Directors found liable for 'phoenix' activity

Monday, 28 September 2009

Australian Securities and Investments Commission (ASIC) has 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 what ASIC regards as illegal 'phoenix' activity and that their legal adviser also contravened the Corporations Act by being involved in the directors' breaches.

Each of the directors had sought advice from the legal adviser in circumstances where his company was insolvent or nearing insolvency. The transactions entered into by the directors as a result of that advice were found by the court to have the effect of taking assets out of their companies and out of the reach of creditors, and that by causing the companies to enter the transactions, the directors failed in their duty to act both in the interest of the company and its creditors.

In this case, Acting Justice Windeyer was satisfied that the legal adviser had devised a series of transactions, with the appearance of legitimacy, to bring about asset stripping and disadvantage to creditors.

"Not only does this case reinforce the role and responsibilities of directors in insolvency situations, but it brings home to advisers the need to ensure that they do not get themselves in a position where their involvement amounts to advice, as in this case, 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," ASIC Commissioner Michael Dwyer said.

Declarations of breaches of their duties, under the Corporations Act, were made against each of the eight directors. Declarations for breaches of these provisions were also made against the legal adviser as it was found that he aided and abetted the directors in their breaches.

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 the legal adviser from managing a company. Acting Justice Windeyer has reserved his decision on that matter.