ALERT: First decision under new Anti-Phoenixing section has big implications for the insolvency industry
At a time of increasing insolvency numbers and cost pressures on businesses in the construction industry among others, the first decision on new Anti-Phoenixing section 588FDB has been decided late last week in the Supreme Court of Victoria.
Intellicomms, a company that operated a business providing translation services to commercial businesses under the trading name “ezispeak” in Australia and New Zealand, has been found to have carried out a phoenix transaction.
Intellicomms’ sole director, Ms Rebecca Haynes, sold a number of business assets to a third party, Techologie Fluenti Pty Ltd, on the afternoon of September 2021 and then held a meeting to place Intellicomms into creditors voluntary liquidation later on the same day.
The assets sold included service contracts held by the company as well as its custom-designed operating system that carried out translations from one language to another. The value of the business and these assets varied greatly; from an $11m valuation carried out in February 2021 to a valuation of just $176,000 in June of the same year.
The valuations appeared to be dependent on the reason a valuation was sought; the $11m valuation was to establish a fair market value of equity prior to a possible issue of equity however the scale of the disparity between the February Valuation and the subsequent valuations was not explained.
The assets were sold to Techologie Fluenti Pty Ltd for an amount well under any of the market valuations.
Techologie Fluenti Pty Ltd, had been incorporated only two weeks earlier, and its sole director and shareholder was Ms Michelle Gigliotti, a sister of Ms Haynes and previously Intellicomms’ financial and payroll administrator.
The Hon. Associate Justice Gardiner commented “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.” (ref: page 71 of the attached)
This decision has major implications for the insolvency industry.
Angelo Conti, Partner at Madgwicks Lawyers and 30-year specialist insolvency lawyer representing the liquidators of Intellicomms, said that “the decision was a clear indication that any business that is contemplating transferring its assets before winding the company up needs to be very cautious particularly where the purchaser is a related party”.
“The judgment also makes it clear that business owners need to be very careful on how they go about getting a valuation. Valuers can be led into providing a value based on the request of the business owner, and forward revenue forecasts, like statistics, can be manipulated towards achieving that request. That was evident here where the director had received four independent valuations in a short period of time and the resulting values varied wildly”.
“The Australian Tax Office has in recent times taken a key interest in these asset sales that occur at ‘five minutes to midnight’ and the company then being placed into liquidation. I would not be surprised to see both the ATO and ASIC post-election having a serious look to use the Anti-Phoenixing section to overturn these kinds of transactions”.
“The decision should also serve as a reminder of the potential civil and criminal liability for advisers, particularly those offering pre-insolvency services, who may unwittingly be pulled into a potential lawsuit or separately targeted by ASIC where they’ve effectively aided and abetted or involved in a transaction that is held to be a creditor defeating disposition”.
As well as carrying the authority of a new piece of law under the new Anti-Phoenixing section, the decision should make it easier for liquidators to void transactions such as sale of business agreements and assist them to claw back assets in the name of creditors where such a transaction has occurred just prior to the winding up of a business.
It should also provide comfort to creditors that assets cannot be disposed of easily prior to liquidation.