A First Decision on Creditor-Defeating Dispositions

The creditor-defeating dispositions provisions have had what is, to my knowledge, their first outing, with the Victorian Supreme Court handing down a decision in Re Intellicomms Pty Ltd (in liq) [2022] VSC 228 (11 May 2022), voiding a sale of the company’s business to a related entity.

The creditor-defeating dispositions provisions were introduced, as a new class of voidable transactions, in 2020 as part of a package of legislation to combat illegal phoenix activity. The provision is found in section 588FBD of the Corporations Act, and the key part for this case is found in subsection 1:

(1) A disposition of property of a company is a creditor-defeating disposition if:

(a) the consideration payable to the company for the disposition was less than the lesser of the following at the time the relevant agreement (as defined in section 9) for the disposition was made or, if there was no such agreement, at the time of the disposition:

(i) the market value of the property;

(ii) the best price that was reasonably obtainable for the property, having regard to the circumstances existing at that time; and

(b) the disposition has the effect of:

(i) preventing the property from becoming available for the benefit of the company’s creditors in the winding-up of the company; or

(ii) hindering, or significantly delaying, the process of making the property available for the benefit of the company’s creditors in the winding-up of the company.

On the face of it, the fact in this case are pretty suspicious. Intellicomms operated a business providing translation services to businesses in Australia and New Zealand. On 8 September 2021, the company transferred its business to a related entity that had been incorporated just two weeks before the transaction. Intellicomms was put into voluntary liquidation on the same day the transaction was completed.

The Liquidators sought to have the Sale Agreement set aside as a creditor-defeating disposition within the meaning of s 588FDB of the Act, and a voidable transaction within the meaning of s 588FE(6B) of the Act.

While the business had been sold following a valuation, its Director had obtained several valuations in the months before the sale, providing the valuers with increasingly pessimistic inputs as to future trading revenue. This caused the valuations to decrease from over $11 million in the first one obtained, to only $57,000 for the one relied upon to sell the business.

The Judge, not surprisingly, found the transaction to be a creditor defeating disposition, opining:

“I consider that the Sale Agreement has all the features of what has become known as a phoenix transaction; indeed, it is a brazen and audacious example. The effect of the Sale Agreement was to strip Intellicomms of what assets it had to satisfy the claims of its creditors and transfer them to an entity which was closely associated with its director”

With such a straightforward set of facts, we don’t get much in the way of interesting clarification of how the provisions will work in practice, however, there was one interesting point made. His Honour expressed the view that Liquidators are only required to establish that, on the balance of probabilities, the consideration payable under the Sale Agreement was less than the market value or the best price that was reasonably obtainable and that there was no onus on the Liquidators to evidence actual values.

It’s great to see these new provisions get a successful outing. They provide another useful tool in the Liquidators toolbox to combat phoenix activity.