ASIC sues North Sydney Solicitor for Phoenix companies
30-November-2010 Commercial Disputes Fraud and Insolvency By Mark StreeterThe Australian Securities and Investments Commission (ASIC) has found a North Sydney Solicitor guilty of advising eight of his clients engage in activity which breached the Corporations Act. This significant case sends a warning to all business advisors. These two judgments of Acting Justice Windeyer are very important decisions of the Court in considering Section 79 of the Corporations Act 2001 (CTH).
The Facts – ASIC v Somerville & Ors (No 2) [2009] NSWSC 998 & ASIC v Somerville & Ors [2009] NSWSC 934
The First Defendant was a solicitor practising in North Sydney. He was sued, together with eight of his clients, for alleged “phoenix” activity. The solicitor had provided similar advice to each of the eight businesses (which were facing insolvency) on separate occasions.
The effect of the advice and the transactions taken by the companies and directors in reliance on this advice was that the company would sell its “business” to a new entity in consideration for being issued “V Class” shares in the new entity which will be paid by dividends. The debts and liabilities of the previous company stayed in the old company. No dividends were ever paid by the new entity back to the old company.
The result of the implementation of this advice was that the purchaser acquired all the assets of the old company free of any of the liabilities of the old company leaving trade creditors, taxation debts and debts for insurance premiums to sue an asset-less company.
The Decision
The solicitor was found to be involved in the Directors’ misconduct. The Company Directors were found to have breached Sections 181, 182 and 183 Corporations Act 2001 (CTH). In the second judgment the directors unsuccessfully sought to make an application for exoneration under section 1318 on the basis that they relied on their solicitor’s advice and should not be personally liable. The solicitor was disqualified from managing corporations for a period of six years and the other directors (of the subject corporations) were disqualified from managing corporations for a period of 2 years.
Comment from Mark Streeter Sydney Lawyer
This case stands as a solitary warning to all participants involved in advising debtors in respect of their statutory obligations under the Corporations Act.
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