Unravelling phoenix transactions: complications in relief in the first test of the new anti-phoenixing laws

Jennifer Ball, Rebecca Hanrahan
07 Jul 2022
Time to read: 4.5 minutes

Proving a transaction was to defeat creditors might be easier, but recovering assets under section 588FF of the Corporations Act which are not specifically part of the impugned transaction remains a challenge.

The first case dealing with the creditor defeating transaction amendments made to the Corporations Act in February 2021, dealing with a particularly “blatant” example of phoenixing, has underscored the limitations of the current remedies, as liquidators could only recover property transferred as part of the transaction, but not property subsequently acquired (IntelliComms Pty Ltd (in liq) [2022] VSC 228; IntelliComms Pty Ltd (in liq) (No 2) [2022] VSC 310).

Key circumstances – a blatant example of phoenixing

Multiple valuations of IntelliComms were obtained by the director over a short period – with increasingly pessimistic inputs regarding future trading revenue, resulting in dramatically lower valuations. QPC, a supplier and creditor, expressed interest in acquiring IntelliComms. Instead, IntelliComms sold its business assets for approximately $20,000 to Tecnologie Fluenti Pty Ltd (TF) (significantly less than the amount that QPC had expressed it was willing to pay to acquire the business), on the last day IntelliComms could comply with a statutory demand served by QPC for an undisputed debt of over $900,000. The sale occurred mere moments before the director of IntelliComms caused it to be wound up. TF was controlled by the sister of IntelliComms' sole director, who previously worked for IntelliComms as its financial and payroll administrator.

Unsurprisingly, the Court described the transaction as featuring "all the hallmarks of a classic phoenix transaction," as it involved “the transfer of the assets of an insolvent enterprise to any entity controlled by persons closely associated with it, leaving behind significant liabilities with no means to satisfy them.”

The liquidators established, on the balance of probabilities, the consideration payable under the sale agreement was less than both limbs of section 588FDB of the Corporations Act:

  1. market value – the Court found that the market value was significantly more than that outlined in an expert report prepared for the purposes of determining market value; and
  2. best price reasonably obtainable for the assigned assets having regard to the circumstances at the time of the sale agreement – the Court found this was not less than the market value, by reason of circumstances including that QPC was apparently interested in purchasing the assets at a significantly higher price (among other circumstances).

In summary, the sale agreement was found to be a creditor-defeating disposition under section 588FDB(1) and 588FE(6B), as the consideration payable under the sale agreement was less than the market value and the best price reasonably obtainable for them having regard to the circumstances existing at the time of the sale agreement. As a result, it was void at and after the time it was made.

The liquidators sought an order that TF deliver up all property of IntelliComms the subject of the sale agreement under section 588FF(1)(b), which was uncontroversial. More controversially, the liquidators sought orders for the transfer of property which was “derived by” TF as a result of the sale agreement but had actually not been transferred by the sale agreement (pursuant to either section 588FF(1)(c) or section 588FF(1)(d)).

Property of the business that was not transferred under the transaction

Under section 588FF(1)(c), the Court may make “an order requiring a person to pay to the company an amount that, in the court’s opinion, fairly represents some or all of the benefits that the person has received because of the transaction”. The Court can also make an order under section 5881(d) “requiring a person to transfer to the company property that, in the court’s opinion, fairly represents the application of either or both of the following:

  1. money that the company has paid under the transaction;
  2. proceeds of property that the company has transferred under the transaction”.

The liquidators' position was that the Court could infer that any new software licences entered by TF and any new customer contracts had been obtained by TF using the intellectual property, know-how and confidential information of IntelliComms. It appears the Court declined to make such an inference, as it declined to make orders because the Court:

  • did not have the power to make an order requiring TF to pay an amount that ‘fairly represents’ the benefits it received because of the transaction, as there was no evidence to calculate ‘an amount’ of benefit which TF received; and
  • could not determine what ‘fairly represents’ the application of the proceeds of the property transferred to TF and there was no evidentiary basis to make such a determination.

Orders regarding the intellectual property were similarly limited to only those items of intellectual property transferred pursuant to the sale agreement. In doing so, Associate Justice Gardiner of the Victorian Supreme Court confirmed that the clawback power in section 588FF(1) is confined to making orders in respect of the property transferred under the impeached transaction. Although he did not explicitly refer to authority, it is perhaps implicit that this limitation is because the nature of the relief under section 588FF is accepted to be restitutionary, rather than compensation for loss or damage suffered by the company.

Contracts with third parties: subsections 588FF(1)(h) and (i)

The liquidators proposed orders affecting contracts between TF and “any person who was, at any time previously, a customer of [IntelliComms] (affected third party) in existence as at the date of the order”. The effect would be to prevent any assignment to TF, and replace TF with IntelliComms. Those third parties would however have been able to apply to the Court to prevent these orders from applying to them.

Associate Justice Gardiner made the variation order as requested by the liquidators, and found it was appropriate that the variation take effect at and after a specified later time.

However, he was not prepared to make an order that the third parties have liberty to apply to the Court for the orders to not apply to them. Instead, it was “implicit that affected third parties agree to the variation being imposed on TF to vary the identity of the contracting party to IntelliComms”. If the affected third parties in question do not wish to be involved in a contractual relationship with IntelliComms, the Court could not impose an obligation on them to do so.

In making such orders, the Court appears to have assumed that section 588FF(1) extends to making orders against non-parties who received no benefit because of the voidable transaction. This is a matter which has been questioned and has yet to be finally determined.

The Court did not consider the case authority on this matter, nor section 588FG, which precludes an order under section 588FF which materially prejudices a right or interest of a person other than a party to the transaction if, for example, the person received no benefit because of the transaction.

Battling phoenixing: what to remember

This decision demonstrates the evidentiary difficulties in recovering assets under section 588FF which are not specifically part of the actual impugned creditor-defeating disposition. In this instance, the period between the order (June 2022) and the transaction (September 2021) was not substantial, however, this is likely to be a more important issue where a more significant period has passed between the transaction and the order.

A section 588FF(1)(d) order may bite where there is sufficient evidence to establish the business the subject of the impugned transaction later turned a profit and such profit may be directly traced to cash or an asset. But even if evidence may be led as to the “proceeds of property”, when seeking orders under section 588FF, the overall aim of restitutionary relief, rather than compensation, must be considered.

While this decision appears to accept that section 588FF orders may be made in respect of third parties who are not parties to the transaction and who not receive any benefit, this should be treated with some caution.

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.