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In June we wrote about illegal phoenix activity, where company directors seek to escape company debt by winding up a company and starting a new company without the debt, but with the benefit of the old company’s assets.
The transfer of assets from one person or company to another person or creditor for the purpose of defeating creditors can be pursued outside the world of insolvency, where there is no pre-requisite for a debtor to be bankrupt or in liquidation. The grounds for such an action is s.37A of the Conveyancing Act [NSW].
In July, the Federal Court case of Royal & Ors v El Ali decided on such a claim by a number of creditors who sought to “unwind” the transfer of (or “alienation” of) a property and the transfer of company shares, which the creditors claimed were transactions made for the purpose of defeating their claims as creditors. In this case the court emphasised that the term “alienation of property” within s.37A of the Act is to be given its “widest possible application.” And the intent of the provision is to “defeat fraud no matter by what device it is implemented”.
This judgement may provide some hope to creditors or others who have been “duped” by unscrupulous debtors who may or may not be insolvent or where a director has engineered a transfer of assets of a company where the director has not been guilty of actually trading a company whilst insolvent or may have been able to “slip through” the cracks of personal liability attributed to directors under the Corporations Act.