A lesson for lawyers

September 13, 2009

phoenix

There is a phenomenon in Australian corporate law called the phoenix company. Bringing about a phoenix basically involves an abuse of the corporate insolvency laws. A company trades, accumulates debts (often substantial) and then sells or transfers all its assets to a new company and then the old company is placed in voluntary liquidation. The creditors of the old company get nothing & the the new company (which has risen from the ashes of the old) carries on substantially the same business….then the whole process is repeated again.

A recent case in the NSW Supreme Court is a salutatory warning to lawyers who assist directors in their phoenix activity.

In ASIC v Somerville [2009] NSWSC 934, Windeyer J said:

“[the lawyer] advised on and recommended the transaction which breached the sections in question, he prepared or obtained all documents necessary to carry out the transaction, he arranged execution of the documents in all cases with knowledge of the relevant facts. I think it clear that he aided, abetted, counselled and by carrying out the necessary work procured the carrying out of the transaction. 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.

49 I have of course carefully considered the argument of Mr Coles QC that it would be extraordinary if a solicitor just giving advice became liable under s 79 of the Act. That of course may be the position in a normal case, but that depends upon what advice was given. If advice is given the result of which brings about an action by directors in breach of the relevant sections of the Act, in other words, 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.”

Photo used pursuant to creative commons licence.

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