Illegal Phoenixing - Re Intellicomms Pty Ltd (in liq) [2022] VSC 228
Company restructuring is becoming an increasingly popular method for companies facing financial difficulty. However, when undertaking a company restructure, it is important you do not fall foul of illegal phoenixing provisions.
What is Illegal Phoenixing?
Illegal phoenixing is the practice of transferring assets from an existing company to a new company often for little or no value in order to avoid paying debts, taxes, or other liabilities.
In 2020 legislation was passed to combat illegal phoenixing. The Corporations Act 2001 ("Act") now includes the concept of a "creditor-defeating disposition". Under section 588FDB, a creditor-defeating disposition will occur if:
the consideration payable for a disposition was less than the market value or best price reasonably obtainable for property; and
the disposition has the effect of preventing, hindering or delaying property from becoming available to a company's creditors.
A jump in business insolvencies may trigger a spike in illegal phoenix activity
Case of Re Intellicomms
Company directors ought to take note of the case of Re Intellicomms before entering into asset sale transactions. This case looked at s588FDB of the Act and provided guidance on the evidence necessary for a liquidator to successfully establish a phoenix had taken place and seek orders for the transaction to be declared void.
In the case of Re Intellicomms, Intellicomms Pty Ltd ("Intellicomms") entered into a sale agreement with Tecnologie Fluenti Pty Ltd ("Tecnologie"). The key facts noted by the court were that:
(a) Tecnologie was only incorporated 2 weeks prior to the transaction;
(b) The sole director and shareholder of Tecnologie was:
(i) the sister of the sole director of Intellicomms; and
(ii) a previous employee;
(c) The sale was never put to the open market and interested parties were not informed;
(d) The sale disposed of Intellicomms' key assets;
(e) The same day the sale transaction agreement was signed, the director of Intellicomms called a members meeting at which the company was placed into a creditors' voluntary liquidaiton.
Consequences for breaching duties
The consequences for directors for breaching the duty to not engage in creditor-defeating dispositions are similar to these for insolvent trading.
Company officers and particularly directors have certain duties, including 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. Further, 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.
Civil and criminal penalties apply for breaching these duties and you may be liable to pay a pecuniary penalty of up to approximately $11 million.
Key Takeaways
When conducting a sale of assets of a company, it is prudent to seek advice about the sale process. Otherwise, the transaction may become voidable by ASIC or the Court should the company enter insolvency.
For liquidators, if you believe a transaction is a creditor-defeating disposition you may be able to seek the transaction be set aside by order of the Court or ASIC.
For directors, you ought to be aware of your risk exposure when restructuring or entering sale transactions. Further, directors ought to take care when considering winding down companies. If you are considering company restructuring, it is important to seek legal advice.