Advisors may be liable if they assist clients with unlawful conduct

A recent decision of the New South Wales Supreme Court in the case of ASIC v Somerville & Ors [2009] NSWSC 934, highlights that legal advisors may be personally liable if they give advice in relation to unlawful activities conducted by their clients.

Facts

Eight directors of various companies under the threat of insolvency sought legal advice from Mr Somerville as to the options available to them.

Mr Somerville recommended a strategy where:

• each company (previous company) would cease to trade;
• a new company would be registered with a similar name to each of the previous companies;
• the previous companies would transfer their assets to the new company in exchange for V class shares; and
• the previous companies remained liable for payment of all creditors.

Mr Somerville then assisted the clients to implement this strategy by:

• arranging for the registration of each new company;
• preparing substantially all of the agreements transferring the assets from the previous company to the new company; and
• preparing the necessary returns and resolutions for the new company V class shares.

The practical effect of the agreements was that the new company acquired the assets of the previous company and their employees, premises and equipment, but the previous company remained liable to pay the creditors – without having any means to do so.

No dividends on the “V” class shares were declared by the new company.

Outcome

The directors had breached their duties under the Corporations Act 2001 by:

• not exercising their powers and discharging their duties in good faith in the best interests of the company;
• improperly using their position to gain an advantage for themselves; and
• acting to the detriment of the previous company in circumstances where the creditors were not considered.

Mr Somerville, as legal advisor to the directors, had breached section 79 by aiding the commission of these offences.

Impact

Legal and other advisors will be found to be in breach of section 79 of the Corporations Act 2001 where they give advice to carry out prohibited activity.

This may be the case where legal advisors have not actually prepared all of the documents to enable the arrangement but have given advice on the arrangements.