Introduction
On 11 May 2022, the Supreme Court of Victoria handed down its decision in Re Intellicomms Pty Ltd (in liq) [2022] VSC 228. The case concerned an application by the liquidators of Intellicomms Pty Ltd (in liq) (“Company”) for relief in relation to an asset sale agreement entered into immediately prior to the winding up of the Company. The substantive provisions of the new anti-phoenixing laws recently introduced into the Corporations Act 2001 Cth (“Act”) were considered for the first time.
Background
Prior to liquidation, the Company operated a business which provided translation services to commercial businesses. On 8 September 2021, the Company entered into an agreement (“Sale Agreement”) to sell some of its business assets to Tecnologie Fluenti Pty Ltd (“TF”), a company incorporated two weeks prior. The sole director and shareholder of TF was the sister of the Company’s sole director, Ms Haynes, and the Company’s former financial and payroll administrator. The amount payable to the Company pursuant to the Sale Agreement was effectively $20,727.17. This amount was purportedly based on a number of valuations obtained by Ms Haynes between February 2021 and September 2021.
Immediately after the Sale Agreement was entered into, Ms Hayes caused the Company to be placed into a creditors’ voluntary liquidation.
The Liquidators sought orders that the Court declare the Sale Agreement a creditor-defeating disposition within the meaning of s 588FDB of the Act, and a voidable transaction within the meaning of s 588FE(6B) of the Act.
The anti-phoenixing provisions
Section 588FDB(1) of the Act provides that a disposition of company property will be creditor-defeating if:
- the consideration payable was less than the lesser of the market value of the property and the best price that was reasonably obtainable for the property; and
- the disposition has the effect of preventing, hindering or delaying the property from becoming available for the benefit of creditors.
Section 588FE(6B)(a) of the Act provides that a creditor defeating disposition is voidable if the remaining criteria in subsections (6B)(b) and (c) are satisfied (i.e. the company was insolvent at the relevant time or became so because of the transaction).
The Decision
The Court rejected the submission by senior counsel for TF that the Liquidators were required to establish sufficient evidence on which the Court could determine an actual monetary value and the best price reasonably obtainable in respect of the assets. Rather, the Court held that the Liquidators merely had to establish that, “on the balance of probabilities, the consideration payable under the Sale Agreement was less than both limbs in s 588FDB” (at [235]). The Liquidators were successful in doing so.
In particular, there was evidence before the Court that a major creditor of the Company, “QPC,” was prepared to pay between $500,000 – $1,000,000 for the assets in question. This was preferred to the values set out in the prior valuations obtained by Ms Haynes, which the Court found to be self-serving and based on forecasted revenue inputs which varied “on whim” by Ms Haynes. Further, despite QPC’s interest, there was no attempt by the Company to put the sale to an open-market, and that the sale was “negotiated in secret” thereby depriving QPC of the opportunity of purchasing the assets.
The Court was also satisfied that the disposition of the Company’s assets under the Sale Agreement had the effect of preventing the property from becoming available for the benefit of the Company’s creditors.
Ultimately, the Court found the Sale Agreement to be a “brazen and audacious example” of a phoenix transaction. Accordingly, the Court ordered that the Sale Agreement be declared void, despite the significant difficulties this would create for TF, including the purported impracticability associated with the re-transfer of the impugned assets.
Take-Aways
- The Courts’ first consideration of section 588FDB and subsection 588FE(6B) bode well for liquidators seeking to claw back the disposition of assets in the context of illegal phoenixing.
- Liquidators must establish that, on the balance of probabilities, the consideration payable under a sale agreement was less than the market value and best price reasonably obtainable for the assets at the time of the transaction.
~ by Helen Hodgins, Lawyer
