Written by Hiteshi Dekhtawala in December, 2009

PHOENIX activity is typically associated with Directors of Companies in financial distress who transfer the assets of an insolvent Company to a new Company controlled by the same Directors for negligible consideration. The Director then places the initial Company into Administration or Liquidation with no assets to pay Creditors, meanwhile continuing the business using the new Company structure.

It is remarkable to know that the Australian Securities and Investments Commission has issued a warning to legal advisers following the landmark prosecution of a legal adviser and eight Company Directors over illegal ‘phoenix’ activity.

The warning comes as the New South Wales Supreme Court declared that Mr Timothy Donald Somerville, of North Sydney firm Somerville & Co Solicitors, had acted in breach of the Corporations Act by engaging in illegal phoenix activity.

The proceedings found that Mr Somerville advised Directors on eight occasions, who sought advice from Mr Somerville in circumstances where their Company was insolvent or nearing insolvency, to take assets out of their Companies and out of the reach of Creditors.

The findings made by the Court against Mr Somerville was sought to clearly mark the line 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.

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 illegal phoenix activity.

Following from the successful prosecution in this matter, ASIC is also seeking to disqualify the Directors involved in these matters and Mr Somerville from managing any Companies in the future.

This is an important step. To date, ASIC has prosecuted many Companies for phoenix related activity. However, ASIC has not successfully prosecuted those that advise the Companies to take such actions. This is the first time ASIC has successfully taken action against an adviser for involvement in facilitating illegal phoenix activity.

This represents a new direction – rather than trying to catch phoenix activities after the fact, ASIC is trying to cut off the professional services that support them.