On 8 September 2009, in the matter of ASIC v Somerville
& Ors  NSWSC 934, the Supreme Court of NSW found
that eight non-related directors of separate companies had breached
their duties under the Corporations Act 2001 (Cth)
(Act) by engaging in 'phoenix1'
type asset stripping. The directors had all received and acted on
advice provided to them by the same solicitor. In the first time
that ASIC has successfully taken action against a solicitor for
their role in a phoenix scheme, a solicitor was found to have also
breached the Act for his part in aiding and abetting the
Advisers, be warned
While this case was about a solicitor, there is nothing in the
judgment, or the Act, that prevents a similar finding being made
against other advisers, for example, insolvency practitioners
advising near-insolvent companies. Advice or assistance to clients
to carry out improper activities, even where that advice is nicely
worded or the transactions are 'sugar coated' for the
perception of legitimacy, may find the adviser in trouble with ASIC
and the courts.
In ASIC v Somerville & Ors, eight directors of
unrelated companies sought advice from their solicitor, Somerville,
in circumstances where their companies were nearing insolvency. In
each case, Somerville advised the directors to transfer the assets
of the existing company to a new company, under an agreement
whereby the existing company received shares in the new company as
consideration for the purchase. To effect the transaction,
Somerville arranged the registration of the new company, prepared
the necessary returns and resolutions for the new company, and
drafted the relevant sale agreements. Somerville advised that the
transactions were not an asset stripping exercise because the
creditors of the existing company would be paid out of the proceeds
of dividends from the shares. In reality, there were no dividends
declared on the issued shares, and the court found that there was
no genuine intention that dividends would ever be paid for the
benefit of creditors.
The court found that the purpose and effect of the transactions
was to take assets out of the reach of creditors. The directors
were held to have breached the following duties that they owed to
the company (and, nearing insolvency, its creditors):
under s181(1), the duty to act in good faith and for a proper
under s182(1), the duty not to improperly use their position to
gain an advantage for themselves or someone else; and
under s183(1), the duty not to improperly use information
obtained in their position as director, to gain an advantage for
themselves or someone else.
Subsection (2) to each of sections 181-183 is in the same terms
"A person who is involved in
a contravention of subsection (1) contravenes this
As to who is considered to be involved in a contravention,
s79(a) provides that a person is involved in a contravention if
they have "aided, abetted, counselled or procured the
contravention." Somerville advised on, and provided the
documents required to effect, the transactions. The court found
that, but for his involvement, the transactions would not have
taken place. At paragraph 49, in finding Somerville liable under
s79, Acting Justice Windeyer commented:
"... when advice is given by
a solicitor to carry out an improper activity and the solicitor
does all the work involved in carrying it out apart from signing
documents, it seems to me that there can be no question as to
That the directors were taken to court by ASIC was not
completely surprising: ASIC has warned that it is keeping a close
watch on the actions of directors throughout the global financial
crisis. Nor, on the facts of the case, was the finding against them
novel (though it should serve as an important reminder of the
responsibilities and duties of directors when their companies near
1 Phoenix activity is a form of asset stripping whereby
directors transfer assets from an indebted company, often where
that indebted company is facing insolvency, to a new company with
the same or similar directorship. The intention is that the
indebted company will enter into administration or liquidation with
no assets to pay its creditors, while the new 'phoenix'
company continues on the business with a favourable balance
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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