A North Sydney Solicitor has been found guilty of ”aiding and abetting” eight clients to break the law by advising them to transfer assets from 15 near-insolvent companies to new vehicles, the NSW Supreme Court ruled yesterday.
Acting Justice William Windeyer said there was ”a direct causal connection” between the involvement of the The North Sydney Solicitor mentioned above, and breaches of the Corporations Act by the company directors he advised.
The judge will hear further submissions about penalties.
The case involved the transfer of assets from companies nearing insolvency to purchasers in exchange for so-called ”V shares”.
Creditors such as employees and suppliers who had a continuing association with the new company were paid what they were owed however other creditors of no on-going value or need such as insurers and tax authorities were not paid. In fact, the scheme that The North Sydney Solicitor promoted was specifically designed to help insolvent companies avoid obligations to the Tax Department.
The judge says ”What has really happened here is that a scheme has been devised to bring about asset stripping but to attempt to make this seem legitimate by providing for “V” class shares,”.
Of Mr North Sydney Solicitor, he said in each instance it was ”clear that he aided, abetted, counselled and by carrying out the necessary work procured the carrying out of the transaction”.
The judge noted that Mr North Sydney Solicitor’s barrister, Bernie Coles, QC, had argued that a lawyer could not be liable under the Corporations Act by ”just giving advice”.
”That, of course, may be the position in a normal case, but that depends upon what advice was given,” the judge said.
”If 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.”
The senior partner of CRS Warner Kugel/Liquidation Direct – Mr Steven Kugel was the responsible person for identifying the Phoenix Transactions promoted by Mr North Sydney Solicitor and bringing them to the attention of the ASIC and the ATO.
Steven Kugel worked on at least 5 The North Sydney Solicitor style liquidations and they all had the same feature in common – the transfer of assets from a company that was hopelessly insolvent to another newly formed company. The consideration for the sale was the issuance of Dividend V class shares to the value of the assets transferred to the new company.
The issue with the Dividend V Class shares as consideration for the transfer to assets was that the shares gave an apparent right to dividends out of the new company to the value of the assets transferred into it – but the declaration of any dividend was entirely at the discretion of the new company directors. Further there was no trigger for the payment of dividend at any time.
In circumstances such as this, the directors could manipulate future profits and never declare a dividend to the Dividend V class shares and therefore, the transfer of assets would be achieved without the old company receiving any funds whatsoever for its assets.
So the old company was left with nothing but debt and its assets had been transferred away and beyond the reach of creditors – a classic phoenix transaction.
CRS Warner Kugel trading as The Insolvency Experts © 2011. All rights reserved