Re Intellicomms Pty Ltd (in liq)

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST

S ECI 2021 03635

IN THE MATTER of INTELLICOMMS PTY LTD (IN LIQUIDATION) (ACN 153 181 367)

BETWEEN:

GLENN JEFFREY FRANKLIN as joint and several liquidator of INTELLICOMMS PTY LTD (IN LIQUIDATION) (ACN 153 181 367) & ORS (according to the attached Schedule)	Plaintiffs
v
TECNOLOGIE FLUENTI PTY LTD (ACN 653 110 582)	Defendant

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JUDGE:	Gardiner AsJ
WHERE HELD:	Melbourne
DATE OF HEARING:	23, 24 November, 1 December 2021
DATE OF JUDGMENT:	11 May 2022, revised 2 February 2024
CASE MAY BE CITED AS:	Re Intellicomms Pty Ltd (in liq)
MEDIUM NEUTRAL CITATION:	[2022] VSC 228

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CORPORATIONS – Sale of business immediately prior to company going into creditors’ voluntary winding up – Allegation that sale agreement was a creditor-defeating disposition under s 588FDB of the Corporations Act 2001 (Cth) (the ‘Act’) and a voidable transaction under s 588FE(6B) of the Act – Whether the plaintiff is required to establish actual monetary value of the property the subject of the transaction for the purpose of establishing that the consideration payable was less than the lesser of the market value of the property and the best price that was reasonably obtainable for the property, having regard to the circumstances existing at the time of the transaction – Finding that sale agreement was a creditor defeating disposition under s 588FDB and voidable pursuant to s 588FE(6B) of the Act – Form of relief considered.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiffs	Mr J Evans QC, one of Her Majesty’s counsel, with Ms V Bell	Madgwicks Lawyers
For the Defendant	Mr H N G Austin QC, one of Her Majesty’s counsel, with Mr D F McAloon	Strongman & Crouch

HIS HONOUR:

By originating process filed 4 October 2021, the first and second plaintiffs, Messrs Glenn Jeffrey Franklin and Petr Vrsecky (the ‘Liquidators’) in their capacity as joint and several liquidators of the third plaintiff, Intellicomms Pty Ltd (ACN 153 181 367) (In Liquidation) (‘Intellicomms’), make application under ss 588FB, 588FDA, 588FDB, 588FE and 588FF of the Corporations Act 2001 Cth (the ‘Act’) for relief in relation to a sale agreement dated 8 September 2021 (‘Sale Agreement’) between Intellicomms and the defendant, Tecnologie Fluenti Pty Ltd (‘TF’), involving the sale of certain business assets of Intellicomms to TF (‘assigned assets’).[1]
[1]The originating process also sought relief in the alternative that the Sale Agreement was an uncommercial transaction, or alternatively, an unreasonable director-related transaction. This relief, while not being abandoned by the Liquidators at the hearing of the application, was not pressed.

Until September 2021, Intellicomms, operated a business providing translation services to commercial enterprises under the trading name “ezispeak” in Australia and, through a wholly owned subsidiary, Intellicomms NZ Ltd (‘Intellicomms NZ’), in New Zealand.

On the afternoon of 8 September 2021, Intellicomms sold the assigned assets to TF under the Sale Agreement. A short time afterwards on the same day, a meeting of Intellicomms was convened at short notice at the behest of its sole director, Ms Rebecca Haynes, and Intellicomms was placed into creditors’ voluntary liquidation. The Liquidators were appointed liquidators in the winding up.

TF was incorporated on 25 August 2021, two weeks prior to the appointment of the Liquidators. The sole director and shareholder of TF is Ms Michelle Gigliotti, a sister of Ms Haynes. Prior to the sale, Ms Gigliotti was employed by Intellicomms as its financial and payroll administrator.

The essence of the relief sought by the plaintiffs is that the Sale Agreement be set aside by reason that it is a creditor-defeating disposition within the meaning of s 588FDB of the Act, and a voidable transaction within the meaning of s 588FE(6B) of the Act.

Relevant legislation

Section 588FDB was introduced into the Act by the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth) and took effect from 18 February 2020. There are no authorities dealing with its operation. The explanatory memorandum introducing the relevant bill observed in respect to phoenix activity:

While the scale of illegal phoenix activity ranges from the opportunistic to the systemic, a common characteristic is the stripping and transfer of assets from a company to another entity. Such transactions are carried out by a company’s directors or other controlling minds with the intention of defeating the interests of the first company’s creditors in that company’s assets. Such transactions are also facilitated by others, including unscrupulous pre-insolvency advisers, accountants, lawyers or other business advisers, who advise companies on how to engage in illegal phoenix activity.[2]

[2]Explanatory memorandum to Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 (Cth) [1.3] (‘Explanatory Memorandum’).

The explanatory memorandum proceeded to observe that the legislation:

… introduces new phoenixing offences to prohibit creditor-defeating dispositions of company property, penalise those who engage in or facilitate such dispositions, and allow liquidators and ASIC to recover such property.[3]…

[3]Ibid [1.9].

The explanatory memorandum went on to observe in respect of s 588FDB:

A creditor-defeating disposition is a disposition of company property for less than its market value (or the best price reasonably obtainable) that has the effect of preventing, hindering or significantly delaying the property becoming available to meet the demands of the company’s creditors in winding-up.
…
A particular asset of the company not being available for division among creditors on winding up is not in and of itself a creditor-defeating disposition. It is also necessary to establish the company received consideration that was less than the market value of the property disposed of and less than the best price reasonably obtainable for the disposition.
The test is applied at the time of the relevant agreement for the disposition is entered into or – if there is no agreement for the disposition – at the time of the disposition.
In this context, market value means the price that would be paid in a hypothetical transaction between a knowledgeable and willing, but not anxious, seller to a knowledgeable and willing, but not anxious, buyer, who transact at arm’s length.
The alternative test of ‘the best price reasonably obtainable’ recognises there will be legitimate situations where a company may need to realise assets at less than market value. This is particularly the case for companies in legitimate financial difficulty that have urgent cash flow needs. The legitimate urgency with which these companies may seek to realise the value of assets means their actual disposal of assets may not realise the same market value price as the hypothetical not anxious seller.
In these cases, the circumstances of the disposition - including the financial circumstances of the company - and the reasonableness of the steps the company took or should have taken to realise the value of the asset will be relevant to determining whether the disposition is a creditor-defeating disposition. For example, a company that sells property through a reasonable process such as a public auction designed to obtain the best price available will not make a creditor-defeating disposition.
Where an asset’s market value is reasonably obtainable, the best price reasonably obtainable in the circumstance is not less than the asset’s market value. In such cases, establishing that the consideration the company received was less than the asset’s market value will also establish that it was less than the best price reasonably obtainable.[4]
…
A transaction is voidable [under s 588FE] if it is a creditor-defeating disposition made by a company at a time when the company is insolvent, or because of the disposition, the company immediately becomes insolvent or enters external administration within the following 12 months.[5]

[4]Ibid [2.12].

[5]Ibid [2.26].

Section 588FDB(1) provides, relevantly:

Creditor-defeating disposition
(1)A disposition of property of a company is a creditor-defeating disposition if:
(a)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:
(i)the market value of the property;
(ii)the best price that was reasonably obtainable for the property, having regard to the circumstances existing at that time; and

(b)the disposition has the effect of:
(i)preventing the property from becoming available for the benefit of the company’s creditors in the winding-up of the company; or
(ii)hindering, or significantly delaying, the process of making the property available for the benefit of the company’s creditors in the winding-up of the company.

Section 588FE(6B) provides:

The transaction is voidable if:
(a) it is a creditor-defeating disposition of property of the company; and
(b) at least one of the following applies:
(i)the transaction was entered into, or an act was done for the purposes of giving effect to it, when the company was insolvent, during the 12 months ending on the relation-back day or both after that day and on or before the day when the winding up began;
(ii)the company became insolvent because of the transaction or an act done for the purposes of giving effect to the transaction during the 12 months ending on the relation-back day or both after that day and on or before the day when the winding up began;
(iii)less than 12 months after the transaction or an act done for the purposes of giving effect to the transaction, the start of an external administration (as defined in Schedule 2) of the company occurs as a direct or indirect result of the transaction or act; and

(c)the transaction, or the act done for the purpose of giving effect to it, was not entered into, or done:
(i)under a compromise or arrangement approved by a Court under section 411; or
(ii)under a deed of company arrangement executed by the company; or
(iii)by an administrator of the company; or
(iiia)by a restructuring practitioner for the company; or
(iiib)under a restructuring plan made by the company; or

(iv)by a liquidator of the company; or
(v)by a provisional liquidator of the company.

None of the circumstances prescribed by sub-para (c) of s 588FE(6B) have application here.

As previously mentioned, the transaction the subject of this proceeding was entered into on the day that Intellicomms entered into creditors’ voluntary liquidation. TF has admitted that the Sale Agreement prevented the property from becoming available for the benefit of Intellicomms’ creditors in the winding up for the purpose of s 588FDB(1)(b) and that it was entered into when Intellicomms was insolvent for the purpose of s 588FE(6B)(b).[6]
[6]See TF’s defence filed 12 November 2021 [7], [16(a)].

If it is established that the relevant transaction is voidable under s 588FE(6B), the Court has jurisdiction under s 588FF to make one or more of the orders prescribed by s 588FF(1). That section relevantly states:

(1)Where, on the application of a company’s liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, the court may make one or more of the following orders:
(a)an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction;
(b)an order directing a person to transfer to the company property that the company has transferred under the transaction;
(c)an order requiring a person to pay to the company an amount that, in the court's opinion, fairly represents some or all of the benefits that the person has received because of the transaction;

Section 588FF(3) prescribes certain time limits for the bringing of applications to render transactions voidable. It provides:

An application under subsection (1) may only be made:
(a)       during the period beginning on the relation-back day and ending:
(i)        3 years after the relation-back day; or
(ii)       12 months after the first appointment of a liquidator in relation to the winding up of the company;
whichever is the later; or
(b)within such longer period as the Court orders on an application under this paragraph made by the liquidator during the paragraph (a) period.

The relation-back day in the winding up of Intellicomms is 8 September 2021.[7] This proceeding was commenced on 4 October 2021, within the time period prescribed by s 588FF(3)(a)(i).
[7]Section 91 of the Act provides for the definition of “relation-back day” in the various types of winding up of a company. Item 23 provides that the relation-back day in a winding up which is not in one of the categories mentioned in items 1-22 is defined as the day on which the winding up is taken because of Div 1A of Part 5.6, to have begun. Section 513B(e) which is found within that division defines that when a company resolves by special resolution that it be wound up voluntarily, the winding up is taken to have begun or commenced in the particular circumstances of this case on the day on which the resolution was passed.

Senior counsel for TF, Mr Austin QC, frankly conceded that the circumstances in which the Sale Agreement was entered into were “undoubtedly unattractive in the extreme to those with any affinity with insolvency law”[8] and that there were “atmospherics”[9] to the transaction.
[8]Transcript of Proceeding Re Intellicomms Pty Ltd (in liq) (Supreme Court of Victoria, S ECI 2021 03635, Gardiner AsJ, 23-4 November, 1 December 2021) 41, line 4 (‘Transcript’).
[9]See, e.g., Transcript 209, line 30.

I think these were appropriate concessions to make. The Sale Agreement has, to my mind, all the hallmarks of a classic phoenix transaction, i.e., it involves the transfer of the assets of an insolvent enterprise to an entity controlled by persons closely associated with it, leaving behind significant liabilities with no means to satisfy them. The transaction documented in the Sale Agreement, which had the effect of placing Intellicomms’ assets beyond the reach of its creditors, could be described as audacious; Ms Haynes caused the company to go into liquidation at a shareholders’ meeting that she convened without informing those who would be interested, including a shareholder and one of its major creditors, Callscan Australia Pty Ltd, which trades under the name QPC (‘QPC’), of the fact that she had entered into the Sale Agreement only minutes before the members’ meeting. It seems clear from the evidence that Ms Haynes had planned the sequence of events carefully in close consultation with her business management consultants, de Jonge Read. There is no suggestion that Ms Haynes considered placing Intellicomms into voluntary administration under Part 5.3A of the Act in lieu of proposing to its members that it be placed into liquidation; if administrators were appointed and the sale process placed in their hands, there would be no suggestion that the sale process was not at arm’s‑length.

Although the timing of the execution of the Sale Agreement and the meeting which followed shortly afterwards was not explained, it is to be noted that on that very day the compliance period for a statutory demand which had been served 21 days earlier on Intellicomms by QPC for what was apparently an undisputed debt of $923,310 was due to expire.[10] QPC would have thereby been afforded standing the following day to file an application for an order to wind up Intellicomms in insolvency. Once such an order was made, the winding up of Intellicomms would have ‘commenced’ and the Sale Agreement would have been a void disposition by operation of s 468(1) of the Act.
[10]No application was made by Intellicomms to set aside the demand under s 459G of the Act.

It will be seen from the evidence that Ms Haynes caused several valuations of Intellicomms to be obtained over a comparatively short period. Ms Haynes provided the persons conducting the valuations with increasingly pessimistic inputs as to future trading revenue. This had the effect that each successive valuation gave dramatically decreasing values for the company. Ms Haynes deposed that the consideration payable under the Sale Agreement was commensurate with the value of Intellicomms in valuations that she caused to be obtained in August and September 2021.

Despite his concession as to the “optics” of the transaction, Mr Austin QC contended that the transaction is nonetheless not susceptible to being rendered voidable by operation of s 588FDB. In this regard, he submitted that in order for the Sale Agreement to be characterised as a creditor-defeating disposition, the Liquidators must establish sufficient evidence upon which the Court can determine an actual monetary value as at 8 September 2021, going to each of: (a) the market value of the assets in question; and (b) the best price reasonably obtainable for the assets; and that in each case the actual value so assigned must be then higher than the consideration payable to Intellicomms for the assets.

The Liquidators submitted in response that there is nothing in the wording of s 588FDB that mandates such a prescriptive approach, but in any case there is sufficient evidence before the Court to enable it to undertake that task and to determine the question in the Liquidators’ favour.

The trial of the application proceeded over three days. There was a considerable volume of evidence filed by the parties, but the argument, submissions and cross‑examination of witnesses was dominated by the valuation evidence relied on by the parties. The ultimate question for consideration was whether the Liquidators had established that the amount payable under the Sale Agreement was less than the lesser of the market value and the best price reasonably obtainable for those assets within the meaning of s 588FDB, and, if so, whether the relief sought by the Liquidators should be granted.

Evidence

The plaintiffs rely on the following evidence:[11]
[11]In the course of the hearing, I acceded to certain objections raised as to admissibility in each party’s affidavits. The objections which were upheld were the subject of redactions, and in particular, to the Franklin Affidavit, Chambers Affidavit, Haynes Affidavit, Hockley Report and Smith Report. Those affidavits were subsequently filed with the Court in redacted form. There was other evidence filed in the proceeding concerned with subpoenas issued by the plaintiffs against the former solicitors for Intellicomms. Mr Franklin also filed an affidavit sworn 28 October 2021 which was primarily concerned with obtaining orders pursuant to s 477(2B) of the Act for the Court’s approval for the Liquidators to enter into a litigation funding agreement between the plaintiffs and QPC. That affidavit material is not relevant to the present application.

(a) the affidavit in support of Glenn Jeffrey Franklin sworn 4 October 2021 (‘Franklin Affidavit’);

(b) an affidavit of Scott Chambers sworn 11 October 2021 (‘Chambers Affidavit’);

(c) an affidavit of Alexandra Elise Lawrence sworn on 14 October 2021 (‘Lawrence Affidavit’);

(d) an expert report of Liz Smith dated 17 November 2021 (‘Smith Report’);

(e) a further affidavit of Scott Chambers sworn 17 November 2021 (‘Second Chambers Affidavit’); and

(f) a further affidavit of Glenn Jeffrey Franklin sworn 22 November (‘Second Franklin Affidavit’).

TF relies on the following materials in opposition:

(a) the affidavit of Rebecca Leah Haynes sworn 12 November 2021 (‘Haynes Affidavit’); and

(b) an expert witness statement of Darryn Hockley dated 12 November 2021 (‘Hockley Report’).

The plaintiffs’ evidence
Affidavit of Glenn Jeffrey Franklin sworn 4 October 2021

Mr Franklin states that following a meeting of the members of Intellicomms on 8 September 2021, Intellicomms was placed into creditors’ voluntary liquidation and the Liquidators were appointed as joint and several liquidators.

Ms Haynes was Intellicomms’ sole director and company secretary. Intellicomms had 11 employees, including four members of Ms Haynes’ family, being two of her siblings and two of her siblings’ partners.

Mr Franklin states that based on the Liquidators’ preliminary investigations 85% of Intellicomms’ revenue was derived from seven key customer contracts for the provision of translation services with Bupa, Origin Energy, Optus, Telstra, Alfred Health, Red Energy and the Government of New Zealand. Intellicomms contracted approximately 700 sub-contractors to perform translation services on its behalf.

The software employed by Intellicomms in its online translation operations was developed by QPC, a minority shareholder in Intellicomms, holding approximately 600 shares, or 28.16% of its issued share capital. The managing director of QPC is Mr Scott Chambers.

Intellicomms owns 100% of the shares in Intellicomms NZ and Sertel Pty Ltd (‘Sertel’). Ms Haynes is also a director of those entities. Mr Franklin has not been able to access the complete records of those subsidiary entities but he understands that Intellicomms NZ was receiving income from the New Zealand Government for translation services when he was appointed. He does not believe that Sertel is trading.

Mr Franklin describes the key assets of Intellicomms as including:

(a) the trademarks, website, and business names of ezispeak;

(b) Intellicomms’ proprietary online translation software;

(c) contracts with the key customers identified above in paragraph 26;

(d) contracts with approximately 700 sub-contractors; and

(e) the 100% shareholding in two subsidiary companies, Intellicomms NZ and Sertel.

On the date of the Liquidators’ appointment, Mr Franklin was provided by Ms Haynes with a Report on Company Activities and Property (‘ROCAP’), which stated that Intellicomms had liabilities totalling $3,276,984, consisting of $368,908 in secured debts and $2,908,076 in unsecured debts. The prominent unsecured were as follows:

(a) QPC: $975,542.01;

(b) director’s loan: $378,000;

(c) loan owing to Intellicomms NZ: $174,511.97;[12]
[12]Exhibit GJF-1 to Franklin Affidavit, 11; Revised Court Book, 28.

(d) Australian Taxation Office: $769,159;

(e) debts to sub-contractors: $58,451;

(f) superannuation obligations to employees: $115,464.46; and

(g) other creditors: $436,947.

Mr Franklin observes that although the ROCAP disclosed an amount of $753,890.70 for total debtors outstanding, the estimated amount realisable is only $384,981.70. He states that, to date, he has been unable to reconcile the difference in these amounts. Further investigations into the assets and liabilities of Intellicomms were still being undertaken at the time he swore his affidavit.

The Sale Agreement

Mr Franklin states that on 8 September 2021, the day that Intellicomms went into voluntary liquidation but shortly prior to the meeting appointing the Liquidators, Intellicomms entered into the Sale Agreement with TF to purchase the assets of Intellicomms, novate its contracts and transfer the employees and their entitlements to TF.[13]
[13]Exhibit GJF-1 to Franklin Affidavit, 19; Revised Court Book, 36.

The Sale Agreement provides that Intellicomms agrees to sell to TF the business, which is defined as the business of providing interpreting and translation services to clients in Australia and New Zealand, together with the assets of Intellicomms which are identified in Attachment A to the Sale Agreement. Those assets include the business records of Intellicomms, its goodwill, intellectual property, shares (defined as the issued shares of any class owned by Intellicomms in Intellicomms NZ), office equipment and computers. In addition, identified computer hardware and mobile telephone numbers are to be assigned to TF. It is the market value of that parcel of assets, and whether they have been transferred to TF for less than their market value, which is the central subject of consideration in this application, not the value of the shares in Intellicomms, which by reason of it being insolvent, have no value.

Aside from specified liabilities in respect of the entitlements of employees who are transferring to TF, TF does not assume any of the other liabilities of Intellicomms, which, as mentioned above, are of the order of $3.3 million. Attachment B to the Sale Agreement identifies the employees of Intellicomms who will be transferred to TF and notes the total value of the liability of their entitlements which TF will assume. I note that among the employees identified as transferring to TF, Mr Damir Cato, whose entitlements were calculated as being $18,144.02, did not transfer to TF and accordingly TF was not obliged to take up that liability despite the assumption it would do so being taken into account in the calculation of the purchase price payable by TF under the Sale Agreement.

Attachment C identifies licences and contracts which are to be assigned under the Sale Agreement. These include those with Bupa, Optus, Greater Western Water, Yarra Valley Water, Origin Energy, Telstra and other entities. Under the heading “New Zealand Based Clients” a contract with the New Zealand Ministry of Business Innovation and Employment is identified, said to be for a term of five years. Attachment C also identifies several hundred contracts with interpreters who are sub‑contracted to Intellicomms which are to be assigned to TF.

The liabilities assumed under the Sale Agreement are expressed to be the accrued employee superannuation and long-service leave entitlements for the transferring employees to which I have referred, together with what is described as the performance after completion of all contracts to be assumed by the purchaser.

The purchase price payable under the Sale Agreement is subject to adjustment by operation of cl 3 of the agreement. Clause 3.1 provides that completion under the contract will not proceed unless and until all necessary contracts and licences are assigned, novated or otherwise transferred to TF on terms satisfactory to TF. Clause 3.2 provides that completion of the Sale Agreement will not proceed unless and until all necessary contracts and any necessary licences to operate the business are assigned, novated or transferred, and the release of any Personal Property Securities Register (‘PPSR’) security interests have been obtained. Clause 3.4 provides that the conditions in cl 3.2 are for the sole benefit of TF and can only be waived by written agreement of TF. Clause 3.4(b) states that if TF waives its rights under cl 3.4(a), and at the time of the waiver the “material contracts” defined in cl 1 have not been assigned or novated, the definition of “purchase price” in cl 1.1 is reduced from $102,000 to $58,000.

Mr Franklin’s analysis is that, after deduction of employee entitlements of the transferring employees (stated to be $37,272.82 by reference to Attachment B to the Sale Agreement),[14] the amount payable to Intellicomms is $20,727.18. I note that as previously mentioned, the liability to Mr Cato, said to be $18,144.02, was not assumed because he did not transfer to TF, however there is no adjustment of the purchase price bringing this to account.
[14]Part A of Attachment B to the Sale Agreement; Revised Court Book, 64.

Mr Franklin states that the conditions precedent in cl 3 of the Sale Agreement have not been satisfied.[15]
[15]Which was also the case at the date of the hearing of this application.

Mr Franklin states that the cost of performing the obligations required to complete the Sale Agreement would likely exceed the purchase price payable under the agreement. He describes those obligations as including:

(a) assisting with the novation and transfer of approximately 700 contracts with respect to the sub-contractors, including obtaining consent from the secured creditors of Intellicomms;

(b) carrying on the business as usual until the sale was complete, with little or no funds available to the Liquidators during this period;

(c) discharging Intellicomms’ superannuation obligations prior to the sale despite limited available funds; and

(d) transferring the shares in Intellicomms NZ to TF in circumstances where Intellicomms NZ is still controlled by Ms Haynes.

Mr Franklin states that shortly after his appointment, he was contacted by Mr Chambers, the managing director of QPC, in relation to the sale and the circumstances of the liquidation of Intellicomms. Mr Chambers stated that over the preceding year, QPC and Ms Haynes on behalf of Intellicomms had been in discussions concerning QPC making a further investment in Intellicomms.

Mr Franklin states that on or about 3 February 2021, Ms Haynes provided QPC with a valuation of Intellicomms undertaken by Rushmore Group (‘February Valuation’). The February Valuation asserted that the fair market value of 100% of the equity in Intellicomms was valued at $11,277,346 as at 30 June 2020.

Mr Franklin states that further valuations of Intellicomms appear to have been obtained on its behalf at various dates in 2021, which appear to show that the value of Intellicomms had decreased substantially. These further valuations were as follows:

(a) on 26 July 2021, a valuation of Intellicomms as of 30 June 2021 undertaken by FTI Consulting found that the fair market value of the equity in Intellicomms was between $117,456 and $683,559 (‘July Valuation’);

(b) on 30 August 2021, a report by Nexus Business Consultants (’Nexus’) found the goodwill in the business to be valued at $101,000 (‘August Valuation’); and

(c) on 8 September 2021, the date of the Sale Agreement and the liquidation, a revised report by Nexus valued the goodwill at $57,000 on the basis of loss or the potential loss of significant contracts (‘September Valuation’).

Summary of February Valuation

The February Valuation was prepared by Mr Andrew Firth, a chartered accountant and director of the Rushmore Group, which specialises in the preparation of forensic accounting and valuation reports.[16] The February Valuation was provided on the basis of instructions dated 22 January 2021 by Ms Haynes on behalf of Intellicomms to assess the fair market value of 100% of the equity on Intellicomms as at 30 June 2020 for the purpose of a possible issue of equity.
[16]The February Valuation is contained in Exhibit GJF-1 to Franklin Affidavit, 67; Revised Court Book 84.

Mr Firth was provided with the financial statements for Intellicomms for the previous two financial years and with forecasts for Intellicomms for the 12 months ending 30 June 2021 and 30 June 2022. On this basis, he concluded that the most appropriate methodology in the circumstances was to value Intellicomms on the basis of a discounted cash flow methodology, which “values a business as the present value of the future net cash flows the business is expected to produce.”[17] In order to ascertain the value of a company under the discounted cash flow method, the future cash flows of a company are discounted by a rate which is said to reflect the risks associated with the expected cash flow streams. The February Valuation explains the methodology adopted, including the selection of certain inputs:
[17]February Valuation [2.2]; Revised Court Book, 84.

(a) free cash flow projections (i.e. the projected revenue of the company less its projected expenses) of Intellicomms until FY2026 were provided by Intellicomms;

(b) a discount rate of 16.6% per annum was applied; and

(c) a terminal value of Intellicomms as at 2026 was selected based on the free cash flow projected in the year ending 2026. Mr Firth states that he estimates that Intellicomms is likely to maintain constant earnings before interest, taxes, depreciation and amortisation (‘EBITDA’) each year after 2026.

Mr Firth considers that the forecast cash flows provided to him were reasonable given that Intellicomms had recorded revenue growth and an upward trend in financial performance in recent years. Further, Intellicomms had invested in its management, processes and business development and this provided the ability to achieve scale in the marketplace in future years. Mr Firth considered that Intellicomms had the in‑house skills to compete in the industry at scale and it had invested in its relationships with key stakeholders which would be likely to facilitate the future growth of Intellicomms.[18]
[18]Calculated in accordance with Appendix 6 to the February Valuation; Revised Court Book, 103.

The February Valuation model considers that, in accordance with the following table, the net present value of the ezispeak business as at 30 June 2020 was $12,470,564:

x The February Valuation then deducts $1.5 million for what is considered to be the amount of working capital necessary to operate the business from the net present value calculation. Mr Firth concludes that the fair market value of 100% of the equity in Intellicomms is $11,277,346 as at 30 June 2020.[19]
[19]February Valuation [5.1]; Revised Court Book, 91.

Neither party placed any emphasis on the February Valuation, perhaps because it valued the company on 30 June 2020, some 15 months before the subject transaction. The scale of the disparity between the February Valuation and the subsequent valuations was not explained.

Summary of July Valuation report

The July Valuation was prepared by Ms Fiona Hansen in accordance with an engagement letter dated 7 July 2021.[20] Ms Hansen is a senior managing director of FTI Consulting with over 25 years’ experience in corporate finance and she has undertaken numerous corporate finance assignments involving acquisitions, divestments, valuations and financial due diligence.
[20]The July Valuation is contained in Exhibit GJF-1 to Franklin Affidavit, 89; Revised Court Book, 106.

The engagement letter requesting the July Valuation instructs Ms Hansen to provide an indicative fair market value of 100% of Intellicomms’ share equity as at 30 June 2021. The purpose of the valuation as stated in the letter of instruction was to inform a potential share issue in lieu of loans provided by shareholders, which I infer to be a reference to the debt capitalisation discussions between QPC and Intellicomms, in addition to a possible capital raising.

The July Valuation adopts the following as inputs:

(a) forecasted cash flows of Intellicomms which were received from the management of Intellicomms for the financial years between 30 June 2022 and 30 June 2026 (these forecasts were provided on 26 July 2021);[21]
[21]Exhibit GJF-1 to Franklin Affidavit, 95; Revised Court Book, 112. A copy of the Excel workbook underlying the table was provided to the Court during the hearing, a copy of which is placed on the Court file (‘Exhibit 94D’).

(b) projected cash flows of Intellicomms for the years between 30 June 2027 and 30 June 2031, which were extrapolated by Ms Hansen on the basis of certain assumptions which she states are in line with management’s assumptions;[22] and

(c) a discount rate of between 20% to 25%, based on what Ms Hansen states are typical rates employed by venture capitalists for early stage entities.

[22]Ibid.

The July Valuation assumes the EBITDA of the company would stabilise in FY2026 and subsequently grow at a constant rate of 2.5%. The report also conducts an implied EBITDA multiple cross-check, from which it concludes that Intellicomms should be priced at a discount to the multiples of comparable companies, given it is smaller and has a less attractive historical revenue. On this basis, the July Valuation estimates that the enterprise value of Intellicomms, being the net present value of the assets, is within a range of values, with the lowest amount being $532,611 and the highest being $1,098,714. As such, subtracting the net debt of Intellicomms of $415,156, the valuation estimates that the indicative fair market value of Intellicomms’ shareholding ranged between $117,456 and $683,559.[23]
[23]July Valuation, 6; Revised Court Book, 111.

I now turn to consideration of the August Valuation and the September Valuation prepared by Nexus (together, ‘the Nexus Valuations’). It will be seen that in her evidence which is summarised below, Ms Haynes stated that the purchase price payable under the Sale Agreement was ‘commensurate with the market value based on the August Valuation and supplemented by the September Valuation.’ They are therefore of significance as they form the basis for the contention by TF that its purchase of the assigned assets was for proper value.

Summary of August Valuation report

The August Valuation dated 30 August 2021 was prepared in accordance with an engagement letter dated 18 August 2021, and was composed by Ms Jelena Hahn, managing director of Nexus.[24] Ms Hahn is a certified practising accountant with over 20 years’ of experience in financial accounting.
[24]The August Valuation is contained in Exhibit GJF-1 to Franklin Affidavit, 113; Revised Court Book, 130.

In her affidavit evidence, Ms Haynes deposes that she caused Intellicomms to obtain the August Valuation in order ‘to ascertain the market value of ezispeak and associated assets to be acquired by TF from Intellicomms.’[25]
[25]Haynes Affidavit [67].

The August Valuation states that it is a valuation of the goodwill of Intellicomms as at 30 June 2021 and Ms Hahn understood it was sought in anticipation of the sale of the business. She states that the report calculates the value of the goodwill only and, in particular, does not seek to value the chattels of Intellicomms.[26]
[26]August Valuation, 2; Revised Court Book, 131.

The August Valuation does not value the intellectual property of the business. The report states that this is not explicitly considered but rather its value is adequately reflected with reference to its indirect effect on Intellicomms’ revenue.[27]
[27]August Valuation, 117; Revised Court Book, 136.

As indicated in the Smith Report,[28] which is relied upon by the plaintiffs, the August Valuation appears to exclude all New Zealand derived revenue of Intellicomms, and does not value the shares of Intellicomms’ subsidiary, Intellicomms NZ. This exclusion appears to be pursuant to the terms of the engagement letter dated 18 August 2021 provided to Ms Hahn.[29]
[28]Smith Report [3.6.1]; Revised Court Book, 1523.
[29]August Valuation, 113; Revised Court Book, 130.

The August Valuation considers that the most appropriate methodology to apply in the valuation of Intellicomms is the discounted cash flow method, by reason that Intellicomms has experienced fluctuations in past performance and the capitalisation of future maintainable earnings would not accurately reflect the value of its contracts. The report contends that Intellicomms has the ability to forecast five years of projected cash flows on the basis of the company’s current contracts, notwithstanding that some of the contracts contain termination clauses which may not be able to be assigned to a new purchasing entity.[30] The conclusion of the report also states that Ms Hahn recommends that an adjustment to the valuation should take place if any contracts are not assigned to the purchaser. I note however that no adjustment is recommended in respect of liabilities which are not assumed by TF.
[30]August Valuation, 116; Revised Court Book, 133.

The August Valuation adopts the following inputs:

(a) projected cash flows of Intellicomms which were received from the management of Intellicomms in respect of the financial years between 30 June 2022 and 30 June 2026;[31]

(b) a discounted cash flow rate of 30%, which the August Valuation states incorporates consideration of the inherent risk of the investment in the business along with the expectation of return when compared to other investments.[32]

[31]August Valuation, 119; Revised Court Book, 136. A copy of the Excel workbook underlying the table was provided to the Court during the hearing (‘Exhibit 94G’).

[32]August Valuation, 119; Revised Court Book, 136.

On the basis of the above, the August Valuation reaches the conclusion that the net present value of the goodwill of Intellicomms as at 30 June 2021 was approximately $101,476.

Summary of September Valuation report

The September Valuation is dated 8 September 2021, the date of the Sale Agreement and the liquidation and was prepared by Ms Hahn, who prepared the August Valuation. The valuation notes that the report has been prepared on an identical basis to the August Valuation, save that it adopts as inputs cash flow projections which were the result of revised cash flow projections provided to her by Ms Haynes on 27 August 2021. The revised projections are summarised in the following table:[33]

[33]August Valuation, 116; Revised Court Book, 139.

[34]Haynes Affidavit [68].
[35]Transcript 122, lines 9-11. Please see para 119 below.
[36]Transcript 123, lines 9-10.
Ms Hahn notes that the revised cash flow projections were provided on the basis that Ms Haynes had indicated a “loss or potential loss of significant contracts” in Intellicomms. In her evidence, Ms Haynes states that she provided the revised cash flows which were said to be “arising from actual or potential loss of significant customer contracts.”[34]In cross-examination, Ms Haynes stated that the revised cash flow projections were prepared on 27 August 2021 on the basis of the effect of the outage arising from the loss of contracts which resulted from the suspension of the software licence.[35] She states that four contracts, which produced an annual revenue of $650,000 in the previous year, were lost during this period. However, in cross-examination, Ms Haynes accepted that the loss of the contracts had already been factored into consideration in the revenue forecasts provided for the August Valuation.[36]

On the basis of the revised revenue projections, the September Valuation calculates the net present value of Intellicomms, rounded to the nearest thousand dollars, as being $57,000.

Mr Franklin says that he is not aware of any attempt by Intellicomms’ director, Ms Haynes, to seek offers to purchase from third parties with respect to Intellicomms’ business and its assets, notwithstanding that Intellicomms was in discussions with QPC for further equity in the business.

Mr Franklin notes that TF is a related entity of Intellicomms by reason that the sole director of TF, Ms Michelle Gigliotti, is the sister of the sole director of Intellicomms, Ms Haynes. He observes that the employees of TF include several of their relatives and that both Intellicomms and TF have nominated an identical address for their respective registered offices at Collins Street in Docklands.

Mr Franklin states that on 4 October 2021 he received a letter from QPC expressing its willingness to purchase the business. Mr Franklin considers that if he were to undertake a sales campaign to sell the ezispeak business, it would be in the best interests of the creditors to invite QPC, TF, and any other parties apparently interested in making an offer in relation to the assets transferred under the Sale Agreement.

Mr Franklin states that as a result of his preliminary investigations, Intellicomms may have been insolvent for some time. He bases this opinion on the following factors:

(a) Intellicomms made a loss of $845,748.00 in the financial year ending 30 June 2021;

(b) Intellicomms was “balance sheet” insolvent from at least 30 June 2017;

(c) Intellicomms has unsecured liabilities of $2,908,075.66

(d) on 17 August 2021, QPC served a statutory demand for $923,310.00 on Intellicomms and the 21-day period for compliance with that demand was due to expire on the day of the Liquidators’ appointment;

(e) there were no funds available to the Liquidators at the date of their appointment; and

(f) Intellicomms had entered into payment plans with the ATO in the two‑year period leading up to the Liquidators’ appointment, many of which were in default.

Intellicomms continues to own a 100% shareholding in Intellicomms NZ. Mr Franklin states that Intellicomms NZ had a number of supply contracts with the New Zealand Government which generated a revenue of approximately $1.8 million per annum.

Mr Franklin states that he is attempting to obtain the financial books and records of Intellicomms NZ and to ascertain its net asset position. On the basis of out‑of‑date financial records he provides a summary of the financial position. In this regard, he deposes:

(a) Intellicomms NZ had $19,799 in cash as at 22 September 2021;

(b) a loan was made to TF by Intellicomms NZ in the amount of $30,287 on 15 September 2021, a week after the Liquidators were appointed;

(c) the only material liability of the company is a loan of $115,126 owed to Intellicomms (and is therefore an asset of Intellicomms);

(d) minimal transactions appear in Intellicomms NZ’s profit and loss statements, with the last sales/revenue recording being 30 June 2021;

(e) no debtors are recorded in the accounting software used by Intellicomms NZ; and

(f) the accounts of Intellicomms NZ show no creditors on the Xero system for the period since 31 July 2021. However, as at 31 July 2021, there were 112 sub‑contractors listed as aged payables that were owed a total of $99,440. Mr Franklin notes that it appears that the contractors were paid in August 2021 and voices a concern that it is likely that the accountants have not updated the aged payables in the Xero system since that time.

Mr Franklin states that shortly after the Liquidators’ appointment, he was provided by Ms Sophie Zapantis of de Jonge Read, the consultants engaged by Ms Haynes to provide pre‑insolvency advice to Intellicomms, with a licence deed (‘Licence Deed’) between Intellicomms and TF which he was requested to execute on behalf of Intellicomms. Mr Franklin notes that the apparent purpose of the Licence Deed was to enable the purchaser, TF, to operate the business of Intellicomms, including that of Intellicomms NZ, on and from the time when Intellicomms entered into liquidation. Mr Franklin notes that no consideration was payable to Intellicomms under the Licence Deed, and based on his view that the transaction documented by the Sale Agreement was not at arm’s length and was likely to be an uncommercial and insolvent transaction, he declined to execute the Licence Deed. Mr Franklin deposes that, notwithstanding this, it appears that Ms Haynes and TF proceeded on the basis that either the Licence Deed or the Sale Agreement was operative because the bank account of Intellicomms NZ was being operated by either Ms Haynes or TF, and that some of the key contracts of Intellicomms appear to have been novated from it (or Intellicomms NZ) to TF. Mr Franklin states that he is concerned that TF may have withdrawn funds that were payable to Intellicomms NZ prior to the appointment of the Liquidators. He has not agreed to transfer the shares in Intellicomms NZ to TF under the terms of the Sale Agreement.

On 17 September 2021, Mr Franklin instructed Madgwicks Lawyers on behalf of Intellicomms to write to the previous solicitors for Intellicomms and to de Jonge Read, advising them that he would not be proceeding with the Sale Agreement.

Mr Franklin states that on 28 September 2021, his office received an email from Mr Craig Stansfield of the Ministry of Business Innovation and Employment of the New Zealand Government. In his email, Mr Stansfield stated that he believed that Intellicomms may have held funds in trust on behalf of Intellicomms NZ in respect to an interpreter levy funding arrangement with the New Zealand Government. As of 31 July 2021 this account allegedly held NZ$177,560.30. Mr Stansfield also noted that an additional NZ$9,000 to NZ$10,000 should accrue in the account each month. Mr Franklin states that he is “not currently aware of the whereabouts of this account” by which I take it to mean he has not been able to locate these funds.

Mr Franklin refers to correspondence between the parties over the course of the two‑week period on and from 17 September 2021, during which he continued to dispute Intellicomms’ authority to execute the Sale Agreement. Despite this, on 30 September 2021 TF’s solicitors wrote to the Liquidators’ solicitors, stating that completion of the Sale Agreement was to take place that day and that TF would deposit the purchase price of $20,727.18 into Intellicomms’ pre-appointment bank account without further notice. Later that day, TF’s solicitors wrote to the Liquidators’ lawyers confirming that such payment had been made.

Mr Franklin describes the issues that he has faced in relation to restricting access to the funds of Intellicomms and Intellicomms NZ held at the Bank of New Zealand, especially in light of the fact that Ms Haynes remains the sole director of Intellicomms NZ.[37] He states that both companies appear to share a single account with the Bank of New Zealand under the name of ‘Intellicomms NZ’, and that although he has requested that the Bank of New Zealand freeze the assets, the bank has refused to do so absent a court order or change of director. He also states that the Liquidators’ lawyers have written to Ms Haynes demanding that she undertake not to access the bank account, however, he states that he is informed by his lawyers that no response has been received to this correspondence.
[37]Franklin Affidavit [49].

Affidavit of Scott Chambers of 11 October 2021

The managing director of QPC, Mr Chambers, states that QPC is an Australian subsidiary of QPC Holdings Limited, a company based in the United Kingdom. QPC carries on the business of supplying software, hardware and telephone platform services within the call centre industry.

On 30 August 2012, Intellicomms entered into an agreement with QPC, pursuant to which QPC would provide Intellicomms with restricted access to software owned by QPC as well as provide support services in exchange for the payment by Intellicomms of a monthly fee. On 8 January 2020, the parties entered into an agreement pursuant to which QPC undertook to provide additional services to Intellicomms. Between 30 August 2012 and 12 August 2021, QPC provided services pursuant to these agreements. He confirms that QPC is a shareholder in Intellicomms and holds 600 fully paid ordinary shares.

Mr Chambers states that, on a date which he does not specify, QPC developed a platform used by Intellicomms for the purpose of providing on-demand interpreting services which produced the majority of Intellicomms’ revenue (‘platform’). Mr Chambers describes what he considers to be the unique advantages associated with the platform.[38] He believes that the platform is of significant value and superior to any other platform available on the market.
[38]Ibid [11]-[16].

During the course of the relationship between QPC and Intellicomms, Mr Chambers states that Intellicomms often made late payments to QPC pursuant to the terms of their agreements. He states that by early 2021 Intellicomms owed QPC approximately $755,209.

Mr Chambers states that given the longstanding relationship between the parties, the parties entered into discussions as to how Intellicomms could arrange to pay these debts over the next three years. As part of those discussions, Intellicomms proposed to issue additional shares to QPC. Mr Chambers states that during the course of these negotiations he was provided with the following financial information from Intellicomms:

(a) management accounts of Intellicomms for the year ended 30 June 2021;

(b) projected revenue forecasts for Intellicomms for the period between 1 July 2021 to 30 June 2026; and

(c) the February Valuation.

Mr Chambers contends that the financial information provided to him revealed certain matters. First, Intellicomms’ ability to accurately forecast revenue and control overheads and expenses were core issues which Mr Chambers believed could be rectified by a change in management. Second, Intellicomms’ financial performance in the financial year ended 30 June 2021 had improved when compared with the previous financial year, including increases in both revenue and gross margins. Third, Intellicomms’ customer contracts were of a significant value.

Mr Chambers states that in late July 2021, the negotiations between the parties broke down. On 17 August 2021, QPC served a statutory demand on Intellicomms claiming $923,310.18 for unpaid invoices under the agreements.

Mr Chambers states on 6 September 2021, Intellicomms’ solicitors approached QPC’s solicitors requesting that QPC consent to the calling of a short notice shareholder meeting for the purposes of proposing a resolution that Intellicomms be placed into voluntary liquidation. It appears that QPC agreed to the abridgement of the notice period and the meeting proceeded.

On 8 September 2021, Mr Chambers attended the meeting on behalf of QPC. At the meeting, Ms Haynes stated that the proposed resolution was based on and as a result of advice that she had received. Mr Chambers stated that Ms Haynes told the attendees of the meeting that no assets of Intellicomms had been sold other than office equipment. I note that even on Ms Haynes’ own evidence and with respect to the terms of the Sale Agreement with which she was intimately involved, she must have known this to be untrue. Ms Haynes did not contend to the contrary in her answers in cross-examination. QPC voted in favour of the resolution.

Mr Chambers states that on 15 September 2021 he attended a virtual meeting with the Liquidators, during which he was informed that on 10 September 2021 the Liquidators had received a copy of the Sale Agreement. He states that the Liquidators informed him that the Sale Agreement would likely result in Intellicomms receiving a net purchase price of approximately $20,000 and that the Liquidators considered it unlikely that the Sale Agreement could be completed.

Mr Chambers states that Intellicomms did not offer QPC the opportunity to purchase the business or to participate in any sale process prior to the execution of the Sale Agreement.

Mr Chambers contends that on the basis of the financial information received by QPC, which is referred to above, the effect of the Sale Agreement was to sell the assigned assets at a significant undervalue. He identifies several bases for that contention:

(a) the February Valuation valued Intellicomms at $11,277,346, including a total asset value of $10,970,564;

(b) as at 30 June 2021 Intellicomms produced an actual gross margin of $1,958,290 and had growing revenues and improving gross margins;

(c) the July Valuation concluded that the fair market value of Intellicomms as at 30 June 2021 was between $117,456 and $683,559; and

(d) the cost for a new entrant to replicate the assets of Intellicomms would be in excess of $300,000.

Mr Chambers states that on 15 September 2021, during a meeting with the Liquidators, he and Mr Timothy Hood, the operations director at QPC, informed the Liquidators that QPC would be interested in participating in any sale process for the sale of the assets of Intellicomms. On 16 September 2021, Mr Chambers instructed QPC’s solicitors to formally confirm this to the Liquidators in writing.

On 4 October 2021, QPC’s solicitors wrote to the Liquidators stating that, subject to contract, board approval and identification of assets available to purchase, QPC’s indicative purchase price for Intellicomms was between $500,000 to $1,000,000.[39]
[39]Confidential Exhibit SC-2 to the Chambers Affidavit.

Mr Chambers concludes that by reason of QPC’s interest as a shareholder, creditor and potential purchaser of Intellicomms, QPC has agreed to fund the Liquidators’ costs of this proceeding and that it understands that if the application is successful, the Liquidators would undertake a fair market process to sell the assets which were assigned under the Sale Agreement.

Affidavit of Alexandra Elise Lawrence sworn 14 October 2021

Ms Lawrence is a solicitor employed by Madgwicks Lawyers, who are the solicitors for the Liquidators. On 11 October 2021, she sent a letter via email to Strongman & Crouch Lawyers, the solicitors for the purchaser. In her letter, Ms Lawrence refers to correspondence between the parties relating to $129,677.43, an amount that relates to pre-appointment debtors that were erroneously transferred to an account controlled by TF. Ms Lawrence asserts that TF has no rights to the erroneous payments even if the Sale Agreement was valid. Ms Lawrence states that in a letter she received from solicitors for TF dated 13 October 2021 it was stated that TF had applied the $129,677.43 towards operational expenses of the ezispeak business.[40]
[40]Lawrence Affidavit [5].

Ms Lawrence states that the Sale Agreement appears to rely upon the August Valuation, which valued Intellicomms at $101,000, and the September Valuation, which valued Intellicomms at $57,000 if major contracts were lost.

Ms Lawrence states that the Nexus Valuations only take into consideration the value of the goodwill in Intellicomms; both valuations expressly state that they do not take into account the value of the shares in Intellicomms NZ, nor the value of any overseas contracts of Intellicomms, including New Zealand contracts.[41]
[41]Lawrence Affidavit [6].

Ms Lawrence observes that despite the value of the shares in Intellicomms NZ or the New Zealand contracts not being considered in the Nexus Valuations, both the Intellicomms NZ shares and the New Zealand contracts were purportedly sold pursuant to the Sale Agreement. Despite no value being attributed to those assets in the Nexus Valuations, she states that an Excel spreadsheet titled ‘Contract, ACV and Expiry’ provided to her client by Nexus on 12 October 2021 indicates that the New Zealand contracts alone are worth $2,470,600 per annum. Furthermore, the Strongman & Crouch letter of 13 October 2021 states that “the contract with the NZ Ministry accounts for a significant portion of our client’s revenues (upwards of 30%) and expenditures.”[42]
[42]Exhibit AEL-1 to the Lawrence Affidavit, 101.

Furthermore, Ms Lawrence observes that the Strongman & Crouch letter dated 13 October 2021 states that because of the Liquidators’ communications with the New Zealand Ministry, the payment of invoices had been suspended. However, in direct contrast to this claim, on or about 14 October 2021 at approximately 6:56am Mr Stansfield, the program manager of the Business, Innovation and Employment division of the New Zealand Government, wrote to the Liquidators to inform them that his division had paid TF NZ$50,776.20 since 8 September 2021 and that no funds were currently being withheld.

Ms Lawrence concludes by deposing to the urgency of the application.

Affidavit of Scott Chambers sworn 17 November 2021

Mr Chambers responds to Ms Haynes’ affidavit evidence that it would not be practicable to unwind the Sale Agreement or return the property of Intellicomms that was the subject of the Sale Agreement. He states that on 5 November 2021 he spoke with one of the Liquidators and proposed that QPC would be willing to assist Intellicomms in maintaining the value of the property of Intellicomms where orders were made that the Sale Agreement would be unwound. He states that QPC would immediately be in a position to so assist. This proposal, later discussed on 15 November 2021 with Mr Franklin, contemplated that QPC would manage the business of Intellicomms during an interim period in order to preserve the value of its assets until the property of Intellicomms could be sold via a public sales campaign, at which point QPC would assist in transferring the assets of Intellicomms to the successful purchaser. He states that, during this conversation, the Liquidators indicated to him that they would be open to considering a proposal of this nature.

Mr Chambers states that, based on his experience with the ezispeak business and online interpreting services, he is of the opinion that presently it is practicable to unwind the Sale Agreement and return the property of Intellicomms that was the subject of that agreement back to Intellicomms.

Affidavit of Glenn Jeffrey Franklin sworn 22 November 2021

In his subsequent affidavit, Mr Franklin states that since his appointment as a liquidator of Intellicomms, his office has been approached by a number of translation companies who have expressed interest in purchasing some or all of the assets of ezispeak which were the subject of the Sale Agreement, were those assets to be returned to Intellicomms. He exhibits to his affidavit certain correspondence that his office has received, including that:

(a) on or about 21 September 2021, Mr Mark Saba of Lexigo stated that Lexigo was interested in purchasing some or all of the business;

(b) on or about 5 October 2021, Mr Nick Corbo of Collins House Advisory informed the Liquidators that he had a client who would be interested in purchasing the business. Mr Corbo sent an email stating that he had a client which was an established business with various government and private interpreting contracts in Australia and New Zealand who may be interested in purchasing the business if the sale was set aside;

(c) on or about 13 October 2021, Mr Steve Donovan of Straker Translations emailed the Liquidators to state that Straker Translations was interested in purchasing the business as a going concern. The next day, Mr Donovan sent another email noting that Straker Translations is a listed entity with the funds and resources necessary to expeditiously conclude a contract for the purchase of the business; and

(d) in mid-October 2021, Mr Adam Hodgson of Interpreter IO called the Liquidators and stated that Interpreter IO was interested in purchasing some or all of ezispeak’s contracts (especially the contract with the New Zealand Government) and the rights to ezispeak’s platform. On or about 19 November 2021, Mr Hodgson sent a subsequent email asking to be kept informed regarding any sale of assets from the business.

TF’s evidence
Affidavit of Rebecca Leah Haynes

Ms Haynes has sworn a lengthy affidavit describing the history and the development of the ezispeak business and her dealings with, among others, QPC, prior to the Sale Agreement and Intellicomms going into liquidation. Because the issue in the proceeding ultimately was confined to whether the value of the business was sold for an undervalue within the meaning of s 588FDB, a significant portion of Ms Haynes’ affidavit is of peripheral relevance and what follows is a curtailed summary of it.

Ms Haynes describes her qualifications and previous experience in the translation services industry over 16 years. She states that she first met Mr Chambers in late 2010 when he was the Sales and Marketing Director of QPC and she was employed at an unrelated company.

Ms Haynes states that she was instrumental in bringing about the incorporation of Intellicomms on 12 September 2011. On or around 1 May 2012, QPC and Intellicomms entered into a written agreement under which QPC was to develop software applications for use by Intellicomms in its business.

This agreement was the subject of a written addendum on 30 August 2012, by which QPC acquired the option to become a shareholder in Intellicomms commensurate with an amount equal to the fees owing to QPC on the condition that those fees would no longer be payable if such an option was exercised.

In early 2013, Intellicomms secured several small contracts with local government clients. In 2014, Intellicomms secured its first contracts with major clients including Origin Energy, Bupa and Yarra Valley Water. The business name ‘ezispeak’ was registered with the Australian Securities and Investments Commission (‘ASIC’) by Intellicomms on 30 September 2014.

Ms Haynes states that by the end of the 2014 financial year, Intellicomms was indebted to QPC for $53,360.98. On 3 December 2015, QPC exercised its option to acquire shares in Intellicomms, as a result of which it came to hold 33% of Intellicomms’ issued shares.

In 2015, Intellicomms continued to expand its operations. In that year, Intellicomms secured contracts with Health Purchasing Victoria, Alfred Health, Austin Health, Telstra Health, and Slater & Gordon.

Between 2016 to 2019, Intellicomms secured contracts with several large clients, including Sorted Services, Red Energy, Lumo Energy, Direct Connect, Tenix Solutions, City West Water, Civca BPO, Queensland Health, Tasmanian Health, Telstra and Optus. In September 2019, Intellicomms entered into an agreement for the provision of translation services with the New Zealand Government.

By the end of the 2019 financial year, Intellicomms had 12 employees, an annual revenue of $2,878,232 and pre-tax losses of $265,296. At that point, Intellicomms owed QPC $205,000.81.

When the May 2012 agreement expired in December 2019, QPC and Intellicomms entered into an agreement styled the Managed Service Agreement (‘MSA’) dated 8 January 2020. Under the MSA, QPC agreed to provide Intellicomms with services and support.

Ms Haynes described the effects of the lockdowns brought about by the COVID‑19 pandemic and stated that it led to a substantial reduction in demand for Intellicomms’ services, in particular from its large clients such as the New Zealand Government, Telstra, Optus and Origin. By the end of financial year ending 2020, Intellicomms owed QPC $367,523.72. Ms Haynes states that the impacts of COVID-19 were reported to Intellicomms’ shareholders in the annual shareholder update issued on 27 October 2020.

On or around 9 November 2020, shortly after the shareholder update was published in October, Ms Haynes received a telephone call from Mr Chambers, who indicated to her that there had been internal discussions within QPC and that QPC now sought to be more active in order to ensure that it realised the value of its existing investment in Intellicomms. Ms Haynes states that, by this time, the company’s indebtedness to QPC had increased to $594,402.03. In the course of discussions, Mr Chambers stated that he should be appointed as a director of Intellicomms, subject to Intellicomms’ at‑call debt being converted to a long-term loan prior to any such appointment.

On 17 November 2020, Mr Chambers requested further information relating to the financial position of Intellicomms. On or around 18 December 2020, Mr Chambers and Ms Haynes spoke over the telephone in relation to a proposal by QPC that it would acquire a further shareholding in Intellicomms, such that the interests of QPC and Ms Haynes would total 75%. Mr Chambers requested Intellicomms obtain a third-party valuation of Intellicomms’ equity in order that QPC would be in a position to assess how much of Intellicomms’ debt to QPC it was willing to capitalise. On 14 January 2021, QPC sent an email providing indicative terms of a proposed loan agreement and a shareholders’ agreement.

On 3 February 2021, Ms Haynes sent an email to Mr Chambers attaching the February Valuation conducted by Rushmore Group, which she said Mr Chambers subsequently described in very disparaging terms. During February 2021, the parties continued to exchange emails which discussed how QPC could capitalise its outstanding debt as well as continue to accrue debt.

Ms Haynes states that Mr Chambers made a “best and final offer” in an email dated 25 February 2021, under which Intellicomms could continue to accrue debt subject to a debt ceiling of approximately $900,000, with Intellicomms to commence making repayments in October 2021. Ms Haynes states that this agreement was intended to provide Intellicomms with the opportunity to improve its financial position, including by restructuring Intellicomms’ labour cost model, which would see the abolition of a fixed payment rate to interpreters of 15-minute units and the substitution of a per‑minute payment model.[43] In addition, different payment rates would be applied to reflect calls of differing complexity. Ms Haynes states that it was her expectation that the implementation of this model would have seen Intellicomms move from a loss‑making position to delivering an EBITDA result of approximately 10% of the company’s total income.[44]
[43]This payment model was apparently implemented on 1 July 2021. This was confirmed by Ms Haynes in cross-examination. See letter from Ms Haynes to Mr Ashley Shield in Revised Court Book, 1533 and Transcript 99, lines 20-1.
[44]Haynes Affidavit [41(j)].

Between March and May 2021, discussions continued concerning the proposed debt capitalisation. The parties also discussed cost-saving measures which could be implemented to improve Intellicomms’ profitability, including staff redundancies proposed by QPC.

By the end of the financial year ended 30 June 2021, Intellicomms owed QPC $897,999.31. Ms Haynes summarises the negotiations between QPC and Intellicomms from May to August 2021. She states that on 4 August 2021 she declined to attend a meeting proposed by QPC as she did not want to provide further confidential information to QPC, including that relating to customer contracts, without receiving assurances that a resolution would first be reached in respect of QPC’s debt.

On 5 August 2021, the solicitors for QPC issued a letter of demand to Intellicomms requesting that payment of $923,310.18 owed to QPC be paid by Intellicomms within five business days, failing which QPC would suspend Intellicomms’ software licences. Ms Haynes states that she then retained de Jonge Read.

On 6 August 2021, Intellicomms made proposals seeking resolution of QPC’s alleged debt, however, the parties failed to reach an agreement. On 12 August 2021, QPC suspended the software licence and Intellicomms’ access to the software platform (the ‘suspension’).

Ms Haynes states that as a result of the suspension, Intellicomms was not able to operate until a new electronic platform was established on 16 August 2021 by a company called Twilio at a cost of approximately $60,000. Intellicomms was without automation processes for a total of 11 days, during which calls were required to be handled manually. She states that as a result of the outage, Intellicomms lost a number of key contracts with customers.

Ms Haynes states that she has subsequently become aware that shortly after the suspension, Mr Hood, operations director of QPC, made an application to ASIC to register Comms Australia Pty Ltd as a subsidiary company of QPC. Comms Australia Pty Ltd was registered with ASIC on 13 August 2021 and that company registered the business name ‘Connecting Now’ with ASIC on 20 August 2021. Ms Haynes states that, by letter dated 14 October 2021, TF’s solicitors, Strongman & Crouch, wrote to Connecting Now and its parent entities in respect of TF’s concerns regarding Connecting Now’s usage of Intellicomms’ confidential information and apparent attempts to solicit Intellicomms’ customers and interpreters.

Ms Haynes states that there are now several platforms on the market which deliver a similar product to that provided by QPC. She also deposes that Mr Chambers’ statement that the cost for a new entrant to replicate the assets of Intellicomms would be over $300,000 is incorrect, as a number of alternative platforms require little to no capital investment. She states that, depending on an entrant’s choice of technology and language service provider, the costs to replicate similar assets would range between $20,000 to $75,000.

Ms Haynes states that on 16 August 2021, she wrote to the shareholders of Intellicomms, other than QPC, informing them that there had been a breakdown in the relationship between Intellicomms and QPC and providing an overview of the events that led to the suspension on 12 August 2021.

On the basis of the events leading up to the suspension, Ms Haynes asserts that she formed the view that Mr Chambers, on behalf of QPC, was leading an attempt to execute a hostile takeover of Intellicomms to maximise its financial return in Intellicomms, including obtaining confidential information in connection with setting up Connecting Now.[45] Ms Haynes states that she expressed this view to the shareholders of Intellicomms, other than QPC, indicating that she considered that QPC had accrued “a significant debt under false pretences which had now put [QPC] in a strong commercial position to try and take over [Intellicomms].”[46] Ms Haynes states that all of those shareholders in essence agreed with that sentiment and supported her in taking steps to “protect [Intellicomms’] business from [QPC’s] predatory behaviour and that they were strongly opposed to [QPC] obtaining a controlling interest in [Intellicomms].”[47] I observe that this contention that the debt was accrued under false pretences is not developed beyond assertion.
[45]Ibid [64].
[46]Ibid [65].
[47]Ibid [66].

Ms Haynes states she then formed the view that Intellicomms should be sold at market value to a new entity and that she discussed the incorporation of TF with her sister, Ms Michelle Gigliotti. She states that TF was incorporated for the purposes of acquiring and operating Intellicomms and its associated assets.[48]
[48]Ibid.

Ms Haynes deposes that in order to ascertain a market value of Intellicomms and its associated assets for acquisition by TF, she caused Intellicomms to obtain a valuation on or around 18 August 2021. As mentioned, on 30 August 2021, Ms Hahn, the managing director of Nexus, prepared the August Valuation of Intellicomms’ goodwill as at 30 June 2021, and concluded that the goodwill of Intellicomms was valued at $101,000.

It is to be noted that Ms Haynes does not refer to the circumstances in which she procured the July Valuation, which was obtained about one month beforehand from FTI Consulting, and which valued the fair market value of the equity of Intellicomms’ share as at 30 June 2021 as being between $117,456 and $683,559. When asked about the July Valuation in cross-examination, Ms Haynes agreed with Mr Evans QC, senior counsel for the plaintiffs, that she was “not willing to accept that valuation.” In re‑examination she contended that the July Valuation was prepared prior to the known impact of the outage.[49]
[49]Transcript 114, lines 4-5.

Around 27 August 2021, Ms Haynes provided Ms Hahn with revised cashflow projections which she deposes arose “from actual or potential loss of significant customer contracts.”[50] As has been mentioned, on 8 September 2021, in response to the revised cash flow figures, Ms Hahn provided Intellicomms with a revised valuation of its goodwill, valuing it at $57,000 (i.e. the September Valuation).
[50]Haynes Affidavit [68].

Ms Haynes states that the Sale Agreement was executed on behalf of Intellicomms on 8 September 2021. She states that the purchase price payable under the Sale Agreement was commensurate with the market value based on the August Valuation and September Valuation.[51] She states that later that day, at approximately 3:30pm, Intellicomms’ shareholders resolved to appoint the Liquidators as liquidators of Intellicomms.
[51]Ibid [70].

I pause to observe that Ms Haynes does not explain why the Sale Agreement was entered into only minutes before she effectively caused Intellicomms to go into liquidation, nor does she describe any circumstances which would give rise to a legitimate urgency to enter into the Sale Agreement. Of course, as discussed earlier in these reasons, once Intellicomms went into liquidation, Ms Haynes would have lost her agency to enter into the agreement on Intellicomms’ behalf, and the conduct of any sale would have become the responsibility of the Liquidators.

Ms Haynes states that since the completion of the Sale Agreement, contracts with Alfred Health, Bupa Insurance, Optus and Telstra were novated to TF in the period between 8 September 2021 and 30 September 2021. A representative of the New Zealand Government has stated that whether the New Zealand Government contract would be novated was still the subject of consideration as at 4 October 2021.[52]
[52]Exhibit GJF-1 to Franklin Affidavit, 228.

Ms Haynes states that of the 688 interpreter contracts identified in Attachment C of the Sale Agreement, approximately 647 of those contracts have transferred to TF.

In the period following the completion of the Sale Agreement, Ms Haynes deposes that:

(a) TF has been addressing the concerns of customers and interpreters arising from the recent suspension;

(b) she has endeavoured to secure new customer contracts. In particular, TF has entered into customer contracts with nine Australian and 11 New Zealand entities, and has also advanced discussions with a number of other parties with a view of entering into customer contracts with TF in the short‑term;[53]
[53]Those entities are listed in Confidential Exhibit RLH-2 to the Haynes Affidavit.

(c) TF has entered into service contracts with 147 new interpreters;

(d) TF has procured and implemented new technology systems and is preparing to launch “ezpispeak+”, which she describes as a “new solution” that will automate the connection to interpreters for scheduled telephone and video assignments; and

(e) she has contacted secured creditors regarding assets utilised by the ezispeak business to obtain their support for TF’s operation of the business.

Ms Haynes states that if any of the assigned assets were reassigned to Intellicomms by Court order, she would not be prepared to be involved in any continued business using the assigned assets. She states that she has been informed by her sister Jacqui Gigliotti and other persons working at the business that they were of the same attitude.

Ms Haynes states that the ezispeak business is now more than a telephone interpreting business and that it would present a significant risk and disruption to ezispeak’s customers’ operations were the Court to make an order preventing TF from operating the business. Ms Haynes states that if the Court was to make such orders, she would estimate that approximately 40 clients, representing 1,000 end-users, would be without access to ezispeak’s services. In her affidavit, Ms Haynes details the documentation which was provided by TF to the valuer engaged for the purposes of this proceeding, Mr Darren Hockley, which is discussed below.

Ms Haynes concludes her affidavit with her explanation as to why it is contended that the contract with the New Zealand Government and other identified customer contracts were at risk and why reduced projected cash flows were provided to Ms Hahn for the purposes of preparing the Nexus Valuations. She observes that a number of those customer contracts allow for termination to occur on relatively short notice.

Summary of Hockley report

A report was prepared by Mr Darryn Hockley on behalf of TF for the purposes of this proceeding. Mr Hockley is a chartered accountant and partner of the forensic consulting division of Grant Thornton in Melbourne. The valuation report was prepared in accordance with instructions received from Strongman & Crouch in a letter dated 21 October 2021, the solicitors for the TF in the current proceeding, who requested Mr Hockley ascertain the market value of the assigned assets in addition to the best price reasonably obtainable for the assigned assets having regard to the circumstances existing at the time of the Sale Agreement.

Mr Hockley concluded that he assessed the market value of the assigned assets to be $22,925 at the time of the sale of the business. He states that he was not able to form a view as to the best price reasonably obtainable for the assigned assets, however, for reasons that he explains in his report, he does not consider that that value would be more than the market value of the assets.[54]
[54]Hockley Valuation [9]; Revised Court Book, 1434.

(c) New Zealand revenue: The plaintiffs point to Mr Hockley’s evidence in which he accepted in cross‑examination that:

(v) referring to how he allocated for Intellicomms’ future New Zealand revenues, which were not originally included in the forecasts provided to him by management,[81] he “plucked those figures out of the air based on [his] own experience and based on the limited information [he had] been provided;” and
[81]See discussion earlier in these reasons at [153].

(vi) he “effectively allocated no prospect to the relationship [with the New Zealand government] continuing after 2024.”

The plaintiffs pointed to the criticism made of this approach by their expert, Ms Smith, as adopting essentially an arbitrary approach and one which Mr Hockley has no expertise in;

(d) overstatement of working capital requirements: the Hockley Report assumed that the company purchasing the assets would require $1.2 million in initial working capital, which the Smith Report challenges as being too high. Mr Hockley accepted that if a lesser amount of, say, $600,000 was required, it would have a “very significant effect” on the overall value of the assets. The plaintiffs contend that this point was not challenged by TF in this regard. In particular the plaintiffs contend the following extract of Ms Smith’s report was particularly relevant:[82]
[82]Smith Report [6.4]; Revised Court Book, 1529.

[4] … At 6% of the Grant Thornton [Hockley] forecast FY22 revenues of $4.9m, the maximum level of normal working capital that the Business would be expected to fund would be $300k.
[5] I note that [the Hockley Report] makes a working capital deduction of $1.2m in FY22, which is significantly higher that what I would consider to be a normal level of working capital for the Business based on FTI’s analysis.
…
[7] The $1.2 million adjustment is based on the assumption that two and a half months of costs (or 75 days of costs) need to be paid before any debtors are collected. In my opinion this assumption is not reasonable for the following reasons:
i.The debtor balance at 30 June 2021 was $694k compared to annual revenues of $6.89m. This would indicate that average debtor days are only 37 days, not 75 days.
ii.Historically the Business has also delayed the payment of creditors, as evidenced by creditor balances being higher historically than the receivable balances.

The plaintiffs also draw attention to Ms Haynes’ email of 4 August 2021 to Mr Shield[83] in which Mr Shield identified the existence of “extended terms with our contractors” which would have the effect of deferring the benefits of the labour compensation model changes introduced on 1 July 2021 so that they would not be “fully realised until the back end of 2021.” The plaintiffs contend that the terms for payment of translating contractors meant that payments to them could be delayed significantly and thereby decrease the amount of working capital required. The plaintiffs contend that if the evidence of Ms Smith is accepted in respect of the working capital requirements, this factor alone would have a material effect on Mr Hockley’s valuation, a position which is supported by Ms Smith in her report;

(e) software value: The Hockley Report attributes no value to Intellicomms’ intellectual property and software (as distinct from the software licences). Intellicomms’ software was not transferred under the Sale Agreement, however the plaintiffs observe that in Intellicomms’ fixed asset register the software had a value of $376,000. They state that it is inappropriate to attribute a nil value to those assets by Mr Hockley without any form of market valuation of the software licences or any form of cost replacement valuation for the software or the software licences; and

(f) employee entitlements: The plaintiffs emphasised the issue that an allowance was made for a liability to which reference has been made which incorrectly included Mr Cato’s entitlements. The plaintiffs’ evidence is that TF is not liable for Mr Cato’s entitlements, and submit the effect of this is that the “true” consideration payable by TF under the Sale Agreement was reduced by $18,144.02.

[83]Email from Ms Rebecca Haynes to Mr Shield dated 4 August 2021; Revised Court Book, 1533.

Best price reasonably obtainable

The plaintiffs submit that the best price reasonably obtainable for the assigned assets, having regard to the circumstances existing at the time of sale, was not less than the market value. The plaintiffs contend that the relevant “circumstances” surrounding the disposition include that:

(a) Ms Haynes, as director of Intellicomms, took no steps to ascertain whether the assigned assets could be sold to a third party other than TF;

(b) the primary intention of the transaction was to ensure that the business was not purchased by QPC prior to Intellicomms entering into liquidation;

(c) TF is a company presently owned by the sister of the sole director of Intellicomms and was incorporated only two weeks prior to when the Sale Agreement was entered into;

(d) there was a short period of time between when the Sale Agreement was entered into and the shareholders of Intellicomms resolved to place Intellicomms into liquidation;

(e) there was no legitimate urgency for Intellicomms to sell the assets without testing the market;

(f) there is no suggestion that Intellicomms considered voluntary administration under Part 5.3A of the Act in lieu of being placed into liquidation;

(g) Ms Haynes concealed from QPC that she had executed the Sale Agreement at the time that she was requesting their assistance as a shareholder of Intellicomms to enter into a resolution for Intellicomms to be placed into liquidation; and

(h) there was a knowledgeable entity who was willing to purchase the assigned assets for an amount that was significantly higher than the purchase price under the Sale Agreement, which suggests that the purchase price under the Sale Agreement was less than the best price that is reasonably obtainable.

In support of the proposition that the assigned assets could have been sold through a mechanism or campaign to ascertain their market value through a bidding process, the plaintiffs refer to the indicative offer of QPC, as well as the evidence from the Liquidators of other purchasers who have expressed an interest in acquiring some or all of the business.[84]
[84] See, e.g., Franklin Affidavit [26].

Relief

Counsel for the plaintiffs submit that the plaintiffs are entitled to the remedy they seek under s 588FF of the Act. The plaintiffs submit that any order other than to void or set aside the Sale Agreement (e.g. relief in the form of monetary compensation as proposed by TF) would be inappropriate in the circumstances having regard to what they assert is blatant misconduct by Ms Haynes to the detriment of the creditors of Intellicomms.

Defendant’s submissions

Counsel for TF prefaced their submissions by drawing the Court’s attention to the fact that QPC is a major shareholder and creditor of Intellicomms and is funding the conduct of the proceeding. TF further alleges that QPC is conducting, via a subsidiary business, Connecting Now, a business that is in competition with the business previously operated by Intellicomms.

TF submits that neither the market value nor the best price reasonably obtainable for the assigned assets exceeds $22,925, being the value of the assigned assets according to the Hockley Report. To the extent that the Court grants relief in respect of the present claim, TF submits that the plaintiffs are only entitled to monetary compensation equivalent to the difference between $22,925, being the assigned assets’ value according to the Hockley Report, and $20,727.18, which is the effective consideration paid under the Sale Agreement.[85]
[85]Defendant’s submissions [14], [24].

TF submits that the only admissible evidence which goes to the market value of the assigned assets in this proceeding is contained in Hockley Report, which TF relies upon to assert that the market value of the assigned assets was equal to $22,925 at the time of the sale. They state that, since the historical valuations, the only report adduced by the plaintiffs is the Smith Report, the author of which was instructed to provide a high-level critique on the methodology of the Nexus Valuations as well as comment on any limitations in the Hockley Valuation which may affect its reliability.[86] As such, it is submitted that the evidence adduced by the plaintiffs cannot discharge the onus that it bears under s 588FDB.
[86]Smith Report [2.1], [3.10.1].

TF submits that the current circumstances are analogous to that which this Court faced in Boz One Pty Ltd v McLellan,[87] in which it was held that:

There is not probative or persuasive or satisfactory evidence upon which I can conclude that the price obtained by the receivers for the asset was substantially below the asset’s true market value, or the best price reasonably attainable in the circumstances, at the time of sale.[88]

[87] (2014) 101 ASCR 442.

[88]Ibid 619, [732].

According to the valuation methodology employed by Mr Hockley, the market value of the assigned assets was calculated as follows: the assessed market value of the intangible assets of the business plus the value of the tangible assets acquired by the purchaser less the value of any liabilities assumed by the purchaser.

TF point to the evidence that Mr Hockley after conducting a discounted cash flow analysis, concluded that the intangible assets of the business have a nil value due to the fact that the business itself has a negative value.[89] The market value of the tangible assets was ascertained by Mr Hockley to be $60,198. Therefore, after subtracting the liabilities assumed by TF, which aggregated to $37,273, by reference to the employee entitlements, the market value of the assigned assets was calculated as $22,925. TF also states that the market value of the assigned assets exceeded the amount paid to date by TF by $2,197.82.
[89]Hockley Report [111]; Revised Court Book, 1465.

TF submits that Mr Hockley should not be regarded to be “a mere mouthpiece” for TF and provides as evidence in support of that contention the fact that Mr Hockley considered it was unreasonable to exclude projected revenues from the New Zealand operations and included New Zealand derived income into his valuation report of his own volition.

TF submits that s 588FDB ought be construed as having two limbs, such that the consideration received by the purchaser must be less than both the market value and the best price reasonably obtainable in the circumstances.

TF makes reference to certain passages of the Explanatory Memorandum which are referred to earlier in these reasons but which are repeated here for convenience:

The alternative test of ‘the best price reasonably obtainable’ recognises there will be legitimate situations where a company may need to realise assets at less than market value. This is particularly the case for companies in legitimate financial difficulty that have urgent cash flow needs. The legitimate urgency with which these companies may seek to realise the value of assets means their actual disposal of assets may not realise the same market value price as the hypothetical not anxious seller.
In these cases, the circumstances of the disposition – including the financial circumstances of [Intellicomms] – and the reasonableness of the steps [Intellicomms] took or should have taken to realise the value of the asset will be relevant to determining whether the disposition is a creditor-defeating disposition. For example, a company that sells property through a reasonable process such as a public auction designed to obtain the best price available will not make a creditor-defeating disposition.[90]

[90]Explanatory Memorandum [2.20].

TF contends that these paragraphs are at odds with each other and that the best price reasonably obtainable must be arrived at by the application of an evaluative standard; the section does not require merging the assessment of the price with a transaction’s putative creditor-defeating nature.

To the extent that the plaintiffs rely on the offer made by QPC to purchase the assigned assets at a price of between $500,000 and $1,000,000 subject to board approval, TF submits that offer is both indicative and price-ranged and, as such, should be attributed no weight. In support of this, TF refers to the decision of the Federal Court in Re Holdco[91] where O’Bryan J observes:

… However, the authorities make clear that the probative value of evidence of an offer will depend on the issue to be determined and the circumstances in which the offer is made. For example, if the issue to be determined is the fair market value of property (being the price that would be paid by a willing but not anxious buyer to a willing but not anxious seller), evidence of an offer made by an anxious seller would have little, if any, relevance.[92]

[91]Pty Ltd (admins apptd) (No 2) (2021) 391 ALR 418.

[92]Ibid 464, [260].

TF submits that while Mr Hockley was not able to form a view as to the best price reasonably obtainable, he stated that he did not consider that price would exceed the market value of the assets in the context of a distressed sale. In support of this proposition, Mr Hockley referred to the circumstances that many of the existing customer contracts contained termination clauses which would be triggered upon appointment of the Liquidators; Intellicomms’ reliance upon a director who may not have continued to have been involved in the business after the sale; and the business’ recent loss of material contracts.

TF submits that Mr Hockley’s assessment is bolstered in circumstances where Intellicomms would otherwise have entered into liquidation and where Intellicomms appears to have been balance sheet insolvent for some time. Further, it is argued that Mr Hockley’s approach is consistent with that adopted by the courts in relation to a comparable provision for “best price reasonably obtainable” within s 420A(1)(b) of the Act. In Florgale Uniforms Pty Ltd,[93] Dodds‑Streeton J observed that reference to the “circumstances existing when the property is sold [in s 420A] permits or invites consideration of associated costs and risks.”[94]

Relief

[93]v Orders (2004) 11 VR 54.

[94]Ibid [407].

TF observes that, in addition to seeking a declaration that the Sale Agreement is void, the claimed relief sought by the plaintiffs includes an order that the Sale Agreement was void and for the transfer back of the assigned assets (‘Transfer-Back Order’) and an order requiring TF to do all things necessary to assign to Intellicomms the benefits of any contracts entered into by TF since 8 September 2021 with any customer of Intellicomms the subject of a contract between Intellicomms and the customer as at 8 September 2021 (‘Contract Assignment Order’). TF ultimately contended that while the first proposed relief is comprehensible by reference to sub‑ss 588FF(1)(b) and (h) of the Act, the Contract Assignment Order has no foundation in s 588FF of the Act.

TF states that the Court has the discretion to make any of the “one or more” orders listed in s 588FF(1) of the Act. It submits that a Transfer-Back Order, as contemplated under s 588FF(1)(b) is “rarely used by the courts,”[95] and draws attention to the plaintiffs’ inability to refer to an instance where the Court has made an order akin to a Transfer-Back Order.
[95] Citing Farid Assaf (LexisNexis ButterWorths, 2015) Voidable Transactions in Company Insolvency [8.31].

TF submits that, in any case, there are a number of factors which weigh against the granting of a Transfer-Back Order by reason that it would not be in the best interests of Intellicomms’ creditors. TF’s submission in that regard can be summarised as follows:

(a) The character of the assigned assets will have changed in the period since the transfer under the Sale Agreement: as the conduct of the business is dynamic and the business has engaged new customers, service providers and technology systems since the sale;

(b) Complete restoration of the business is not likely to be possible: a trading concern requires the maintenance of relationships between management and certain key actors, such as customers, service providers, and employees. A Transfer‑Back Order will not, by itself, preserve those relationships. Key personnel may be unwilling to continue to work in the business if it were to come under control of the plaintiffs or a competitor. Ms Haynes has deposed that, in such circumstances, she would cease to be involved with the business and that it is doubtful that certain other staff would remain with the business. Retention of customers may also be affected by uncertainty associated with the Transfer-Back Order;

(c) The property transferred under the Sale Agreement may not be able to be completely re-assigned to the plaintiffs: the assigned assets did not include the contracts between Intellicomms and customers of the business. Further, certain pre‑transaction contracts no longer exist on the basis that they have been terminated, novated or replaced.

(d) Further steps will be required in order to realise a return on the assigned assets which will require the incurring of costs by the Liquidators and contribute to uncertainty as to the ultimate outcome of the liquidation for creditors: although Mr Franklin deposes to the prospect of undertaking a properly advertised sales campaign, it is submitted that there is no evidence before the Court as to what that campaign would entail or cost and hence the outcome of any sales campaign is speculative. It is said that it is also unclear whether the potential purchasers would have interest in purchasing the assets which are actually capable of being returned to Intellicomms under any Transfer-Back Order.

TF submits that there is no basis upon which a Contract Assignment Order can be made under s 588FF(1). In particular, it is submitted that the plaintiffs cannot rely upon s 588FF(1)(b) of the Act, as the contracts were not “transferred” under the Sale Agreement and were therefore never the property of Intellicomms. TF refers to difficulties that may arise with the “no assignment” clauses contained in the customer contracts and states that no subsection of s 588FF is capable of overcoming this issue. In any case, assignment in the present circumstances is said to be unworkable as the obligations under the contract would remain with TF as they cannot be assigned. TF states that it is not clear how the intended outcome of the Contract Assignment Order can be achieved without the agreement of the counter-parties to the contracts.

TF reiterates that the appropriate order is an order requiring TF to pay to Intellicomms an amount that fairly represents the difference between the benefits derived by TF as a result of entering into the Sale Agreement and the consideration provided by TF to Intellicomms under the Sale Agreement, which it states is equal to $2,197.82.[96]
[96]See earlier in these reasons at [213].

Consideration

As I have observed earlier in these reasons, I consider that the Sale Agreement has all the features of what has become known as a phoenix transaction; indeed, it is a brazen and audacious example. The effect of the Sale Agreement was to strip Intellicomms of what assets it had to satisfy the claims of its creditors and transfer them to an entity which was closely associated with its director, Ms Haynes. Shortly afterwards, Ms Haynes was instrumental in placing Intellicomms into voluntary liquidation with debts in excess of $3.2 million. No explanation was given as to why it was necessary to urgently sell the business rather than leave the process of the sale of what assets the company had to the Liquidators. Nor it seems was the regime of Part 5.3A of the Act explored and administrators appointed; in a similar way, the administrators, armed with the machinery of that part of the Act, could have conducted an orderly sale of Intellicomms’ assets for the benefit of its creditors.

As the essentially uncontroversial chronicle of the factual background reveals, Ms Haynes, apparently with the assistance of her advisors, de Jonge Read, executed a plan designed to place the assets of Intellicomms beyond the reach of its creditors. Over a relatively short period of time, Ms Haynes commissioned several valuations of Intellicomms. With each succeeding valuation, she provided those conducting the valuation with inputs which reflected an increasingly pessimistic outlook for the company, with the direct effect of decreasing the valuation. I am satisfied that Ms Haynes did so in order that she could arrive at a valuation which would minimise the consideration payable by TF, an entity which was established shortly before the execution of the Sale Agreement and the liquidation as a NewCo vehicle, arranging so that her sister as TF’s director and shareholder would give the appearance of Ms Haynes being once removed from TF. It seems that Ms Haynes’ motive for doing this was to prevent QPC, who was a shareholder and also Intellicomms’ largest creditor, from having the opportunity to purchase what assets Intellicomms had either from a liquidator or an appointed administrator.

It is notable that, during the lengthy phase where QPC and Intellicomms were negotiating a proposed debt capitalisation, there was no attempt by Intellicomms to put the sale to an open‑market, considering the second limb of s 588FDB (best price reasonably obtainable). To the contrary, the sale was negotiated in secret, depriving QPC of the opportunity to make an offer for the business in circumstances where it was readily apparent that QPC was uniquely in a position to purchase the assets for a higher price which would have been to the benefit of the Intellicomms’ creditors.

In its submissions, TF criticises QPC’s motives in funding this application, contending it had some improper or ulterior motive in doing so. I reject that submission. QPC is owed nearly $1 million by Intellicomms. In funding this application, QPC expressly recognises that if the Sale Agreement is upset or rendered void, it will have to compete at arm’s length in an open-market in any subsequent sale of the assets. It has made the commercial decision to do so, no doubt fully recognising the pitfalls of upsetting the Sale Agreement which are emphasised by TF in its final submissions. QPC would need to be the highest bidder and the proceeds of any sale would be received by the Liquidators and distributed amongst the general body of creditors, not just QPC.

It is clear from her own evidence that Ms Haynes was well aware of QPC’s interest in Intellicomms’ business and with the assistance of her advisors, embarked on a plan to frustrate the legitimate motives of QPC in retrieving its commercial position.

The Sale Agreement is, in my view, a creditor‑defeating disposition under s 588FDB and a voidable transaction under s 588FE(6)(B). I am also satisfied that the application has been brought within the time period prescribed by s 588FF(3)(a)(i).

Mr Austin QC, senior counsel for TF, contended that in order for the Sale Agreement to be a creditor-defeating disposition, the plaintiffs must establish sufficient evidence upon which the Court can determine an actual monetary value as to each of the market value of the assets and the best price reasonably obtainable for the assets, and that in each case those actual values must be higher than the consideration payable to Intellicomms by TF for the assets.

I do not agree with that submission. In my view, the Liquidators are required to establish that, on the balance of probabilities, the consideration payable under the Sale Agreement was less than both of the limbs contained in s 588FDB.

In support of his submissions, Mr Austin QC contended that the only evidence in respect of the market value of the assigned assets was contained in the Hockley Report, and Mr Hockley’s evidence supports TF’s position that the market value of the assigned assets was $22,925 at the time of the sale.

There are, however, several features of Mr Hockley’s valuation which open it up to criticism. Before moving to those matters, at the outset, Mr Hockley accepted that he relied heavily on forecasted revenue inputs provided to him by Ms Haynes as to what the future cash flows for Intellicomms would be. Like the other valuations which are described in these reasons, they are heavily reliant upon and assume the accuracy and validity of what the future cash flows for Intellicomms would be. It seems quite clear that Ms Haynes varied the forecasted revenue inputs at her whim in an attempt to arrive at what she considered to be an acceptable valuation. Other than accommodating for some New Zealand revenue, Mr Hockley did not conduct any independent investigation of these crucial inputs because it was not within the terms of his engagement to conduct a critical audit or examination of those inputs.

I consider that the plaintiffs’ criticisms and identification of the deficiencies in the Hockley Report have very considerable force. They are detailed in paragraph 206 of these reasons. Mr Hockley accepted that if any of the underlying data and assumptions with which he was provided with by Ms Haynes are incorrect or unreliable, his opinion as to the value of the assets is likely to be impacted. The inputs he used were those prepared by Ms Haynes on 27 August 2021. Mr Hockley was not informed that a new compensation model for contractors which would very significantly increase the business gross profit margins from approximately 28% to approximately 45% had been implemented. Mr Hockley accepted in cross-examination that if there was a gross profit margin of 45%, this would have had a significant effect on his valuation.

As regards the revenue from the New Zealand‑based operations, while Mr Hockley, apparently of his own volition, made some allowance for this income stream, as the plaintiffs pointed out he proceeded to apply a 25% reduction in respect of those revenue streams in FY2022 and further reductions in the following years. Mr Hockley had accepted in cross-examination that he “had plucked those figures out the air” based upon his own experience and the limited information with which he had been provided. Ms Smith observed that the valuation in the Hockley Report would be materially higher if the existing New Zealand revenue was to be included in the forecasts that form the basis of the valuation, and if the forecast revenue growth rates were assumed to be in line with general industry expectations. I also accept the plaintiffs’ submissions as to the criticisms mounted against the Hockley Valuation in respect of the overstatement of working capital requirements and the lower figure in that regard, which is mentioned in Ms Smith’s evidence, is accepted.[97] Further, the Sale Agreement contemplated TF assuming liabilities for employees who would be transferring to it and the precise amount of these liabilities was specifically brought into account in arriving at the consideration payable by TF. However, no adjustment was made for the fact that Mr Cato did not transfer his employment, despite the fact that TF had the benefit of an allowance of $18,144 factored into the purchase price to compensate it for assuming that liability.
[97]Smith Report [6.4]; Revised Court Book, 1529.

It is not practicable to quantify the effect of the acceptance of these criticisms of Mr Hockley’s report but I am prepared to say that, on the balance of probabilities, the effect of them is that the market value of the assigned assets was significantly more than the value placed on them by Mr Hockley. The market value of the assigned assets was never tested but it seems very clear that they had a unique value to QPC which would have been prepared to pay considerably more than the consideration under the Sale Agreement had it been given the opportunity to do so. This is illustrated by the fact that it is funding the Liquidators for conducting this proceeding and the costs of doing so will be considerable. One could also make the same observation in regard to TF which has similarly applied significant resources to maintain its rights under the Sale Agreement.

As has been mentioned, TF criticised the involvement of QPC in funding the conduct of this proceeding contending that it is conducting via a subsidiary business, a business in competition with that previously operated by Intellicomms. I cannot accept that submission. QPC is a creditor of Intellicomms for nearly $1 million and it is fully entitled to seek whatever means are legally available to try and retrieve its losses. If it takes the commercial decision to do so by seeking to purchase the assigned assets it is entitled to do so.

Conclusion

I accept the plaintiffs’ submission that, having regard to the circumstances surrounding the time of the sale, the best price reasonably obtainable for the assigned assets was not less than the market value. Those “circumstances” are catalogued at paragraph 207 above. They include the factor of QPC’s apparent interest in purchasing the assigned assets for an amount that was significantly higher than the sale price under the Sale Agreement. I accept the submission that this suggests that the purchase price under the Sale Agreement was less than the best price that is reasonably obtainable in the circumstances.

I consider that the Sale Agreement was for the foregoing reasons a creditor‑defeating disposition within the meaning of sub-s 588FDB(1) of the Act. The consideration payable under the Sale Agreement was less than the market value of the assigned assets and the best price that was reasonably obtainable for them having regard to the circumstances existing at the time of the Sale Agreement. The disposition of the assigned assets under the Sale Agreement has clearly the effect of preventing that property from becoming available for the benefit of Intellicomms’ creditors in the winding up within the meaning of sub-s 588FDB(1)(d)(i). Further, the Sale Agreement was entered into at a time when Intellicomms was insolvent.

The proceeding has been commenced within the time period prescribed by sub‑s 588FF(3). Because the Sale Agreement is a creditor‑defeating disposition pursuant to s 588FDB and voidable pursuant to s 588FE(6B) of the Act, the jurisdiction of the Court is attracted under s 588FF. TF has described several significant difficulties which might arise if the agreement is declared void, but they are to my mind of its own making. The transaction constituted by the Sale Agreement was a blatant example of phoenixing. The plaintiffs pressed for an order that the Sale Agreement be declared void with the knowledge of the possible drawbacks of such a course and I believe that such a declaration is warranted together with the necessary ancillary orders.

After considering these reasons, the parties should consult on a form of order designed to implement them.

SCHEDULE OF PARTIES

S ECI 2021 03635
BETWEEN:
GLENN JEFFREY FRANKLIN as Joint and Several Liquidator of INTELLICOMMS PTY LTD (IN LIQUIDATION) (ACN 153 181 367)	First Plaintiff
PETR VRSECKY as Joint and Several Liquidator of INTELLICOMMS PTY LTD (IN LIQUIDATION) (ACN 153 181 367)	Second Plaintiff
INTELLICOMMS PTY LTD (IN LIQUIDATION) (ACN 153 181 367)	Third Plaintiff
- v -
TECNOLOGIE FLUENTI PTY LTD (ACN 653 110 582)	Defendant

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2 February 2024