Creditor-Defeating Dispositions: Section 588FDB

The Section 588FDB Test

Section 588FDB requires an undervalue disposition and an effect on creditors’ access to the property in the winding up. Both limbs must be established.

The consideration payable to the company must be below the lower of market value and the best price reasonably obtainable. Assess those benchmarks when the relevant agreement was made, or when the disposition occurred if there was no agreement. The circumstances at that time affect what price was reasonably obtainable.

This means a distressed sale below market value does not automatically satisfy the price limb. A properly conducted sale might achieve the best price reasonably obtainable, despite a higher market valuation. Conversely, a nominal price for equipment transferred to a related entity can warrant investigation of both benchmarks.

The second limb concerns the disposition’s effect. It must prevent the property becoming available for creditors, or hinder or significantly delay that process. Section 588FDB does not require proof that the transferor intended that effect.

The 2019 explanatory memorandum, at paragraph 2.7, describes the targeted harm as transfers that “prevent, hinder or significantly delay creditors’ access to the company’s assets in liquidation”. The wider business pattern is covered in illegal phoenix activity.

Section 588FDB(3) also addresses consideration directed elsewhere. If the buyer gives consideration to a third party instead of the company, the company is treated as disposing of that consideration. Trace payments to directors or related entities alongside the asset transfer.

The formal administration exceptions sit in section 588FE(6B)(c), which governs voidability. They cover dispositions under a deed of company arrangement or a court-approved section 411 compromise or arrangement. Dispositions by an administrator, restructuring practitioner, liquidator or provisional liquidator are also excluded, as are those under a restructuring plan.

The statutory language distinguishes a disposition made by an officeholder from a private sale that the officeholder merely approves. Retain the documents showing who made the disposition and the authority under which it occurred.

Voidability and the Look-Back Window

Section 588FE(6B) makes a creditor-defeating disposition voidable through either an insolvency route or a later external-administration route. The company must be being wound up, and the formal administration exceptions must not apply.

For the insolvency route, the transaction or an act giving effect to it must fall within the statutory window. That window is the 12 months ending on the relation-back day, plus the period after that day through the start of winding up. The company must have been insolvent when the transaction or act occurred, or become insolvent because of it.

The relation-back day is the statutory reference point determined under section 91. It can differ from the liquidator’s appointment date, so establish it from the actual administration history before calculating the window.

The alternative route applies where external administration starts less than 12 months after the transaction or an act giving effect to it. That administration must result directly or indirectly from the transaction or act. This route does not separately require insolvency at the time of transfer.

A creditor-defeating disposition therefore does not have to qualify as an “insolvent transaction” under section 588FC. Its own section 588FE(6B) conditions determine voidability. The other voidable transaction categories have different elements and look-back periods.

For a hypothetical example, an insolvent company transfers equipment eight months before its relation-back day for a nominal price. If both section 588FDB limbs are established, that transfer falls within the insolvency route’s 12-month window. A solvent company’s transfer needs a different analysis if it causes external administration to start six months later.

The look-back window is separate from the time allowed to seek recovery. Under section 588FGAA(2), a liquidator’s ASIC request period starts on the relation-back day. It ends at the later of three years after that day or 12 months after the first liquidator appointment for the winding up.

ASIC Orders and Related Offences

The Australian Securities and Investments Commission (ASIC) can order recovery under section 588FGAA when a company in liquidation has made a voidable creditor-defeating disposition. The proposed recipient must have received money or property directly or indirectly through the disposition or a later acquisition of the property.

ASIC can act on its own initiative or at the liquidator’s request. Its available orders require the recipient to return the property, pay an amount reflecting the benefit received or transfer property representing the proceeds. A liquidator can also seek court orders under section 588FF.

ASIC’s INFO 261 explains the request process and evidence needed. ASIC must consider the circumstances and relevant protections under section 588FG. Safe harbour and protections for certain good-faith recipients or later acquirers can prevent an order.

ASIC’s 2023 Corporate Insolvency Update, Issue 30 reported 22 requests concerning 15 companies. Orders had been made for five requests, five had been rejected and 12 remained under consideration. These are the newsletter’s historical figures, not a cumulative total for later years.

Section 588GAB addresses an officer’s conduct that results in the company making a creditor-defeating disposition. Section 588GAC extends to any person who procures, incites, induces or encourages a disposition that the company then makes.

Both provisions have criminal and civil penalty limbs. Criminal liability includes recklessness for the statutory results and circumstances. For the civil limbs, the officer or procuring person must know, or a reasonable person in their position would know, that the disposition is creditor-defeating.

The relevant company circumstances include existing insolvency or insolvency caused by the disposition or concurrent dispositions. They also include external administration or complete cessation of business less than 12 months later, caused directly or indirectly by the disposition. Cessation of business is an offence-related condition that does not itself establish voidability under section 588FE(6B).

The officer and procuring-person provisions exclude specified formal arrangements and dispositions by liquidators or provisional liquidators. Section 588GA also supplies safe harbour protection where its conditions are met. Assess liability under the compiled Corporations Act separately from whether an asset can be recovered.

Evidence That Shows the Disposition

Bank statements test whether the agreed consideration reached the company and whether later payments removed its benefit. Combine that trail with the sale agreement and evidence identifying the property transferred.

Build a payment schedule around the transactions you need to establish.

• Match the price received by the old company to the debit in the buyer’s statement.
• Trace any return payment to the buyer or onward payment to a director or related entity.
• Identify customer receipts entering the new entity’s account for trading previously conducted by the old company.
• Follow proceeds from a further sale of the transferred property.

In a hypothetical matter, a buyer pays $40,000 to the old company for equipment. Two days later, the old company pays the same amount back to the buyer. The schedule exposes the return payment, while the underlying documents establish its purpose and the transaction’s legal effect.

Receipts entering a new entity’s account can help establish when trading moved. Match those receipts to customer invoices and contracts before attributing them to the old company’s business. Follow onward payments through an asset-tracing investigation where the supplied records support the route.

Page-cited findings give a valuation expert the payment history and supporting statements without another search through the bundle. The expert assesses market value and the best price reasonably obtainable using the relevant asset and sale evidence. Bank-statement analysis supplies the transaction facts for that assessment.

FinTrace saves liquidators and forensic accountants hours of statement review by consolidating large PDF bundles into a searchable ledger and a clear findings report. The analysis flags suspicious transfers and follows movements across supplied accounts. Each finding cites its PDF filename and page, putting the payment evidence directly beside the explanation.

Use the payment schedule to identify the consideration actually received, any return payments and the destination of later receipts. Pair those findings with the valuation and administration chronology to address each element of the proposed recovery claim.