It is alleged that Timothy Donald Somerville, of North Sydney firm Somerville & Co Solicitors, recommended and prepared documents that assisted the directors to engage in phoenix trading, in contravention of the Corporations Act.

Phoenix trading effectively transfers the business or assets of a company in financial distress to another company controlled by the same directors for a negligible consideration.

It is alleged that in each instance the assets of the distressed vendor company were transferred through a sale agreement signed by the same person, as director of both the vendor and purchaser companies. The vendor company was then placed into liquidation after the sale of its assets.

ASIC has also alleged that there was no tangible consideration received from the sale of assets, there were unpaid tax debts and that the businesses continued to operate under the name of the new company.

“Everyone practicing in insolvency knows that phoenix company activity is relatively common,” commented Clayton Utz partner David Cowling.

Cowling pointed to an ASIC study of phoenix company activity in 1996, which found that annual losses to the Australian economy due to phoenix-type activities were estimated to be in the range of $670 million to $1.3 billion (at 1996 values), 45 per cent of phoenix activities appeared to be in the building and construction industry; 77 per cent of phoenix companies did not have adequate books and records; and 77 per cent transferred corporate assets to evade paying creditors.

The survey found that the average phoenix company group generated creditor losses of about $557,000 — which equated roughly to $90,000 per phoenix company group per annum over the average lifespan. The average number of creditors affected by a phoenix company group, again over its lifespan, appeared to be about 838 who lost on average $10,300.

Cowling expressed support for ASIC’s tougher stance on the apparently widespread problem,

“The fact that ASIC has begun this litigation and has announced it in the media is good news. Regardless of the merits (or otherwise) of this particular case, ASIC is sending a clear message to the commercial community and, more importantly, to those professionals who advise phoenix companies,” he said.

“ASIC’s current action appears to be sending a warning to professional advisers (lawyers and accountants) against becoming involved in the planning of phoenix company activities,” Cowling said.

“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,” he observed. His observation appears to be backed up by the statement of intent from ASIC which cited phoenix trading as a “significant issue”.

“ASIC has broadened its focus in relation to misconduct to include not only company directors but also others who are involved in, or help facilitate, such transactions”, said ASIC’s Executive Director of Enforcement, Jan Redfern.

ASIC is seeking declarations of contravention of the Corporations Act by the eight company directors and Somerville, injunctions and director-banning orders. Somerville could also face investigation for professional misconduct if a complaint is laid with the Law Society of New South Wales.

The pending civil proceedings will be held in the New South Wales Supreme Court.