ASIC sends stern warning to advisers over phoenix companies

ASIC and the courts have sent a stern warning to accounting and legal advisors this morning in relation to phoenix activity: if clients act on advice that is found to breach the Corporations Act, then the advisor could be prosecuted.

This is an important step. To date, ASIC has prosecuted many companies for phoenix related activity: that is, companies that illegally take assets out of companies and out of reach of creditors and then literally start again like the phoenix rising from the ashes.

However, ASIC has not successfully prosecuted those that advise the companies to take such actions. Until now. Yesterday ASIC announced that the New South Wales Supreme Court has found eight directors of unrelated companies to have acted in breach of the Corporations Act by engaging in illegal ‘phoenix’ activity. And their legal adviser, Timothy Donald Somerville, was also found to have contravened the Corporations Act by being involved in the directors’ breaches.

Each of the directors of the eight companies had sought advice from Somerville when their company was insolvent or nearing insolvency. He gave them advice on which they acted which resulted in assets being taken out of their companies and out of the reach of creditors. By entering into the transactions, the directors failed in their duty to act both in the interest of the company and its creditors, the court found.

ASIC says that now it has been successful in taking action against an adviser for involvement in facilitating illegal phoenix activity, a line has been drawn across which legal and other professional advisers should not step.

“It was found that the transactions would not have taken place but for Somerville’s involvement,” ASIC says. “By his advice and conduct, Somerville had facilitated his clients breaching their directors’ duties and as a consequence he was found to have aided and abetted their breaches.”

ASIC Commissioner Michael Dwyer says the case not only reinforces the role and responsibilities of directors in insolvency situations, but brings home to advisers the need to ensure that they do not get themselves in a position where their involvement amounts to advice to carry out an improper activity.

“Advisers who go beyond the normal giving of advice which cause their clients to breach the director duties provisions of the Corporations Act run the risk of themselves breaching those provisions by being involved in their clients’ contraventions,’ he says.

Declarations of breaches of their duties of the Corporations Act, were made against each of the eight directors and Somerville, and orders restraining each of the defendants from engaging in similar conduct in the future were also made. ASIC is also seeking an order disqualifying the directors and Somerville from managing a company.

Many company directors turn up at the doors of advisors when they are on the brink of trading insolvently. Often they are desperate and unaware of their obligations or choose to ignore them.

It is high time that advisors who encourage this type of behavior are prosecuted as phoenix activity creates an unlevel playing filed, misery for creditors and can encourage the hapless and hopeless to start again without learning any of the hard lessons of business.