Legal
Issue No. 51 - February/March 2010
Phoenix ruling burn notice
The Australian Securities and Investment Commission’s recent successful prosecution of North Sydney solicitor Timothy Donald Somerville for facilitating clients’ illegal ‘phoenix’ or asset stripping activity (ASIC v Somerville [2009] NSWSC 934) is a warning for all professionals and advisors to take care when advising clients during or near insolvency, and the extent to which they become involved in their clients’ affairs.
Somerville was a partner of the firm Somerville & Co. He advised various clients that were either referred by accountants or sought advice directly. On no less than eight occasions, Somerville and his staff recommended and assisted in the implementation of a mechanism for clients to protect assets where their companies were – or were about to – become insolvent.
The advice given was found to have the effect of taking assets out of the companies and out of the reach of creditors.Each of the clients had generally similar circumstances. Creditors had taken various actions, ranging from issuing payment demands to winding up applications, and in some instances Section 222AOE notices had been served on directors. Somerville proposed a mechanism purporting to protect the assets of companies that were insolvent or about to become insolvent:
Old Company Pty Ltd
• Sells assets and business operation which the current director/s seek to protect from creditor claims.
• Keeps outstanding creditors who can’t be paid through normal trading.
• Receives ‘V’ class shares in the New Company and the right to dividends to a specified amount.
New Company Pty Ltd
• Acquires assets and business operations which the director/s seek to protect from creditor claims.
• Issues ‘V Class’ shares in consideration.
• No dividend is paid in respect to the ‘V’ class shares.
The court found that Somerville had aided, abetted, counselled and - by carrying out the necessary wor...
