The NSW Supreme Court recently brought down a decision against a solicitor for aiding, abetting, counseling or procuring a contravention of the Corporations Act. Readers that recall that we wrote a series of articles on this topic from December 2007 to March 2008 under the title “Advisors – Aiding & Abetting and Getting Paid.”
In this case the court found that the directors of a series of companies had entered into arrangements that were clearly designed to set up phoenix companies and remove assets from the reach of creditors. It also found that these arrangements were entered into on the advice of a particular solicitor acting for the companies and that the solicitor was ‘involved’ in these contraventions under section 79 of the Corporations Act.
79 Involvement in contraventions
A person is involved in a contravention if, and only if, the person:
(a) has aided, abetted, counseled or procured the contravention; or
(b) has induced, whether by threats or promises or otherwise, the contravention; or
(c) has been in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to, the contravention; or
(d) has conspired with others to effect the contravention.
That section deems that anyone who is involved in the contravention – to the required extent – is liable for penalty along with the main participants – as sections 181, 182 and 183 of the Corporations Act state that “a person who is involved in a contravention of [this section] contravenes this subsection”.
The solicitor was a defendant in the application because of his advice to the other defendants and the agreements that were put in place as a result of that advice. From the Judgment:
Those agreements for sale and purchase were similar but there were some differences. All included clauses under which:
(a) the vendor company agreed to transfer its business, or the assets of its business, to the purchaser company;
(b) the consideration was the issue of 100 “V” class shares in the purchaser company carrying the right to receive all dividends declared by the company until a total of (a certain amount) was paid;
(c) the vendor company would receive payments invoiced prior to the settlement and apply those to debts of the vendor company;
(d) the trade creditor debts of the vendor company would remain with the vendor;
(e) employees would be terminated and the purchaser company would offer re-employment on the same terms;
(f) plant and equipment on lease or hire would be transferred to the purchaser and leases of premises assigned.
The result was that the new company – the phoenix company – acquired all the assets of the old insolvent company but that it would not receive any payment for that transfer unless dividends were declared by the new company. No dividends were ever paid, meaning that the assets were effectively transferred for no consideration.
The evidence also showed that the solicitor not only “advised on and recommended the transaction which breached the sections in question, he prepared or obtained all documents necessary to carry out the transaction, [and] he arranged execution of the documents in all cases with knowledge of the relevant facts.”
The court found that the solicitor aided, abetted, counseled and carried out the necessary work to bring the transaction into effect. The court found that there “was a direct causal connection between his involvement and the breach” and that “the transactions would not have taken place but for his involvement”.
The result was that the solicitor gave advice to directors that resulted in a breach of section 81, 81 and 83 of the Corporations Act, but as he went further and took part in the implementation of that advice he crossed the invisible line that we have referred to in previous articles on this topic, and went from advisor to participant with the required ‘involvement’. The court ended the Judgment with a warning to advisors:
“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.”
ASIC v Somerville & Ors  NSWSC 934