First test of anti-phoenixing laws exposes difficulties in recovering assets
The Supreme Court of Victoria was the first Australian court to test the new creditor defeating disposition laws that came into effect in early 2020 (read our summary of the laws here). The decision of Re Intellicomms Pty Ltd (in liq) [2022] VSC 228 has shown that proving a transaction was intended to defeat creditors may be easier, but recovering assets outside of the transaction will remain a challenge.
Factual background
On 8 September 2021, Intellicomms Pty Ltd (Intellicomms) entered into a sale share agreement with Technologie Fluenti Pty Ltd (TF) and sold a number of assets, including their intellectual property. The court expressed the opinion that this sale agreement had “all the hallmarks of a classic phoenix transaction”. This was based on the following factors:
- TF was controlled by the sister of IntelliComms' sole director and shareholder;
- TF was incorporated two weeks prior to the sale agreement;
- The assets were sold for significantly less than what they were valued at by a different potential purchaser;
- Intellicomms was placed into creditors’ voluntary liquidation immediately after the share sale;
- one of Intellicomms’ major creditors, who was also a shareholder, was not notified of the shareholders’ meeting proposing to appoint the liquidators; and
- there was no evidence that Intellicomms had taken steps to sell the business to any third party.
The Court found that the sale agreement was a creditor-defeating disposition under section 588FD(1) and 588FE(6B) of the Corporations Act 2001 (Cth), as the consideration payable under the sale was less than market value and best price reasonably obtainable having regard to the circumstances existing at the time of the sale agreement. As a result, it was void at and after the time it was made.
The liquidators applied to the court to have an order that TF deliver up all property of IntelliComms under section 588FF(1)(b), which was uncontroversial. However, what was unique was the request under either section 588FF(1)(c) or section 588FF(1)(d) was to have all property which was “derived by” TF as a result of the sale agreement.
Can a liquidator recover property that was “derived” from a voidable sale?
Under section 588FF(1)(c), the court may make an order requiring a person to pay to the company an amount that, in the court’s opinion, fairly represents some or all of the benefits that the person has received because of the transaction.
The Court can also make an order under section 588(1)(d) requiring a person to transfer to the company property that, in the court’s opinion, fairly represents the application of either or both money that the company has paid under the transaction and proceeds of property that the company has transferred under the transaction.
The liquidators claimed that any new software licences that had entered into was as a result of the intellectual property, know-how and confidential information of IntelliComms. The court declined to make orders because:
- there was no evidence to calculate ‘an amount’ of benefit which TF received; and
- could not determine what ‘fairly represents’ the proceeds of the property transferred to TF and there was no evidentiary basis to make such a determination.
Gardiner AsJ confirmed that the clawback powers in section 588FF(1) are limited to property transferred in the impeached transaction. This is due to the nature of the relief under this provision being restitution rather than compensation for loss or damage.
This decision was the first to test out the parameters of the anti-phoenixing legislation and provides a useful example of the considerations the court will take into account when determining what is a “creditor defeating disposition”. However, this decision also demonstrates how difficult it may be to claim relief under section 588FF for assets that are not specifically part of the relevant transaction and whether relief sought is restitution or compensatory.
ATO obtains $220 million dollar freezing order for potential capital gains tax liability
An important decision was handed down in the Federal Court recently in Deputy Commissioner of Taxation v State Grid International Australia Development Company Limited [2022] FCA 139 (Perry J). It was held that a taxpayer’s assets may be frozen despite no notice of assessment being issued by the ATO at the time freezing orders were applied for.
Background
On 28 January 2022, AusNet shareholders voted in favour of a scheme for a consortium led by Brookfield, a global asset manager, to purchase all the shares in AusNet from existing shareholders. The date of implementation was set as 16 February 2022. State Grid was incorporated in Hong Kong and a majority shareholder who owned 19.9 per cent of the company.
State Grid stood to make $736.5 million from the takeover and, according to the Australian Taxation Office (ATO), would subsequently owe $220 million in capital gains tax (CGT) from the deal. However, the ATO could not action an assessment until the date of implementation.
The ATO was aware of the transaction and had a phone conversation with State Grid’s lawyers where they requested that State Grid hold an amount on account of the anticipated CGT liability. This request was refused as State Grid had disputed that any CGT liability would arise.
Due to concerns that State Grid would remove the proceeds of sale from Australia and deprive the ATO of the opportunity to recover the CGT from State Grid, the Deputy Commissioner applied to the Federal Court for a freezing order on 15 February 2022, one day before the date of the takeover.
Should a freezing order be granted?
A freezing order is an order restraining a respondent from removing any assets located in or outside Australia. Under Rule 7.32 of the Federal Court Rules, the Federal Court has power to make a freezing order to prevent its processes from being frustrated by a prospective judgment being unsatisfied. An important note in this case was that there was no judgment, just a prospective judgment – in that the transaction had not yet occurred so there was no tax assessment.
The Court will grant an order when the following three elements are satisfied:
(a) A good arguable case
The Court held that the Deputy Commissioner had a good arguable case on the basis that the Commissioner would be issuing the Special Assessment as soon as the transaction completed on 16 February 2022.
(b) Danger that a prospective judgment will be wholly or partially unsatisfied
There were ten different reasons why the Court held that there was a danger that the proceeds of sale would be removed from Australia. The most significant ones were that it was a substantial sum of money, State Grid had no assets in Australia and State Grid has never lodged an income tax return or Business Activity statement with the ATO.
(c) Balance of convenience
The Court then undertook a weighing of factors to determine whether the balance of convenience favoured the making of the order. State Grid submitted that there was no evidence that they had proposed to do anything unlawful, the fact that no special assessment had been made and the effect that the order could have on the takeover.
The Deputy Commissioner submitted that fact that this was a substantial sum, that after the takeover by Brookfield, State Grid would not have any residual business in Australia and that there would be difficulties in enforcing a prospective judgment obtained against State Grid in respect of assets held in China or in Hong Kong.
The Court held that the balance of convenience favoured the order being made.
Conclusion
The Court made the freezing orders against both State Grid and AusNet on the basis that:
• State Grid could not diminish the value of two specific bank accounts below approximately AUD$220 million; and
• AusNet must continue to hold $220 million of the amount payable to State Grid.
Applications for freezing orders are common but rarely granted where a debt is yet to be owing. This case has tested the Court’s willingness to issue a freezing order, despite no judgment and no notice of assessment.
Sign of the times: electronic execution now embedded in the Corporations Act
On 22 February 2022, the Corporations Amendment (Meetings and Documents) Act 2022 came into force to modernise the Corporations Act 2001 (the Act). The amendment permanently embeds the temporary amendments for electronic signing that were due to expire on 31 March 2022 (see our earlier insight here).
Changes to the Corporations Act
The Bill amends the Corporations Act to allow:
- Electronic Execution of Documents;
- Companies to hold hybrid or virtual meetings; and
- Sign and provide meetings-related documents electronically
Electronic Execution
The changes introduced by the Bill will give companies the option of executing certain documents electronically and remove ambiguity around this process.
The Documents that can be signed electronically include:
- Deeds
- Agreements
- Any document for purposes of section 9 of the Corporations Act
These documents may now be signed in accordance with ss 126 and 127 of the Act by signing either a physical or electronic form of the document. Documents can be signed by way of split execution and different execution methods can be used.
Virtual meetings
Companies can now hold meetings of members either in person, hybrid or wholly virtual (but only if this is expressly required or permitted by the company constitution). If a member is attending a meeting virtually, they must be given reasonable opportunity to participate including by hosting it at an appropriate time and ensuring reasonable technology is used that allows a member to ask questions or make comments.
Sending meeting documents
The Bill permanently enables any documents relating to meetings to be signed and given electronically (regardless of the format in which the meeting will be held). The Bill also introduces a requirement for members to be notified of their right to elect to receive a document electronically or in physical form 'at least once' each financial year.
Implementation
The Bill will apply to documents executed on or the day after Royal Assent. For documents sent and meetings held the provisions will apply from 1 April 2022. If your company’s constitution does not currently permit virtual meetings, you will need to update it to allow the option to hold a virtual meeting after 1 April 2022.
A change of heart? Company debts no longer forgiven for love and affection
Three half years after first flagging the changes, the ATO has confirmed new rules regarding a company’s emotional abilities to forgive debt. This will have implications, particularly for family law and business breakdowns.
Background to changes
The commercial debt forgiveness rules were introduced in 1996 to resolve a perceived ‘gain’ that a person makes when a commercial debt that they owe is forgiven. The rules cancel out this gain by reducing tax losses, net capital losses, certain other deductions and the cost bases of CGT assets up to the ‘net forgiven amount’. There were exceptions to the commercial debt forgiveness rules, including where the forgiveness of the debt is for reasons of ‘natural love and affection’, i.e., a gift.
In mid-2003, the ATO published their non-binding comments, noting they believed that a debt from a company could be forgiven for reasons of natural love and affection, and this exemption could therefore apply. This interpretation was widely used in family breakdowns, in mitigating the tax implications of separation. Then on 6 February 2019, the ATO withdrew these non-binding comments.
On 2 October 2019, the ATO set out a question as to whether the exclusion for debts forgiven for reasons of natural love and affection require that the creditor be a natural person. What followed was a two and a half year wait for confirmation to this question.
Implication of changes
On 9 February 2022, it was confirmed by the ATO that the exclusion for debts forgiven for reasons of natural love and affection requires that the creditor is a natural person. This means advisors need to be cautious about relying on this particular exemption.
However, the ATO did clarify that the debtor need not be a natural person, meaning there could be situations where an individual forgives debt to a company or trust. However, more care will be need to be taken when advising on forgiveness of debt and the tax implications.
Director Identification Number applications are open: here’s what you need to know
On 1 November 2021, applications opened for directors to apply for a director identification number (DIN). This is a new regime in Australia and it is vital that all company directors are aware of how to obtain one.
What is a DIN?
A DIN is a unique 15-digit identifier given to a director, or someone who intends to become a director that will be kept by the individual permanently. The introduction of DINs was in response to a government effort to combat illegal phoenix activity. It is hoped that in the event of liquidation or administration, it will be easier to trace a director’s activities over time and prevent fraudulent director identities.
Who must apply?
The requirement to have a DIN extends to all persons appointed as a director, or an alternate director for companies registered under the Corporations Act, this includes foreign corporations trading in Australia. The application can be commenced through the Australian Business Registry Services website. It is free and can be done via the myGovID app.
When to apply?
Applications are open now and there are strict deadlines. For those who became directors before 31 October 2021, the deadline is 30 November 2022. If you become a director between 1 November 2021 and 4 April 2022, it must be done within 28 days of appointment. However, for those who get appointed after 5 April 2022, it will have to be done before your appointment.
Directors who fail to apply for a DIN by the deadline could face criminal or civil penalties of up to 5,000 penalty units (currently $1.1 million dollars).
With an estimated 2.1 million company directors in Australia, this requirement will affect a number of Australians.
