"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  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
transfer assets from a failing company to a newly established
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
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
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
were thereby in contravention of the Corporations
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
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
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
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
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.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
This was an interlocutory decision about the appointment of a tutor for the child appellant, to carry on his proceedings.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).