1.         Background

1.1       Last month in Featherstone v Ashala Model Agency Pty Ltd (in liq) & Anor [2017] QCA 260 (Featherstone) the Queensland Court of Appeal demonstrated how far the phoenix prohibition in the Corporations Act 2001 (Cth) (Corporations Act) reaches.

1.2       Phoenix activity refers to an insolvent company moving its assets to a new company with the same directorship to avoid paying creditors.

1.3       In summary Featherstone concerned:

(a)        A de facto director who used company money to pay a debt owing to the ultimate owner and controller of the company to enable them to purchase an apartment for their personal benefit.

(b)        The company was wound up and its assets moved to a phoenix company.

(c)        The effect of this was that creditors of the company, such as the Deputy Commissioner of Taxation, were defeated.

1.4       Section 588FE(5) of the Corporations Act prohibits the directors of a company from making transactions for the purpose of defeating creditors. Under section 588FE(1) of the Corporations Act, such transactions are voidable and the assets recoverable by a liquidator.

1.5       Issue: whether this was an uncommercial transaction that was made for defeating creditors or whether it was done in the ordinary course of business for the benefit of the company.

2.         The Decision

2.1       The 2-1 decision of the QCA demonstrates a broader and more objective approach to interpreting s 588FE(5).

2.2       Key points in the majority judgments of Morrison JA and Sofronoff P:

(a)        The loan repayments were an uncommercial transaction because:

(i)         The transactions left the company with very low funds;

(ii)        Any benefit the company received in discharge of the liability for rent only came about by preferential payment; and

(iii)       The company had never paid tax or GST.

(b)        “Purpose” does not require fraudulent intent;

(c)        “Undervalue” is only a factor in determining purpose, not the “signal marker of fraud”;

(d)        Intention can be inferred from the nature of the transactions and the parties to it; and

(e)        The transactions would not have been completed by a reasonable person knowing the company’s financial position and non-compliance with its tax obligations.

3.         Comment

3.1       Both liquidators and company directors should be aware of how s 588FE(5) can apply more broadly than previously for clawing back assets upon liquidation. A voidable transaction need not be made dishonestly due to this broad reading. Therefore, more transactions may be determined voidable, leading to a greater pool of assets for creditors.