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The Corporations Act (the “Act”) has been amended to create a new avenue of recovery for Liquidators.

Section 588FDB sets out the new recovery tool, being a voidable “creditor-defeating disposition”.

This relates to the disposal of company property that prevents, hinders, or significantly delays property from becoming available for the benefit of creditors in the winding-up.

When a company is wound up, the Liquidator is tasked with distributing the pool of assets to creditors in proportion with their provable debts.  However, the disposal of company property prior to this improperly adjusts the assets of the company and is otherwise known as a ‘voidable transaction’.

In relation to timing, the disposition of property is deemed voidable if:

  • it occurred during the 12 months ending on the relation-back day (depending on the manner in which the company commenced winding-up); and
  • the company was insolvent, or the company became insolvent as a result of the disposition.

The new s. 588FDB is intended to prevent illegal phoenix activity, preventing companies from disposing of assets prior to liquidation and passing those assets – often to a related-entity – for less than market value.

The provisions relating to creditor-defeating dispositions only apply to dispositions made on or after 18 February 2020.

A Liquidator may seek to recover a voidable creditor-defeating disposition by applying to Court for orders to void the disposition, or requesting ASIC to make an order to undo the disposition.  ASIC can also exercise their own power, at their initiative.

ASIC will take numerous considerations into account when deciding whether to make such orders, including:

  • the conduct of the company and its officers
  • the circumstances, nature and terms of the disposition
  • the time that has elapsed between the disposal of the property and when the Liquidator requested that ASIC makes an order
  • whether the person(s) in receipt of the property and the property are readily traceable and identifiable
  • the prospects of a return to creditors
  • the estimated shortfall between the assets and liabilities in the liquidation

For a comprehensive outline of circumstances in which ASIC can and cannot make an order to undo the disposition of property, see below:

ASIC CAN MAKE AN ORDERASIC CANNOT MAKE AN ORDER
If the consideration payable to the company is less than both the market value of the property and the best price reasonably obtainable in the circumstances (s. 588FDB)If the disposition was entered into or done before 18 February 2020
If the disposal prevents, hinders or significantly delays the property from becoming available for the benefit of creditors in the winding-up.(s. 588FDB)If the disposition was part of a safe harbour restructure
If the disposition was entered into, or an act giving effect to it was done during the 12 months ending on the relation-back day, or between that day and on or before winding up began (s. 588FE(6B))If the disposition was under a compromise or arrangement approved by a court under s. 411 of the Act
If the disposition was entered into, or an act giving effect to it was done when the company was insolvent, or the company became insolvent because of the disposition or act (s. 588FE(6B))If the disposition was under a Deed of Company Arrangement, or by an Administrator of the company
If the company enters external administration within 12 months after the disposition (or an act giving effect to it) as a direct or indirect result of the disposition or act (s. 588FE(6B))If the disposition was by a Small Business Restructuring Practitioner for the company or under a restructuring plan made by the company
The person(s) receiving the property has received money or property as a direct or indirect result of: (s.588FGAA(1)(c)) the disposition, ortheir acquisition of the property after the dispositionIf the disposition was by a Liquidator or a Provisional Liquidator
 If ASIC have reason to believe that such an order would materially prejudice the right or interest of a person (other than a party to the disposition) who: received no benefit because of the disposition, orreceived the benefit in good faith and at the time had no reasonable grounds to suspect (nor would a reasonable person in the circumstances) that the company was insolvent, or would become insolvent as a result of the disposition
 If ASIC have reason to believe that such an order would materially prejudice the right or interest of a person who: became a party to the disposition in good faith and, at the time, had no reasonable grounds to suspect (nor would a reasonable person in the circumstances) that the company was insolvent, or would become insolvent as a result of the dispositionprovided valuable consideration under the disposition or has changed their position in reliance on the disposition
 If ASIC have reason to believe that such an order would materially prejudice a right or interest of a person (other than a party to the disposition) if it is proved that the person later acquired the property in good faith
Dominic Cantone
Dominic Cantone Partner
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