twelve months of the transaction, there is a risk that liquidators will seek to have the transaction set aside under the new anti-phoenixing laws.

Business advisers and accountants should also be aware of exposure to potential penalties, as they may also be liable where they procure, incite, induce or encourage a creditor defeating disposition.

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This article in no way constitutes legal advice. It is general in nature and is the opinion of the author only. You should seek legal advice tailored to your individual circumstances before acting on anything related to this article.

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