28/10/2009

Accountants and other professional advisers need to be aware that the Australian Securities & Investment Commission has recently enjoyed success in the New South Wales Supreme Court by successfully charging eight company directors with violations of the Corporations Act by engaging in illegal Phoenix Activity. However, the remarkable aspect about the case – and the reason professional advisers need to be alert - is that for the first time an adviser to the company directors has also been found guilty for aiding and abetting the director’s illegal activities.

The case of ASIC v Somerville & Ors [2009] NSWSC 934 represents the first time ASIC has successfully taken action against an adviser for involvement in facilitating illegal Phoenix Activity. The case is an important precedent for accountants and other professional advisers identifying the boundaries that a professional adviser should not cross in the delivery of professional services.

Phoenix Activity occurs when a company is in, or nearing insolvency and as a result actions are taken to remove assets from the company and out of the reach of creditors. This is usually achieved by transferring the assets to a new company and carrying on the business as before, while leaving the insolvent company with no assets and no way of paying off its debts. Such actions are deemed to be both a failure of the director’s duty to act in the best interest of the company and in the best interest of creditors.

In the Somerville case the solicitor to the various company directors of unrelated companies was found to have devised a series of transaction with the appearance of legitimacy which were designed and had the intention of stripping assets from the financially struggling companies, and disadvantaging creditors. In this case Acting Justice Windeyer said:

“He (the solicitor) advised on and recommended the transactions which breached the sections in question, he prepared or obtained all documents necessary to carry out the transactions, he arranged execution of the documents in all cases with knowledge of the relevant facts. I think it is clear that he aided and abetted, counselled and by carrying out the necessary work procured the carrying out of the transactions. There was a direct causal connection between his involvement and the breach. I find the transactions would not have taken place but for his involvement.”

This case not only highlights the duties of directors in insolvency situations, but clearly indicates that ASIC will be aggressive in ensuring that those advisers who counsel and assist their client to undertake improper activities will also face prosecution.

The penalties can be significant. The adviser in Somerville was disqualified from managing a corporation for six years. 

If you would like more information about this article or directors/officers duties under the Corporations Act, please contact Mark Dupuis at Townsends Business & Corporate Lawyers (02) 8296 6222.