Legal Guide

Creditor Defeating Dispositions — s588FDB

What Is a Creditor Defeating Disposition?

A creditor defeating disposition (CDD) is a category of voidable transaction introduced by the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020, which received Royal Assent on 17 February 2020. The provisions target "phoenixing" — where company assets are stripped or transferred to avoid paying creditors before the company is placed into liquidation.

Under section 588FDB of the Corporations Act 2001 (Cth), a disposition of company property is a CDD if it has the effect of:

• Preventing the property from being available for the benefit of the company's creditors in the winding-up of the company; or
• Significantly diminishing the value of property available for that purpose.

The existing voidable transaction framework under Part 5.7B — unfair preferences (s588FA) and uncommercial transactions (s588FB) — requires the company to be insolvent at the time of the transaction. The definition of a CDD under s588FDB does not itself require insolvency, though for a CDD to be voidable under s588FE(6B), at least one of three conditions must be met: the company was insolvent at the time, the company became insolvent as a result of the disposition, or external administration commenced within 12 months.

Key Elements

Disposition of property

The CDD provisions apply to any "disposition of property" of the company. This is broadly defined and includes transfers, assignments, conveyances, and other dealings that result in property moving out of the company's control.

Effect on creditors

The test is whether the disposition has the effect of preventing property from being available to creditors in a winding-up, or significantly diminishing its value. This is an objective test — the subjective intention of the director is relevant to penalties but not to whether a CDD has occurred.

No consideration or less than market value

A disposition is more likely to be characterised as a CDD where the company receives no consideration, or consideration that is less than the market value or the best price reasonably obtainable.

Recovery Mechanisms

Court orders (s588FF)

A liquidator can apply to the court under s588FF for orders to recover property or its equivalent value. The limitation period under s588FF(3) is the later of 3 years after the relation-back day, or 12 months after the first appointment of a liquidator.

ASIC orders without court involvement (s588FGAA)

ASIC has the power under s588FGAA to make orders recovering property involved in a CDD without going to court, provided certain conditions are met. This administrative recovery power was introduced to enable faster action against phoenixing schemes.

Director Liability

Officer's duty to prevent a CDD (s588GAB)

Section 588GAB imposes a duty on officers to prevent creditor defeating dispositions. It contains both a criminal offence (s588GAB(1)) and a civil penalty provision (s588GAB(2)). An officer contravenes s588GAB if they fail to prevent a CDD and were aware, or ought reasonably to have been aware, that the disposition was or would become a CDD.

Procuring a CDD (s588GAC)

Section 588GAC targets any person — not only directors — who procures, incites, induces, or encourages a company to make a CDD. It also contains both a criminal offence (s588GAC(1)) and a civil penalty provision (s588GAC(2)). The criminal offence under s588GAC(1) carries a maximum penalty of imprisonment under Schedule 3 of the Corporations Act.

Safe harbour (s588GA)

The safe harbour defence under section 588GA applies to CDD liability under both s588GAB and s588GAC. Where a person starts developing courses of action reasonably likely to lead to a better outcome for the company, and the disposition is made in connection with such a course of action, the contravention provisions do not apply.

Key Case Law

As a provision that commenced in 2020, the body of case law on CDDs is still developing. Relevant decisions include:

• Re Intellicomms Pty Ltd (in liq) [2022] VSC 228 — One of the first reported judicial decisions considering the CDD provisions under s588FDB.
• Connelly (liquidator) v Papadopoulos [2024] FCA 888 — A Federal Court decision holding a third-party restructuring adviser liable under the CDD provisions, applying s588GAC.
• ASIC v Plymin [2003] VSC 123 — While pre-dating the CDD provisions, the Plymin indicators remain relevant to establishing insolvency in the broader context in which CDDs may arise.