Anti-Phoenix Decision

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In a report commissioned by the Fair Work Ombudsman in June 2012 titled “Phoenix Activity – Sizing the problem and matching solutions”, the following definition of phoenix activity was developed in consultation with stakeholders: –

“Phoenix activity is the deliberate and systemic liquidation of a corporate trading entity which occurs with the fraudulent or illegal intention to:

  • avoid tax other liabilities, such as employee entitlements
  • continue the operation and profit taking of the business through another trading entity

Legislation

The Treasury Law Amendment (Company Illegal Phoenixing) Bill 2019 passed parliament and received royal assent on 17 February 2020.

The legislation includes a number of reforms which are intended to curb the practice of illegal phoenixing and includes reforms in the following areas.

  • Incorporating a phoenix offence in the Corporations Act under Section 588FDB of the Corporations Act 2001;
  • Improving the accountability
  • GST estimates and director penalties; and
  • Retention of tax refunds

Phoenixing Offences

The centrepiece of the legislation introduces a prohibition on a creditor defeating disposition or disposition of company property for less than its market value (or the best price reasonably obtainable) that presents, hinders or significantly delays the property becoming available to creditors in a liquidation.

The parties who can be potentially liable under the legislation are directors or an officer of the company and any person who procures, incites, induces or encourages a company to engage in a prohibited creditor defeating disposition.

This is likely to extend to include pre insolvency advisers, accountants lawyers and other business advisors.

By extending liability beyond company directors and officers the legislation places professional facilitators of phoenix schemes directly in the cross hairs of recovery action.

This measure came into effect the day after royal assent.

Recent Case Law 2022

The Supreme Court of Victoria is the first Australian court to test creditor-defeating disposition laws designed to defeat illegal phoenix activity in Re Intellicomms Pty Ltd (in liq) [2022] VSC 228 (Re Intellicomms).

The background to Re Intellicomms is as follows:

  • On 8 September 2021 (over a year after the Reforms commenced), Intellicomms entered into a sale agreement with Tecnologie Fluenti Pty Ltd (TF) and sold a number of its business assets, including its intellectual property (Sale Agreement).
  • Later that same day, a meeting of Intellicomms was convened at short notice by its sole director and Intellicomms was placed into creditors’ voluntary liquidation. There was no evidence that voluntary administration was considered. Intellicomms was left with debts in excess of $3.2 million.
  • Two weeks prior on 25 August 2021, TF was incorporated. The sole director and shareholder of TF was a sister of the sole director of Intellicomms and was employed by Intellicomms as its financial and payroll administrator.
  • One of Intellicomms’ major creditors, who was also a shareholder, was not notified of the shareholders’ meeting proposing to appoint the liquidators. That same creditor was interested in purchasing Intellicomms’ business. However, there was no evidence that Intellicomms had taken steps to sell the business to any third party.

The liquidators of Intellicomms applied to the Court for relief in relation to the Sale Agreement, claiming it was a creditor-defeating disposition and a voidable transaction.

In the judgement, the Court expressed the view that the Sale Agreement had ‘all the hallmarks of a classic phoenix transaction’ in that it involved the transfer of the assets of an insolvent company to an entity controlled by persons closely associated with it, leaving behind significant liabilities with no means to satisfy them. It was clear on the evidence that the sole director of Intellicomms had planned the sequence of events carefully in close consultation with her business management consultants.

The key issue was whether the $20,727.17 payable to Intellicomms under the Sale Agreement was less than the market value of the property or less than the best price that was reasonably obtainable for the property. This was made difficult to determine because the Court was presented with multiple valuation reports of Intellicomms, each with wildly different accounts of the value of the business: ranging from over $11 million in June 2020, down to $57,000 in September 2021.

In reaching its decision, the Court noted that some of the valuation reports did not comply with various technical requirements under accounting standards. The Court’s focus then turned on what a prospective buyer of Intellicomms would have paid for the purchase of Intellicomms’ business.

The Liquidators provided evidence that:

  • Intellicomms may have been insolvent for some time before entering into the Sale Agreement;
  • they received correspondence from a secured creditor expressing its willingness to purchase the Intellicomms business, and provided an indicative purchase price between $500,000 and$1 million; and
  • if the Liquidators were to undertake a sale campaign to sell Intellicomms’ business, it would be in the best interests of the creditors to invite the secured creditor, TF, and any other parties apparently interested in making an offer in relation to the assets transferred under the Sale Agreement.

With sufficient evidence that the purchase price of the Sale Agreement was less than the best price that was reasonably obtainable for the property, the Court was satisfied that the criteria for a creditor-defeating disposition had been met and that the disposition was a voidable transaction.

Implications

The case is a timely reminder to directors and promotors of phoenix style schemes to tread warily as there are a number of measures available to unwind any transactions as a result of these schemes.

Further, regulatory authorities such as ASIC and the ATO have devoted considerable resources to curbing this activity.

Brent Kijurina RTP® | Partner at Hall Chadwick

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