The Rise of the “Anti” Phoenix
What is illegal phoenixing?
Phoenixing involves the transfer or sale of a company’s assets to another entity.
Illegal phoenixing usually occurs when the assets are transferred or sold to another related entity owned and controlled by the same persons, at an undervalue, which only leaves liabilities to the seller which is then placed into liquidation. If a liquidator is appointed to the seller, creditors are left with little prospects of recovering any money owed to them.
The introduction of Anti-Phoenixing legislation in 2020 aimed to create methods to tackle undervalued transactions that undermine creditors. Intellicomms Pty Ltd & Ors v Tecnologie Fluenti Pty Ltd [2022] VSC 228 is the first decision handed down that deals with illegal anti-phoenixing.
What happened in Intellicomms Pty Ltd & Ors v Technologie Fluenti Pty Ltd [2022]
The liquidators of Intellicomms, made an application to the court for relief in relation to an agreement between Intellicomms and Fluent, for the sale of business assets for Intellicomms to Fluenti.
Intellicomms sold these assets to Fluenti and was placed into liquidation on the same day. The liquidators sought orders from the court that the agreement is set aside, alleging it was a creditor-defeating disposition within the meaning of s588FE(6B) of the Corporations Act.S588 provides that a transaction is a creditor defeating disposition if:
1. the consideration 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 the time; and
2. 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
The court found the case had “all the classic hallmarks of a phoenix transaction”. The following factors were considered by the court, granting the orders under s588FDB and 588FF(1):
1. The business sale agreement was entered on the same day that Intellicomms went into liquidation.
2. Fluenti was incorporated two weeks before the winding up of Intellicomms and its director was the sister of the director of the Company.
3. Intellicomms could not prove it had sought any advice or considered appointing a voluntary administrator prior to appointing a liquidator.
4. The resolution appointing the liquidators was made at a shareholders meeting without notice to major shareholders. The major liquidator in question was actually crucial in funding the litigation commenced by the liquidators.
5. Intellicomms could not prove they had sought to sell the business to any third party.
6. The monetary consideration in the sale agreement was significantly undervalued.
What does this mean?
Liquidators are now given increased powers to pursue potentially illegal Phoenixing activity. This should remind those that conduct transactions close to a company’s insolvency that increased scrutiny will likely occur. Want to know more? Contact our team to discuss your specific situation.
