Combating Illegal Phoenix Activity

A timely reminder to company officers and advisors that the anti-phoenix law reforms introduced over two (2) years ago to combat illegal phoenix activity is at work and is demonstrated in a recent decision where a sale transaction was declared void.

A timely reminder to company officers and advisors that the anti-phoenix law reforms introduced over two (2) years ago to combat illegal phoenix activity is at work and is demonstrated in a recent decision where a sale transaction was declared void.

The Supreme Court of Victoria recently delivered a decision declaring that a sale of a business transaction entered by a company immediately prior to it being placed into liquidation was a blatant example of an illegal phoenixing activity and was clearly considered a creditor defeating disposition pursuant to s588FDB and s588FE(6B) of the Corporations Act 2001(“the Act”).

The above provision was introduced within the Act in February 2020 to combat illegal phoenix activity. This recent decision is the first case heard in relation to this provision and potentially sets a precedence for future decisions.

The liquidator for Intellicoms Pty Ltd (“Intellicoms”) alleged that its director had sold the company’s business and assets to a newly created company named Tecnologie Fluenti Pty Ltd (“TF”) for less than market value. It was revealed that TF was owned by the director’s relative and was incorporated for the sole purpose of acquiring and operating Intellicom’s business.

A sale agreement between Intellicoms and TF was executed on 8 September 2021 just a few hours before the company was placed into liquidation for a consideration of $57,000 subject to adjustments. It is understood that the company was served with a creditors statutory demand by a major creditor which was due to expire on 8 September 2021. This appears to be the compelling reason for the director’s swift and unreasonable actions and thereby intentionally preventing the company’s assets from being made available to its creditors who were owed in excess of $3.2m.

In the lead up to the sale, it was uncovered that the company obtained several valuations of the company’s assets from February 2021 to September 2021 that ranged from $57,000 to $11.3m. It is noted that for each valuation, the director provided input to the valuers which reflected an increasingly pessimistic outlook for the company with the direct effect of decreasing the valuation. In addition, it is worth noting that the major creditor had expressed an interest in purchasing the company’s business and assets for an amount ranging from $500,000 to $1m.

The company’s director deliberately with the assistance of a pre-insolvency advisor secretly proceeded with the sale transaction with TF without having regard to the major creditors’ interest in purchasing the assets and without exercising due care and diligence in placing the company’s business and assets on an open market to obtain the best possible price.

In declaring the sale transaction void the judge described that such action by the director was a “brazen and audacious” example of a phoenix transaction which had the effect of stripping a company’s assets and placing them beyond the reach of creditors.

It is important to understand there are both civil and criminal offences for conducting illegal phoenix activity which has been introduced primarily to prevent asset stripping behaviour of unscrupulous directors to the detriment of creditors.

These offences extend to the company’s officers as well as to other persons such as the pre-insolvency advisors involved in causing the company in making the creditor defeating disposition at a time when the company is insolvent or has become insolvent because of such disposition.

The consequences for undertaking illegal phoenix activity are serious and can result in significant penalties imposed upon the company officers and their advisors as follows:

  • For Individuals – $1m to over $1.1m and/or imprisonment for ten (10) years or both; and
  • For Body Corporate – $10m to $11.1m.

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