In a decision handed down last week in the Supreme Court of Victoria, it was held that liquidators possess a strong new power in their arsenal, allowing both the unwinding of transactions and clawing back of assets sold ‘five minutes to midnight’.
The first ever decision to rely on amendments made to the Corporations Act 2001 (Cth) through the Treasury Laws Amendment (Combatting Illegal Phoenixing) Act 2020 (Cth), the Court held in Intellicomms Pty Ltd (In Liquidation) & Ors v Tecnologie Fluenti Pty Ltd  VSC 228 (‘Intellicomms’) that a sale agreement made on the same day in which a corporation was made insolvent was an unlawful and voidable transaction of a “brazen and audacious” nature.
Facts of the case
The Court held that Intellicomms, a translation service trading under the name of Ezispeak within Australia and New Zealand, had been illegally sold in 2021 at well under market value.
Following a valuation at $11.27 million in February of 2021, the sole director of Intellicomms and CEO of Ezispeak sold the business to a third party and family member for the sum of $58,000 in September of the same year.
On the day of the sale, Intellicomms was also placed into voluntary liquidation with $3.27 million owing in liabilities, including unsecured debts totalling $2.9 million.
In a damning judgment, it was held that the Intellicomms director had been driven by an obvious motive to depress the value of the company’s assigned assets, openly manipulating valuations by amending cash flow forecast, to support the sub-market value purchase price.
The Court held that Intellicomms had been ‘phoenixed’, in that their assets had been stripped and transferred so as to avoid them being available for the benefit of its creditors and employees in the subsequent liquidation.
Consequently, the Court voided the sale through a newly created category of voidable transactions known as ‘creditor-defeating’ dispositions, as contained within the amended section of 588FDB(1) of the Corporations Act 2001 (Cth).
What is a ‘creditor defeating’ position?
Section 588FDB of the Corporations Act provides that a transaction is ‘creditor defeating’ if:
- the consideration for the disposition was less than “the market value of the propertyor 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 preventing, hindering or significantly delaying the property from becoming available for the benefit of the company’s creditors in the winding-up.
Liquidators’ powers clarified in light of the decision
Whilst liquidators have always possessed powers to void transactions, the Intellicomms decision provides a clear example of how the Court intends to interpret section 588FDB.
Whilst Intellicomms concerned the conduct of a director, the decision applies to all company officers.
Further, the decision illustrates that it is now an offence for a company officer to engage in conduct which encourages, entices or creates a ‘creditor defeating’ disposition, in circumstances where the company is insolvent or becomes insolvent because of the disposition.
Should a company officer fail to comply with the amended provisions, this may result in:
- up to 10 years’ imprisonment;
- fines of nearly a million dollars; and/or
- compensation to be paid back to the company.
ASIC has additionally been provided with wide-ranging powers to enforce the ‘creditor-defeating’ disposition provisions. This includes powers to issue administrative orders to recover property the subject of voidable dispositions. A recipient of an administrative order may apply, within 60 days, to the Court, for an order to set it aside.
The Court additionally rejected the submission that liquidators possess the onus of evidencing the actual market value of and best price reasonably ostensible for the assets of a company. Rather, liquidators need only prove that the consideration payable under the Sale Agreement was less than both valuations.
A warning to those designing transactions on the eve of a company’s insolvency, the decision provides liquidators with greater powers to unwind transactions and claw back assets sold ‘five minutes to midnight.’
If you require assistance in relation to any of the information provided above, Pragma Lawyers can provide advice to you and your business to minimise your future risk. Contact us today by clicking here or call us on (08) 6188 3340.