Additional Recovery Option for Creditors of a Company in Liquidation: Increased Creditor Protection from Illegal Phoenix Activity

Creditors’ claims against director/s and creditor defeating dispositions

Section 588M(1A) of the Corporations Act 2001 (Cth) (the Act) was recently expanded to provide for a creditor to recover, from a director of a company, loss and damage suffered by the creditor where a director has contravened ss 588GAB(1) or (2) or 588GAC(1) or (2) of the Act.

Subsection 588GAB(1) of the Act is contravened where a director engages in conduct that results in the company making a creditor defeating disposition of company property and any of (a-d) below is satisfied:

1. the company is insolvent;
2. the company becomes insolvent because of the disposition or a number of dispositions made at the time of the disposition;
3. less than 12 months after the disposition, the start of an external administration of the company occurs as a direct or indirect result of the disposition; or
4. less than 12 months after the disposition, the company ceases to carry on business altogether as a direct or indirect result of the disposition.

Otherwise, in circumstances where there may have been multiple directors appointed to the company: subsection 588GAC(1) of the Act is contravened where a director has engaged in conduct that procured, incited, induced or encouraged the disposition of property, that conduct results in the making of the disposition, the disposition is a creditor defeating disposition, and any of (a-d) above is satisfied. ^[1]

What is a creditor defeating disposition?

A disposition of property of a company is a creditor defeating disposition, if (s 588FDB of the Act):

1. The consideration payable to the company for the disposition was less than the lesser of the following at the time the relevant agreement (as defined in section 9) for the disposition was made or, if there was no such agreement, at the time of the disposition:
   1. the market value of the property;
   2. the best price that was reasonably obtainable for the property, having regard to the circumstances existing at that time; and
2. The disposition has the effect of:
   1. preventing the property from becoming available for the benefit of the company’s creditors in the winding up of the company; or
   2. hindering, or significantly delaying, the process of the making the property available for the benefit of the company’s creditors in the winding up of the company.

Loss and damage, insolvency and winding up

The balance of s 588M(1A)(b-c) requires that one of more creditors have suffered loss or damage because of the disposition and the company’s insolvency; and the company is being wound up.

In those circumstances, the creditor may recover from the director an amount equal to the amount of the loss and damage: s 588M(3) of the Act.

Time limits and procedure

The creditor has six (6) years after the beginning of the winding up to commence such proceedings: s 588M(4) of the Act.

There are a few steps that a creditor must take before the creditor is able to commence proceedings pursuant to s 588M of the Act. These include:

1. The creditor first needs to seek the consent of the company’s liquidator to bring their proceedings: s 588R of the Act.
2. The creditor must wait six (6) months before seeking any such written consent (presumably to allow an opportunity for the liquidator to first take up the litigation themselves). The notice should ask the liquidator to give the creditor, within three (3) months of receiving the notice: (i) a written consent to the creditor; or (ii) a written statement of the reasons why the liquidator thinks that the relevant proceedings should not be commenced; s 588S of the Act.
3. If the liquidator does not provide the aforementioned consent, the creditor can, after waiting for the expiry of the three (3) month period, apply to the Court for leave (permission) to have the right to commence the proceedings: s 588T(2)(b) of the Act.
4. If, during the applicable three (3) months, the liquidator provides the creditor with a written statement as to why the liquidator thinks that the proceedings should not be begun, the creditor must file the statement with the Court when applying for leave and the Court must have regard to it when considering the application: s 588T(3) of the Act.

However, the creditor will be barred from commencing their own proceedings if: the liquidator has applied under s 588FF of the Act in relation to the debt or disposition, or in relation to a transaction under which the debt was incurred; the liquidator has begun proceedings under s 588M of the Act in relation to the incurring of the debt or the making of the disposition; the liquidator has intervened in an application for a civil penalty order against a person relating to a contravention of ss 588GAB(2) or 588GAC(2) of the Act relating to the disposition; or the liquidator has requested ASIC to make an order under s 588FGAA(3) of the Act relating to the disposition; or ASIC has made an order under s 588FGAA(3) relating to the disposition: s 588U of the Act.

When is this law useful to a creditor?

This right can be exercised in circumstances where the company’s liquidator is not taking active steps to recover compensation for the creditors in relation to creditor defeating dispositions. This inactivity can occur due to a range of reasons (for example, the liquidator may have little appetite for risk, or consider the risk v reward calculations undesirable, or lack sufficient time, funding etc).

Creditors who are interested in pursuing these types of claims can do so with their own lawyers (without the need to provide funding or indemnities to a liquidator or the additional burden on liquidator fees. Also, any recovery of money is to the benefit of the one creditor who takes the action, rather than for the liquidator on behalf of all creditors equally).

This article is not exhaustive in this complex area of law, various exceptions and qualifications apply. Gavin Parsons and Associates can assist you with your enquiries and explain how the new laws apply to you. Contact us on (02) 9262 4471 for a free no obligation consultation.

1. The other subsections (588GAB(2) and 588GAC(2) of the Act) require proof of actual knowledge or a reasonable person being aware that a disposition was a creditor defeating disposition. Accordingly, it is unlikely that a creditor would prosecute an action seeking to establish such elements where they are not required to (given that they could, for instance, rely on s 588GAB(1)). ↑