In a recent case, the Victorian Supreme Court said that an accountant ‘would know well that a statutory demand involves strict time frames for response and potentially very significant consequences for a company’. The accountant failed to take appropriate steps to inform the company of the statutory demand.

The statutory demand process

If a company does not comply with a statutory demand within 21 days of service, it is deemed to be insolvent and the creditor may proceed to wind up the company.

Our last newsletter commented on high inflation, dwindling business confidence and international supply chain issues. Those factors continue to influence the economic outlook, with some businesses unable to survive the strengthening head winds impacting the economy. The consumer price index increased 7.2 percent in the 12 months to December 2022, remaining stubbornly high despite significant movements in the official cash rate to 4.5%, up significantly from the 0.25% it was sitting at in October 2021. ANZ's economic forecast warns that a "policy induced recession is looming".

Liquidators accepting a new appointment will have to think carefully if there's a possibility of disclaiming onerous property as part of that appointment.

What is Illegal Phoenix Activity?

The Australian Securities & Investments Commission (ASIC) defines illegal phoenix activity as activity that occurs when a new company, for little or no value, continues the business of an existing company that has been liquidated or abandoned to avoid paying outstanding debts, including taxes, creditors and employee entitlements.

In Short

The Situation: In February 2020, amendments to the Corporations Act 2001 (Cth) expanded the kinds of transactions that may be voidable if a company is being wound up to include asset disposals undertaken as part of illegal phoenixing schemes. Such disposals are termed as "creditor-defeating dispositions" in the legislation.

This week's TGIF considers In the matter of Intellicomms Pty Ltd (in liq) [2022] VSC 228, in which Associate Justice Gardiner found that a Sale Agreement disposing of key assets to a related entity on the day of appointment of liquidators constituted a creditor-defeating disposition and therefore able to be set aside.

Key takeaways

The first case has been decided under Australia’s statutory powers to set aside “creditor defeating dispositions”.

Public examinations are a powerful process for a liquidator to explore the reasons for a company’s failure, identify any claims the liquidator or the company might have and assess recoverability prospects following any successful claim.

In a similar vein, liquidators might also obtain document production orders against natural persons and corporate entities. Such document production orders are often obtained in advance of examinations, and can assist the liquidator in its investigations and preparation for the examinations.

In Re Dessco Pty Ltd, the Victorian Supreme Court adjourned a winding up application for 50 days to allow time for creditors to vote on a restructuring plan.

Whilst the adjournment was opposed by the Plaintiff, the Judicial Registrar of the Court accepted the assessment formed by the Small Business Restructuring Practitioner that the company was eligible to avail itself of the new regime having regard to the criteria that must be satisfied (and the ‘just estimate’ approach adopted in respect of contingent liabilities) and the interests of the company’s creditors.

The severe restrictions imposed by State and Federal Governments on large gatherings due to the COVID-19 pandemic are inhibiting, and in some cases preventing, businesses from trading. Although the present circumstances may necessitate administration or lead to receivership for some businesses, many practitioners are wary of accepting an appointment where there is an inability to trade as a going concern, thereby preserving value and maximising sale prospects.