New laws give liquidators expanded powers to claw back funds.
By Nathaniel Kitingan, Managing Principal Lawyer – Melbourne and Tim Puget – Associate at Macpherson Kelley.
Anti-phoenix laws were introduced in 2020, however, it wasn’t until early May that a judgment enforced these laws in Court, setting out clear precedent for future cases. In the case of Intellicomms Pty Ltd (in Liquidation) (Intellicomms) & Ors v Technologie Fluenti Pty Ltd (Technologie Fluenti), Associate Justice Gardiner observed that the case had “all the classic hallmarks of a phoenix transaction” before handing down his decision.
What are anti-phoenix laws?
Introduced under the Treasury Laws Amendment (Combatting Illegal Phoenixing) Act 2020 (Cth) and taking effect from 18 February 2020, s 588FDB and s 588FE(6B) of the Corporations Act 2001 (Cth) provide liquidators with a new tool to recover assets disposed of by companies for less than market value in the 12 months prior to winding up.
As defined by ASIC, illegal phoenix activity occurs when a new company, for little or no value, continues the business of an existing company that has been liquidated or otherwise abandoned to avoid paying outstanding debts, which can include taxes, creditors and employee entitlements.
Anti-phoenix laws enforced in supreme court
The Liquidators of Intellicomms brought their claim in the Supreme Court of Victoria for orders that the sale of the business operated by Intellicomms to Technologie Fluenti was for less than market value and intended to defeat creditors of Intellicomms, in breach of s 588FDB of the Act.
The following factors weighed in favour of granting the orders under s 588FDB and 588FF(1) of the act:
- The business sale agreement was entered into on the same day that Intellicomms was wound up as a Creditors’ Voluntary Liquidation (so within 12 months of the winding up of Intellicomms in accordance with s 588FE(6B)) and shortly prior to expiration of a Creditors’ Statutory Demand for Payment of Debt which had been served on Intellicomms.
- Technologie Fluenti was incorporated two weeks prior to the winding up of Intellicomms and its director was the sister of the director of Intellicomms.
- There was no evidence that the director of Intellicomms had obtained advice or otherwise considered the option of appointing a voluntary administrator prior to appointing a liquidator.
- The resolution appointing the liquidators was made at a shareholders meeting without notice to one of its major creditors, who was also a shareholder of Intellicomms. This major creditor ultimately funded the litigation commenced by the liquidators against Technologie Fluenti.
- There was no evidence that Intellicomms had sought to sell the business to a third party or otherwise test the market for prospective purchasers. In fact, there was evidence that the major creditor would have likely purchased the business if the opportunity had arisen.
- The consideration paid by Technologie Fluenti for the business was significantly under value.
Useful tool for liquidators
Ultimately, the Court granted the liquidators orders requiring the business assets to be transferred back to Intellicomms and an order under s 588FF(1)(c) requiring Technologie Fluenti to account for profits it received from the business.
This case highlights the expanded powers now available to liquidators to pursue antecedent transactions. We will no doubt see more use of these tools as the number of formal insolvency appointments slowly increases to pre-pandemic levels.
Learn about how CreditorWatch’s credit reports can help identify illegal phoenixing activity here.