Australia: Solicitor Liable For Facilitating Unlawful "Phoenix" Activity: Professional Advisors Beware!

Last Updated: 6 May 2010
Article by Emily Eliades

"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 liability."

The decision of Windeyer AJ in ASIC v Somerville & Ors [2009] NSWSC 934 illustrates the potential for exposure of legal, accounting and other professional advisors to liability if they facilitate improper corporate conduct, and serves as a warning for those who overstep the legitimate boundaries when providing legal or financial advice.

On 8 September 2009, the New South Wales Supreme Court found solicitor Timothy Donald Somerville liable for aiding and abetting directors of certain companies to contravene their directors' duties by engaging in 'phoenix' activity.

Eight directors, whose companies were insolvent or facing insolvency, were found liable for breaching sections 181(1), 182(1) and 183(1) of the Corporations Act 2001 (Cth) for 'restructuring' in line with advice provided by Mr Somerville. In each case, Mr Somerville had advised the respective directors to:

  • transfer assets from a failing company to a newly established company;
  • issue 100 'V' class shares from the new company to the old company as consideration for the transfer of the assets, with the old company entitled to dividends declared by the new company up to a certain amount;
  • terminate the employment of all employees of the old company and re-employ them with the new company; and
  • have the new company take over plant, property and equipment leases of the old company.

While the old companies would remain liable for any outstanding debts to creditors, the 'restructure' ensured that the assets owned by the old companies would be transferred out of reach of the creditors. Further, the assets were effectively transferred for no consideration, as no dividend was ever paid on the shares issued by the new company to the old companies.

The Court found that in undertaking the transactions, the directors:

  • had failed to discharge their duties in good faith and for a proper purpose in the best interests of the companies concerned. There was no purpose other than to preserve the old failing companies' assets in new companies without the burden of liabilities;
  • had used their position to gain advantage for themselves and cause a detriment to the old companies;
  • had improperly used information obtained by them as directors to gain an advantage for themselves and cause detriment to the old companies; and
  • were thereby in contravention of the Corporations Act.

Mr Somerville, who was ASIC's principal target in the proceedings (in order to discourage other professionals from acting in the same way Mr Somerville had), was found to have breached the Act by aiding, abetting, counselling or procuring the directors' contraventions of the Corporations Act.

The Court found there was a direct causal link between Mr Somerville's conduct and the directors' breaches and that the transactions would not have occurred but for Mr Somerville's involvement.

Mr Somerville provided the advice that led to the implementation of the transactions, prepared the agreements, arranged registration of the new company, prepared the necessary returns and resolutions for the new company 'V' class shares and ensured the relevant transactions took place prior to the winding up of the old company.

Accordingly, the Court held that Mr Somerville had given advice to carry out an improper activity and had done substantially all of the work involved in carrying it out 'apart from signing the documents'.

The decision represents the first time ASIC has successfully taken action against a professional advisor for assisting directors to shift assets from insolvent or near insolvent companies. According to ASIC Commissioner Michael Dwyer, 'Advisors who go beyond the normal giving of advice which causes their clients to breach director duties provisions of the Corporations Act run the risk of themselves breaching those provisions by being involved in their clients' contraventions'.

This landmark decision opens the door for liability to attach to professional advisors who facilitate or are involved in breaches of the Corporations Act by their clients.

Whether liability will attach to the giving of advice alone, as opposed to an active participation in implementing the advice given, remains to be seen. However, the decision clearly highlights the need for professional advisors to be extremely careful when acting for and advising clients in situations where their clients may be in breach of the Corporations Act (or another Act with similar accessorial liability provisions, such as the Trade Practices Act).

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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