Out Of The Corporate Ashes And Into The Corporate Grave
On 18 February 2020, The Treasury Laws Amendment (Combatting Illegal Phoenixing) Act 2020 (Cth) (Phoenixing Amendments) came into effect. The amendment imposed several new civil penalties and even criminal offences (through the Corporations Act 2001 (Cth) (Act)) upon officers and professional advisers who engage in illegal phoenix activity to defeat creditors including the ATO and employees.
These previously unused provisions were considered and, ultimately utilised, in the recent matter of Intellicomms Pty Ltd (in Liquidation) (ACN 153 181 367) & Ors v Technologie Fluenti Pty Ltd (ACN 653 110 582) [2022] VSC 228 (Intellicoms Case), in which Associate Justice Gardiner stated that the case had “all the hallmarks of a classic phoenix transaction”.[1]
What is “Phoenixing”?
The term ‘phoenix activity’ comes from the imagery of the mythical phoenix bird, which would burst into flames upon death and be reborn from the ashes. In terms of corporate activity, phoenixing a company occurs when a newly incorporated company, often of little to no value, takes over the business activities of an older company, but where the controllers and the business itself, is essentially the same.[2]
Schedule 1 to the Phoenixing Amendments provides for the new offences and other rules about property transfers for the purpose of defeating creditors, while Schedule 2 provides for improving the accountability of resigning directors.
Events Leading to the Intellicoms Case
Until September 2021, Intellicomms Pty Ltd (ACN 153 181 367) (Intellicomms), trading as ‘ezispeak’ in Australia and Intellicomms NZ Ltd in New Zealand, operated a translation services business to commercial enterprises. In September 2021, Intellicomms sold its assigned assets to Technologie Fluenti Pty Ltd (ACN 653 110 582) (Technologie Fluenti) under a Sale Agreement. On the same day, a meeting of Intellicomms was convened at short notice at the behest of its sole director, and was placed in9to creditors’ voluntary liquidation.
Proceedings were initiated by the liquidator claiming that the Sale Agreement be set aside by virtue of the fact that its sole purpose was to defeat the creditors of Intellicomms.
Findings and Outcome
The Court considered six key factors in deciding whether orders should be made to set aside the Sale Agreement. The plaintiffs argued that the Sale Agreement was a ‘voidable transaction’[3] and a ‘creditor-defeating disposition’[4] as defined in the new Phoenixing Amendments. The factors weighed by the court are summarised as follows:
1) The Sale Agreement between Intellicomms Pty Ltd and Technologie Fluenti Pty Ltd was entered into on the same day that Intellicomms was wound up as a Creditors’ Voluntary Liquidation.[5] Section 588FE(6B) of the Act provides that a transaction is voidable if it is a creditor-defeating disposition of the property of the company and less than 12 months after the transaction or act done for the purposes of giving effect to the transaction, the start of an external administration of the company occurs as a direct or indirect result of the transaction.[6] In addition, the transaction occurred shortly before a Creditors’ Statutory Demand for Payment of Debt was due to expire.
2) The director (who happened to be the sister of the director of Intellicomms) of Technologie Fluenti was incorporated two (2) weeks before the winding up process for Intellicomms had begun.[7]
3) There was no direct or indirect evidence that the director of Intellicomms had taken any action to mitigate the events that led Intellicomms towards insolvency including considering the appointment of a voluntary administrator and/or entering a Deed of Company Arrangement (DOCA) to handle the company’s solvency issues, prior to appointing a liquidator.[8]
4) The director’s resolution that appointed the Liquidators was made in the absence of one of Intellicomms major creditors (who was owed approximately 60% of Intellicomms overall debt) and who was also a shareholder in the company.[9] In an expected twist of fate, this creditor ultimately ended up funding the litigation against Technologie Fluenti.
5) There was nothing to suggest that Intellicomms had been put to market or that any third parties were even given the opportunity to acquire the business;[10] and
6) The consideration paid by Technologie Fluenti was considered to be at a significant under value. Interestingly, the valuation of the business assets initially came in at around 70% lower than the purchase price. It was noted, however, that this valuation was reached in circumstances where the business valuers had been provided with inaccurate and doctored business forecast documents.
The Court concluded that the Sale Agreement and the way in which the director of Intellicomms conducted the transaction with Technologie Fluenti was clearly a creditor-defeating disposition under s 588FDB of the Act[11] and a brazen and audacious phoenix transaction.
Ultimately, the director was ordered to transfer Intellicomms assets back to Intellicomms and an Order was made under s 588FF(1)(c) requiring Technologie Fluenti to account for profits it received from the business.
Key Take Away
We have assisted numerous clients in the past by providing advice on whether proposed sales, transfers or other disposals of company assets may be held to be voidable transactions in the event of the company’s later insolvency. Similarly, assistance has been provided to clients on the other end of the equation, having had debtor companies disposing of assets in an apparent attempt to defeat creditors.
The Phoenixing Amendments have added a number of additional considerations required in such matters, as directors engaging in phoenix activities facing a raft of civil and criminal penalties.
If you have any concerns as to the whether any such liability may arise as a result of potential transaction, or have concerns about the conduct of debtor companies, we would be happy to assist you navigate through those concerns.
[1]Intellicomms Pty Ltd (in Liquidation) (ACN 153 181 367) & Ors v Technologie Fluenti Pty Ltd (ACN 653 110 582) [2022] VSC 228 at [16].
[2] Helen Anderson, Ann O’Connell, Ian Ramsay, Michelle Welsh and Hannah Withers, ‘Defining and Profiling Phoenix Activity’, Melbourne Law School (December 2014).
[3]Corporations Act 2001 (Cth) s 588FE.
[4]Corporations Act 2001 (Cth) s 588FDB.
[5]Intellicomms v Technologie Fluenti [2022] VSC 228 at [11].
[6]Corporations Act 2001 (Cth) s 588FE(6B)(b)(iii).
[7]Intellicomms v Technologie Fluenti [2022] VSC 228 at [4].
[8] Ibid at [16].
[9] Ibid.
[10]Ibid at [207].
[11]Corporations Act 2001 (Cth) s 588FDB