A creditor-defeating disposition occurs when a company, who is being wound up, transfers property or other high value assets for much less than the current market value of those assets. Typically, these actions intend to hinder, prevent or cause significant delay to the company’s assets becoming available to meet creditor demands.
Where there is an identified creditor-defeating disposition, it may well be part of a broader process of illegal phoenixing. Essentially, this is the process of “rebirthing” a company whereby the company is stripped of its assets and those assets are transferred into a new entity, which hinders the process of liquidation and creditor demands.
Introduction of creditor-defeating dispositions in Australian law
As part of a widespread attempt to crack down on illegal phoenixing activity across Australia, the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2019 (Cth) has been slightly reformed as of February 2020. The aim of these reforms are to give liquidators in their capacity another avenue in pursuing assets.
A phoenixing task force has also highlighted the need for reform in order to target illegal phoenixing. As part of a force consisting of multiple federal, state and territory government agencies, it was demonstrated that illegal phoenixing poses an extreme threat to revenue, employee entitlements and overall, the integrity of the Australian Corporate system.
Breakdown of the new provisions
The abovementioned Treasury Laws Amendment Act amended elements of the Corporations Act 2009 (Cth) in creating a refreshed definition of creditor-defeating dispositions, outlining duties to prevent these dispositions, as well as providing remedies and increasing ASIC’s powers.
Definition of creditor-defeating dispositions
Pursuant to section 588FDB of the Corporations Act, a disposition of property is a creditor-defeating disposition if:
- The consideration payable to the company for the disposition was less than the lesser of the following at the time the relevant agreement for the disposition was made or, if there was no such agreement, at the time of the disposition:
- The market value of the property; or
- The best price that was reasonably obtainable for the property, having regard to the circumstances existing at that time.
- The disposition has the effect of preventing the property from becoming available for the benefit of the company’s creditors or hindering/significantly delaying the process of making the property available for the benefit of the company’s creditors.
- The transaction, or the act done for the purpose of giving effect to it, was not entered into, or done:
- Under a compromise or arrangement approved by a Court; or
- Under a deed of company arrangement executed by the company; or
- By an administrator of the company; or
- By a liquidator of the company; or
- By a provisional liquidator of the company.
Duties of company officers
The Corporations Act sets out the following new duties to prevent creditor-defeating dispositions:
- An officer of a company must not engage in conduct that results in the company making a creditor-defeating disposition of property of the company; and
- A person must not engage in conduct of procuring, inciting, inducing or encouraging the making by a company of a disposition of property that results in the company making the disposition of property.
Remedies and ASIC’s powers
Should it be deemed that a creditor-defeating disposition has occurred, as well as the court deeming the disposition voidable, a range of remedies will be available to liquidators and creditors including the recovery of property, damages in restitution and monetary compensation.
Additionally, the reforms have handed further powers to ASIC’s ability in combating illegal phoenixing, by allowing the Commission to enforce creditor-defeating disposition provisions. Pursuant to section 588FGAA of the Corporations Act, ASIC may make an order to request that property involved in a creditor-defeating disposition be returned/restored, at an amount that fairly represents the proceeds paid.