Phoenix Activity and the Liability of the Advisor

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1 Phoenix Activity and the Liability of the Advisor Helen Anderson and Linda Haller Abstract This article explores the liability of professional advisors such as lawyers, accountants and insolvency practitioners in giving advice to company directors in relation to fraudulent phoenix activity. It looks at the losses caused by such activity, and the nature and deficiencies of the current regulatory response. The Supreme Court of New South Wales decision in ASIC v Somerville is examined in detail, with questions asked about the utility of this decision in terms of both general deterrence and in providing clear guidance to the legal profession as to what constitutes acceptable advice in the business rescue context. Recommendations are made about ways to improve this situation. I Introduction Fraudulent phoenix activity is of increasing concern to government, regulators and the community as a whole. It occurs when company controllers exploit the separate legal entity of the company and the limited liability of its shareholders to allow an insolvent company, Oldco, to avoid payment of its debts, while the business continues through a newly formed company, Newco. Difficulties arise because the external manifestations of a phoenix transaction the external administration of one company, the purchase of its business for a modest or nominal sum by its former controllers, and the continuation of that business in another form are also characteristics of a successful, and perfectly legal, business rescue. 1 Similarly, where the previous owner of Oldco is the only party interested in purchasing these assets, establishing a market price is problematic. This can lead to a perception of fraudulent phoenix activity where none truly exists. This article does not seek to address the shadowy no man s land of the possible phoenix. Nor does it seek to delineate the dimensions of the technically legal, but morally questionable, business rescue that has little likelihood of a beneficial outcome for creditors. Rather, it deals with the deliberate phoenix that is undoubtedly a breach of duty on the part of Oldco s directors and officers. 1 Associate Professor, Melbourne Law School, University of Melbourne; Adjunct Associate Professor, Department of Business Law and Taxation, Monash University. Senior Lecturer, Melbourne Law School, University of Melbourne. Note that saving a company or its business is the objective of voluntary administrations: Corporations Act 2001 (Cth) s 435A ( Corporations Act ). A business can also be resurrected where Oldco is liquidated, the owner buys all the relevant assets and conducts the same business through a new company. This is discussed further below.

2 472 SYDNEY LAW REVIEW [VOL 36:471 The Australian Securities and Investments Commission (ASIC) can take criminal or civil action against the company s controllers, 2 but it rarely does for a variety of reasons noted below, including problems of detection, alternative priorities and lack of resources. Likewise, there are difficulties for other regulators in mounting actions against the company s controllers in relation to phoenix activity. This article argues that the relative lack of action against improper phoenixing necessitates another approach: a focus on advisors to improve the effectiveness of existing methods for penalising (and deterring) such activities. It asks whether the most devious schemes, examples of which will be detailed, are the product of the advice directors receive, rather than of their own imaginations. Could the directors devise and implement these illicit transactions without the help of their legal, insolvency or accounting advisors? This is not to suggest that all, or even most, corporate rescues are fraudulent or that the advice behind them is improper. But it must be conceded that undoubtedly some are. The aim of this article is to reflect on ways in which improper phoenixing have been, and could be, discouraged. It examines various forms of regulation used to date, 3 and forms and targets of regulation that appear under-utilised. In particular, it considers whether the more frequent imposition of liability on the advisor as an accessory to the directors breach of duty is needed to educate and deter other advisors from becoming involved in the creation of these arrangements that cause such harm to the economy. 4 To date, only one accessory case has been brought against a legal advisor and, for reasons we develop in Part IV of this article, more are needed. Part II sets out the background to this inquiry. First, it explains the mechanism of phoenix activity, shows why it is of such concern at the moment, and presents some examples. While losses of taxation revenue have sparked the current interest in fraudulent phoenix activity, it is beyond the scope of this article to look at the broad issue of sham transactions in the taxation context. 5 Rather, its focus is confined to phoenix activity and its effect on creditors in general and employees as a particularly vulnerable subset of creditor. 6 Second, Part II looks at Directors and officers of companies are subject to duties under the Corporations Act pt 2D.1. See the discussion in Parts IIA and IV below. We take a broad approach to the notion of regulation, including within our definition not only statutory, civil and criminal liability, but also professional discipline and the influence of professional indemnity insurance, and more informal forms of regulation, such as that exerted by professional colleagues. See, for further elaboration: John Braithwaite and Christine Parker, Regulation in Peter Cane and Mark Tushnet (eds) The Oxford Handbook of Legal Studies (Oxford University Press, 2003) ; See also, eg, Christine Parker and Vibeke Nielsen (eds), Explaining Compliance: Business Responses to Regulation, (Edward Elgar Publishing, 2011). See Joachim Dietrich, The Liability of Accessories under Statute, in Equity and in Criminal Law: Some Common Problems and (Perhaps) Common Solutions (2010) 34 Melbourne University Law Review 106. Accessory liability is considered in detail below. See, eg, Edwin Simpson and Miranda Stewart (eds), Sham Transactions (Oxford University Press, 2013). Employee vulnerability in the insolvency context is well acknowledged. See, eg, D Bruce Gleig, Unpaid Wages in Bankruptcy (1987) 21 University of British Columbia Law Review 61; Arturo S Bronstein, The Protection of Workers Claims in the Event of the Insolvency of Their Employer: From Civil Law to Social Security (1987) 126 International Labour Review 715; Robert Howse and Michael Trebilcock, Protecting the Employment Bargain (1993) 43 University of Toronto Law Journal 751; Paula Darvas, Employees Rights and Entitlements and Insolvency: Regulatory Rationale, Legal Issues and Proposed Solutions (1999) 17 Company and Securities Law Journal

3 2014] PHOENIX ACTIVITY & THE LIABILITY OF THE ADVISOR 473 the sole case in which an advisor was sued in negligence in relation to his advice about alleged phoenix activity. Third, it considers the meaning of accessory liability under relevant statutes, the Corporations Act and the Fair Work Act 2009 (Cth) ( Fair Work Act ). Finally, it outlines the professional and legal obligations of lawyers, accountants and insolvency practitioners in the context of their role as advisors in business transactions. Part III examines some of the relevant litigation dealing with accessory liability. First, Australian Securities and Investments Commission (ASIC) v Somerville 7 is explored. In that decision, the NSW Supreme Court found that a legal advisor was not just complicit in certain directors breaches of duty, but was in fact instrumental in structuring new companies into which the assets of various insolvent companies were transferred. The case illustrates accessory liability for the directors breach of the Corporations Act. Second, labour law actions brought under the Fair Work Act are considered. The Fair Work Ombudsman (FWO) routinely seeks penalties against directors as accessories to the company s breach of the Act in failing to pay employee entitlements, which frequently occurs in the phoenix context. This examination will be used as the basis for a discussion in Part IV as to whether the FWO ought to be seeking monetary penalties from the company s other accessory in other words, the advisor who recommended to the director, acting as the directing mind and will of the company, that they liquidate the company and move the business elsewhere as a means of avoiding payment of liabilities. Part IV applies the foregoing discussions to fraudulent phoenix activity in five ways. First, it looks at ASIC s approach to enforcement as illustrated by the Somerville proceedings. Second, it considers the various ways in which the decision in Somerville has been interpreted, and the implications for the professional and legal responsibilities of advisors. Third, it considers the potential role of the professional societies in educating and disciplining their members. Fourth, it ponders what else regulators might do. Finally, it considers the effect that placing increased attention on the actions of advisors might have on company rescues in general. Part V concludes. II A Background Phoenix Activity While phoenix activity has caused problems for creditors for decades, 8 a groundswell of concern over its detrimental effects has built since 2009, when an ; Ronald B Davis, The Bonding Effects of Directors Statutory Wage Liability: An Interactive Corporate Governance Explanation (2002) 24 Law and Policy 403; Helen Anderson, Directors Liability For Unpaid Employee Entitlements Suggestions For Reform Based On Their Liabilities For Unremitted Taxes (2008) 30 Sydney Law Review 470; Hina B Shah, Broadening Low-wage Workers Access to Justice: Guaranteeing Unpaid Wages in Targeted Industries (2010) 28 Hofstra Labor and Employment Law Journal 9. (2009) 77 NSWLR 110 ( Somerville ). Law Reform Committee, Parliament of Victoria, Curbing the Phoenix Company: First Report on the Law Relating to Directors and Managers of Insolvent Corporations (1994). The second and

4 474 SYDNEY LAW REVIEW [VOL 36:471 Australian Government Treasury paper found that fraudulent phoenix activity was responsible for losses of taxation revenue of approximately $600 million per annum, as well as other widespread losses. 9 Treasury s 2009 Phoenix Proposals Paper has resulted in a suite of new legislation, 10 which arguably will do very little to stem the tide. 11 Meanwhile, in 2012, the FWO commissioned their own report into fraudulent phoenix activity, which estimated lost employee entitlements of between $191,253,476 and $655,202,019 annually. 12 That report also estimated losses generally to business from fraudulent phoenix activity to be between $1,784,338,743 and $3,191,142,300 annually. 13 These figures, while hard to verify, nonetheless show the significance of the issue and the desirability of finding effective ways to deter it. Fraudulent phoenix activity can take two forms. The first is through successor companies. One company, Oldco, becomes insolvent and a new company, Newco, is incorporated to take over the business of its failed predecessor. Second, phoenixing can occur within corporate groups, where Newco is an existing company within the group, and it takes over the business of Oldco, which is an insolvent related company. Treasury s 2009 Phoenix Proposals Paper called these basic and sophisticated phoenix activity respectively. 14 In both cases, the aim is to quarantine Oldco s debts or legal obligations, which are unenforceable against Newco or its owners. Both Oldco and Newco will have directors, and both companies can employ lawyers and accountants who advise on and carry out the necessary transactions. Before considering some examples of phoenix activity, the mechanism by which it is achieved must be sketched. Sophisticated phoenixing requires little, and sometimes no, additional paperwork because Newco is usually an existing part of third reports of this inquiry were published in May 1995 and November 1995 respectively. See also Australian Securities Commission, Project One: Phoenix Activity and Insolvent Trading Public Version (Research Paper 95/01, 1996); Niall Coburn, The Phoenix Re-examined (1998) 8 Australian Journal of Corporate Law 321; Commonwealth, Royal Commission into the Building and Construction Industry (Cole Royal Commission), Final Report (2003), vol 8, ch 12; Chris Powell, Phoenix Activities in Australia Practical Issues Faced by Liquidators (2008) 9(4) Insolvency Law Bulletin 70; Murray Roach, Combating the Phoenix Phenomenon: An Analysis of International Approaches (2010) 8(2) ejournal of Tax Research 90. Australian Government, Treasury, Action Against Fraudulent Phoenix Activity Proposals Paper, (2009) 5 ( 2009 Phoenix Proposals Paper ). Corporations Amendment (Phoenixing and Other Measures) Act 2012 (Cth); Tax Laws Amendment (2012 Measures No 2) Act 2012 (Cth) and the Pay As You Go Withholding Non-Compliance Tax Act 2012 (Cth). The Corporations Amendment (Similar Names) Bill 2012 did not pass the exposure draft stage. The Corporations Amendment (Phoenixing and Other Measures) Act 2012 (Cth) allows, but does not require, ASIC to wind up dormant companies but does not punish those involved in phoenix activity in any way. The Act also introduced a new insolvency notices website. See further Helen Anderson, The Proposed Deterrence of Phoenix Activity: An Opportunity Lost? (2012) 34 Sydney Law Review 411. The director penalty notice (DPN) regime, amended in 2012 by the tax legislation above n 10, is complex and beyond the scope of this paper. It does nothing to tackle phoenix activity in general; the imposition of personal liability on directors is only in relation to certain unremitted withholding taxes and superannuation, and only in limited circumstances. PriceWaterhouseCoopers, Phoenix Activity: Sizing the Problem and Matching Solutions (Report Prepared for the Fair Work Ombudsman, June 2012), iii. Ibid Phoenix Proposals Paper, above n 9, 2 [1.1.2].

5 2014] PHOENIX ACTIVITY & THE LIABILITY OF THE ADVISOR 475 the group. If Oldco owns no assets and the employees are to be dismissed, 15 the company is liquidated and there is nothing to be transferred to Newco. Indeed, such companies sometimes remain unliquidated but inactive, 16 because creditors may estimate the cost of a liquidation to exceed the amount they will recover from the company. Newco simply contacts Oldco s customers and business continues seamlessly. Because the contribution of the advisor may be indiscernible here, it will not be considered further by this article. Despite its name, in the case of basic phoenix activity through successor companies, there is usually a last-minute flurry of paperwork. This is where the advisor s role is critical. A second company takes over the business of the first. To incorporate Newco, the director can apply directly to ASIC by completing Form 201, which can be accessed from ASIC s website; 17 or a director may get assistance from an advisor, who could be a lawyer or accountant. Either way, few details are required and incorporation takes place routinely once the form is submitted and the fee paid. Importantly, no questions are asked about prior company history. However, professional assistance from an insolvency practitioner will be required where Oldco is placed into voluntary administration or liquidated, and its assets are bought by either Oldco s current owners or Newco. 18 In providing advice and conducting this work, the insolvency practitioner becomes an officer of the company and has a duty to achieve the best return for Oldco s creditors as the result of powers and responsibilities imposed under the Corporations Act. 19 These duties include acting with care and diligence, 20 acting in good faith in the best interests of the company and for a proper purpose, 21 and not misusing their position to make a gain for themselves or someone else, or cause a detriment to the company. 22 Where an insolvency practitioner transfers assets owned by Oldco to Newco for less than their proper market value, each of these duties is likely to be breached. At the conclusion of the administration, the insolvency practitioner is required to report to ASIC on the outcome. 23 These duties and the reporting obligation would appear to give the insolvency practitioner a strong incentive not Assets may be owned by other companies within the group, or leased from external third parties. These are known as dormant companies. ASIC, Form 201: Application for Registration as an Australian Company (12 March 2014) <http://www.asic.gov.au/asic/asic.nsf/asic+formsdisplayw?readform&code=201> Powers are only given to liquidators to conduct liquidations: Corporations Act s 477. Only certain qualified people, such as qualified accountants and members of accounting professional bodies, may apply to become liquidators: ASIC, External Administration: Liquidator Registration, Regulatory Guide 186, 30 September 2005, [7]. Application for registration as a liquidator is made to ASIC pursuant to the Corporations Act s 1279(1)(b). The insolvency practitioner becomes an officer of the company (see Corporations Act s 9) and is therefore subject to the same duties as directors under pt 2D.1. In relation to liquidators, see generally Corporations Act pt 5.4B div 2, pt 5.6 div 3; in relation to administrators, see Corporations Act pt 5.3A divs 3 4. Ibid s 180(1). Ibid s 181(1). Ibid s 182(1). Ibid ss 438D, 533. Reporting is via Form EX01: ASIC, Form EX01: Schedule B of Regulatory Guide 16 Report to ASIC under s422, s 438D or s 533 of the Corporations Act 2001 or for Statistical Purposes (17 January 2011) <http://www.asic.gov.au/asic/asic.nsf/asic+formsdisplayw? readform&code=ex01>.

6 476 SYDNEY LAW REVIEW [VOL 36:471 to become involved in any impropriety and, as stated earlier, it is probable that the vast majority do not. 24 In contrast to insolvency practitioners, lawyers and accountants who formulate, advocate and even carry out a fraudulent phoenix scheme are likely to escape characterisation as officers. They will only be considered officers of the company where they are, for example, a person who participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation or who has the capacity to affect significantly the corporation s financial standing. 25 However, it is probable that, in many cases, the advisor s involvement in management will fail to be sufficiently substantial or significant to satisfy these requirements. 26 Moreover, in many situations, the lawyers will simply be retained to advise the Newco or its directors, rather than the directors of Oldco, even though those individuals are one and the same. Here, the status of each of the companies as separate legal entities poses challenges in framing an appropriate action against the advisor. Similarly, the accountability of the legal practitioner or accountant who concocts a fraudulent phoenix scheme, but who leaves the implementation to one or more other, possibly unwitting, professionals, presents particular difficulties for both detection and enforcement. A number of allegations of fraudulent phoenix activity have found their way to court under a range of different mechanisms. For example, criminal action was taken against Greig Heilbronn, the director of a company with substantial sales tax liabilities, who stripped the company of its assets and transferred them to another company, and then to a third company. On each occasion, the same business was carried under the same trading name. A proper price was not paid for the assets and no effort was made to ensure that liabilities and legal obligations under the predecessor to the Corporations Act had been met. 27 Other corporate law examples of phoenixing include the well-known breach of duty Note also that those insolvency practitioners who are members of the Australian Restructuring Insolvency and Turnaround Association (ARITA) (formerly the Insolvency Practitioners Association of Australia) are bound by the Code of Professional Practice for Insolvency Practitioners. Principle 2 of the Code requires the insolvency practitioner to be independent, and the practitioner must complete a Declaration of Independence, Relevant Relationships and Indemnities (DIRRI) before taking the insolvency appointment. In addition, a requirement has been added to the latest version of the Code relating to referrals. A practitioner must disclose the referrer s name and their firm s name. The Code also says that the practitioner should disclose in the DIRRI any connection to the insolvent person: ARITA Code [6.6]. The practitioner must also declare in the DIRRI that no information or advice, beyond that outlined in the DIRRI, was provided to the Insolvent, officers of the Insolvent (if the Insolvent was a company) or their advisors: ARITA Code [6.8.1B]. Corporations Act s 9 (definition of officer ). See Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd (2010) 238 FLR 384, 412 [126] (White J): [P]ara (b)(ii) [of the Corporations Act s 9, definition of officer ] should be taken as referring to a person who, in his or her management of the affairs of the corporation, has the capacity to affect significantly the corporation s financial standing. It does not refer to a person who has that capacity as a third party but is not involved in the management of the corporation s affairs. R v Heilbronn (1999) 30 ACSR 488.

7 2014] PHOENIX ACTIVITY & THE LIABILITY OF THE ADVISOR 477 cases, Grove v Flavel 28 and McNamara v Flavel. 29 The Australian Taxation Office (ATO) has also brought cases. 30 A series of apparent phoenix transactions were pursued by the Fair Work Ombudsman in relation to a New South Wales abattoir business controlled by Stuart Ramsey through a number of different companies. In 2002, Mr Ramsey closed his business, terminated his staff and then re-opened the business, refusing to re-employ former employees who were union members. This was a breach of s 298K of the Workplace Relations Act 1996 (Cth). 31 In 2011, in Fair Work Ombudsman v Ramsey Food Processing Pty Ltd, 32 the Court found that Mr Ramsey had attempted to avoid Ramsey Food Processing Pty Ltd being legally liable for workers entitlements by setting up a company called Tempus Holdings to employ workers and supply them to Ramsey Food Processing to work at the abattoir in a labour-hire arrangement. After the employment of some abattoir workers was terminated, Tempus Holdings was drained of funds and placed into liquidation in an effort to prevent the workers from recovering their termination entitlements. In another case, the sole director of a transport company was fined over $42,000 in relation to the underpayment of an employee where the Oldco employer was placed in liquidation and the business restructured to effectively deny the employee the capacity of suing [Oldco] with any real expectations of recovering the amount owing. 33 Examples also exist of companies engaging in phoenix activity to avoid the effect of industrial instruments Grove v Flavel (1986) 43 SASR 410. One company in a group was likely to become insolvent to the detriment of other companies in the group who were its creditors. Grove, as director, caused a series of cheques to be written, cancelling the indebtedness of the financially precarious company. McNamara v Flavel (1988) 6 ACLC 802. McNamara transferred a valuable asset for no consideration from his insolvent company to another company that he controlled. See, eg, Deputy Commissioner of Taxation (Cth) v Casualife Furniture International Pty Ltd (2004) 9 VR 549, where the ATO sought to wind up Newco on the just and equitable ground pursuant to the Corporations Act s 461(1)(k); the ATO s actions against fraudulent phoenix activity (the nature of which are unspecified) are noted in Commonwealth of Australia, Official Committee Hansard, Joint Committee of Public Accounts and Audit, 23 October 2009, 24. See also Australian Taxation Office, SA Labour Hire Companies now in ATO Sights (Media Release, 2013/06, 27 February 2013) <https://www.ato.gov.au/media-centre/media-releases/sa-labour-hire-companiesnow-in-ato-sights/>, where it was reported that search warrants had been executed on premises associated with 80 South Australian based labour hire companies operating in the agricultural industry suspected of phoenix company behaviour. The facts are recounted in McIlwain v Ramsey Food Packaging Pty Ltd (2006) 154 IR 111, [11]. Fines were imposed on four companies controlled by Mr Ramsey. Compensation was ordered in a subsequent judgment: McIlwain v Ramsey Food Packaging Pty Ltd (No 4) (2006) 158 IR 181. Fair Work Ombudsman v Ramsey Food Processing Pty Ltd (2011) 198 FCR 174; see also Fair Work Ombudsman v Ramsey Food Processing Pty Ltd (No 2) [2012] FCA 408 (20 April 2012). Buchanan J imposed penalties imposed on the company for breach of breach of s 235 of the Workplace Relations Act 1996 (Cth) and on Mr Ramsey for being knowingly concerned in the company s breach. Fair Work Ombudsman v Foure Mile Pty Ltd [2013] FCCA 682 (28 June 2013), [34]. See, eg, Australasian Meat Industry Employees Union v Aziz [1998] FCA 925 (28 July 1998); Burswood Catering and Entertainment Pty Ltd v Australian Liquor, Hospitality and Miscellaneous Workers Union,WA Branch (2002) 131 IR 424.

8 478 SYDNEY LAW REVIEW [VOL 36:471 B Civil Liability for Phoenix Activity? The cases discussed above all involved regulators bringing a variety of different actions against companies or directors engaged in deliberate phoenix activity. None involved advisors. The difficulties of fixing advisors with civil liability for involvement in fraudulent phoenix activity are demonstrated well by the only apparent case in which this has been attempted: Dae Boong International Pty Ltd v Dae Boong Australia Pty Ltd. 35 In Dae Boong, Oldco, through its liquidator, sued its barrister for negligent advice. The insolvent company was facing certain winding up on the basis of an unsatisfied statutory demand. Advice was sought from a barrister, Mr Gray, who faxed a document including the following statements to the company s solicitors: To avoid the control of the company and its assets passing into the hands of a liquidator on 8 March 2005, I believe the company has available to it the following options only. No later than 10 am on 8 March, the company must transfer by way of sale the whole of the company s undertaking and assets to a new company. If the new company assumes liability for all the existing company s debts (except the judgment debt on which the winding up summons is based) then there would be no need for any significant sum of money to change hands, but the transaction must be completed (ie transfer of title of assets be actually completed) by 10 am Tuesday 8 March; 36 Windeyer J denied the negligence claim on a number of factual bases, including that Oldco had suffered no loss. 37 He held that there was insufficient evidence to show the transaction was fraudulent, and if it was fraudulent, he found that it could have been set aside by the liquidator. 38 He also found that the plaintiff had not shown that it was the responsibility of the barrister to advise that the contract price be market value and that money actually change hands, and to warn that the transactions had to be bona fide and for value and otherwise might be set aside as preference or as uncommercial transactions. 39 Unfortunately, in saying I do not consider that these matters are made out. It is not shown to have been the responsibility of the barrister to give such advice, 40 his Honour did not make clear whether it is the responsibility of a barrister to give such advice but that on this occasion, the evidentiary burden had not been discharged, or whether it is not the responsibility of the barrister to give such advice. In contrast, his Honour went on to say [the barrister] had not advised that security should be taken for the indemnity [but] I do not consider that it was part of his responsibility [to do so] Dae Boong International Pty Ltd v Dae Boong Australia Pty Ltd [2008] NSWSC 357 (15 April 2008) ( Dae Boong ). Ibid [3], [5]. The Court noted at [4] that a second option dealt with the possibility of appointing an administrator that need not be considered further because nothing was done to bring that about. Ibid [10]. Ibid [11]. Ibid [12] [15]. Ibid [15]. Ibid.

9 2014] PHOENIX ACTIVITY & THE LIABILITY OF THE ADVISOR 479 As Part IV below will note, it is regrettable that the Court failed to clarify the professional obligations of lawyers to their client Oldco. While it is understandable that a claim brought in negligence must fail if the necessary elements are not made out, the absence of any indication of the standard of care required of legal advisors makes later negligence claims more risky to pursue and therefore less likely to be undertaken. 42 This puts pressure on other parts of the regulatory framework to discourage this behaviour. One way to do this is through the imposition of accessory liability on advisors for breaches of the law by others. C Accessory Liability Justice Black succinctly sums up the role and importance of accessory liability thus: Accessorial liability should tend to encourage persons within its reach to seek to identify and prevent any breach of the Corporations Act. To the extent that accessorial liability creates an incentive for other parties to withhold assistance to contravening conduct, it presumably reduces the likelihood of that conduct. There is an overlap between accessorial liability and a focus on the role of gatekeepers, both within the corporation and outside it, such as directors and officers, legal representatives, investment bankers and auditors, which has received particular emphasis in the enforcement strategy of the Australian Securities and Investments Commission. 43 Both the Corporations Act and the Fair Work Act provide for accessory liability. 44 Section 79 of the Corporations Act states: 79 Involvement in contraventions A person is involved in a contravention if, and only if, the person: (a) has aided, abetted, counselled 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 Note that unlike the Corporations Act ss 181 3, which provide expressly for liability for those involved in the director or officer s particular breach of duty, the statutory duty of care (s 180), has no such provision so there is no scope for accessory liability as defined by s 79. Justice Ashley Black, Directors Statutory and General Law Accessory Liability for Corporate Wrongdoing (2013) 31 Company and Securities Law Journal 511, (citations omitted). Note that those who knowingly assist in breaches of fiduciary duty under the general law can also be liable to pay equitable compensation under the second limb of the rule in Barnes v Addy (1874) LR Ch App 244. See, eg, Hon William Gummow, Knowing Assistance (2013) 87 Australian Law Journal 311. For a discussion of this liability following the Western Australian Bell judgments (the Supreme Court in Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) (2008) 39 WAR 1; the Court of Appeal in Westpac Banking Corp v Bell Group Ltd (in liq) (No 3) (2012) 44 WAR 1) see Hon T F Bathurst and Sienna Merope, It Tolls for Thee: Accessorial Liability after Bell v Westpac (2013) 87 Australian Law Journal 831,

10 480 SYDNEY LAW REVIEW [VOL 36:471 Liability for a specified breach is then imposed through the particular contravention. An example is the Corporations Act s 182(1), which prohibits company directors, officers and employees from making an improper use of their position to gain an advantage for themselves or someone else, or cause detriment to the corporation. This is the clearest section under which fraudulent phoenix activity is proscribed. According to s 182(2), [a] person who is involved in a contravention of subsection (1) contravenes this subsection. The civil penalty provisions of pt 9.4B then contain the relevant consequences for those in contravention. Injunctions can also be sought under s 1324(1) of the Act against those who aid, abet, counsel, procure, induce, conspire or are in any way, directly or indirectly, knowingly concerned in, or party to, the contravention by a person of this Act. 45 Section 550 of the Fair Work Act allows for accessory liability for those involved in breaches of the Act in almost identical terms to s 79 of the Corporations Act. 46 The question that arises from these provisions is, how involved does the accessory have to be? The elements of both s 79 and s 550 are alternatives, and Bednall and Hanrahan note that while there is some disagreement on the point, the better view is that paragraph (c) is broader than paragraph (a). 47 As a result, being knowingly concerned in, or being a party to, a contravention, does not require the accessory to have aided, abetted, counselled or procured the contravention. The High Court of Australia in Yorke v Lucas 48 held that each of the four limbs of this sort of accessory provision require knowledge of the essential elements of the contravention by the accessory, 49 although it is not necessary for them to know that the action was unlawful. 50 Both Acts make it clear that an omission is sufficient, although the express inclusion of the words by act or omission was probably not necessary, 51 as an accountant was found liable under trade practices legislation where the word was absent because he remained silent when false statements were made to the purchasers of a business. 52 In addition, there is no requirement of causation, such that the act of the principal wrongdoer would not have occurred but for the involvement of the accessory For the limits of s 1324, see the Queensland Court of Appeal decision in McCracken v Phoenix Constructions (Qld) Pty Ltd [2012] QCA 5 (9 February 2012). In addition, s 550(1) also contains the contravention element, by saying that [a] person who is involved in a contravention of a civil remedy provision is taken to have contravened that provision. Tim Bednall and Pamela Hanrahan, Officers Liability for Mandatory Corporate Disclosure: Two Paths, Two Destinations? (2013) 31 Company and Securities Law Journal 474, 489 and references cited therein. Yorke v Lucas (1985) 158 CLR 661. This was an action under the Trade Practices Act 1974 (Cth) ( TPA ). Nonetheless, courts have held that decisions interpreting the TPA are also applicable to the Corporations Act. See HIH Insurance Ltd (in liq) v Adler [2007] NSWSC 633 (22 June 2007), affirmed General Reinsurance Australia Ltd v HIH Insurance Ltd (in liq) (2008) 65 ACSR 626. Yorke v Lucas (1985) 158 CLR 661, 667, relying on Giorgianni v The Queen (1985) 156 CLR 473. See a thorough discussion of the relevant principles and cases in Dietrich, above n 4. Dietrich, above n 4, 120. Ibid. Sutton v A J Thompson Pty Ltd (in liq) (1987) 73 ALR 233. HIH Insurance [2007] NSWSC 633 (22 June 2007), [20] (Einstein J).

11 2014] PHOENIX ACTIVITY & THE LIABILITY OF THE ADVISOR 481 There has been some recent judicial and scholarly commentary questioning the scope of the liability of accessories to corporate wrongdoing, especially relating to disclosure and misstatements. 54 This area is particularly problematic: the principal may be the company; the company s contravention may not require proof of intention; and the accessory s conduct may involve an omission or failure to remedy another s default. These difficulties do not exist in the case of fraudulent phoenix activity where the advisor consciously promotes a fraudulent phoenix scheme, thus making them an accessory, under s 79, to the director s breach of duty under the Corporations Act. Even where the accessorial liability is to a company s contravention of the Fair Work Act, the deliberateness of the advisor s behaviour in relation to the fraudulent phoenix activity is what makes, and ought to make, the advisor liable. Applying the accessory liability rules to the situation of an advisor consulted by the director of a failing company, it is not enough for the advisor simply to know that the director plans to close their existing business and start a new one, after buying the assets of Oldco through an external administrator. To be an accessory, the advisor must know, for example, that the director is misusing their position in some way to avoid the creditors of Oldco receiving whatever return they would otherwise receive if the company s assets were sold in an arm s length transaction. This knowledge requirement ensures that advisors will not be liable for innocently or unintentionally aiding a wrongdoer. Nonetheless, the accessory cases make it plain that the advisor need not be the architect of the scheme, and a failure to tell a director that what they planned was an improper use of their position could result in accessory liability. 55 In our opinion, it is highly likely that advice from a lawyer or accountant would have been needed in order to pursue the phoenix schemes outlined in Part IIA above, yet in none of the published cases is there any reference to an advisor or any evidence of the regulator or the court turning their minds to the role that advisors might have played in encouraging their clients to engage in phoenix activity. Even if, in a particular case, the evidence is unsatisfactory or the court ultimately concludes that the elements of a cause of action are not all satisfied, it would be useful for courts to recognise, through obiter dicta comments, the availability of an action against the advisor as an accessory where there is the requisite involvement. D Professional Discipline Even where a plaintiff is unable to prove they suffered loss in a civil action for negligence against their advisor, or where an advisor does not meet the statutory See, eg, Bednall and Hanrahan, above n 47; Michael Pearce, Accessorial Liability for Misleading or Deceptive Conduct (2006) 80 Australian Law Journal 104; Angie Zandstra, Jason Harris and Anil Hargovan, Widening the Net: Accessorial Liability for Continuous Disclosure Contraventions (2008) 22 Australian Journal of Corporate Law 51; Australian Securities and Investments Commission v Maxwell (2006) 59 ACSR 373, [92] (Brereton J). Contrast the need to establish causation as an element in a civil action for negligence: see discussion of Dae Boong [2008] NSWSC 357 (15 April 2008) in Part IIB above.

12 482 SYDNEY LAW REVIEW [VOL 36:471 definition for accessory liability under legislation such as the Corporations Act or Fair Work Act, advisors may still face disciplinary action for their conduct. The position of an insolvency practitioner is perhaps clearer than that of a lawyer. As stated previously, 56 the insolvency practitioner becomes an officer of the company and is therefore subject to the same duties as directors. This includes acting with care and diligence, in good faith in the best interests of the company, and for a proper purpose. Where an insolvency practitioner is found in breach of those duties, professional disciplinary action can follow, in addition to any prosecution or civil action against the practitioner. 57 On the other hand, lawyers will only be deemed to be an officer of the company if the court concludes that the lawyer s client was Oldco. It is the officers of Oldco who are breaching their duty to that company by improperly transferring company assets, and the lawyer will only be an officer of Oldco by participating to a significant degree in its decisions. 58 Professional discipline of lawyers can occur in one of two ways. The first occurs where a statutory regulator believes a lawyer is no longer a fit and proper person to hold a practising certificate and takes administrative action to withdraw that certificate and hence the lawyer s right to practise. 59 Any disciplinary action that removes a lawyer s right to practise must be recorded on a public disciplinary register, 60 but it appears that details of the lawyer s conduct and the reasons for removing their right to practise will only come to public attention if the lawyer appeals the decision. 61 The second form of professional discipline occurs when a formal, public disciplinary hearing is brought against a lawyer. 62 In NSW, this follows a written complaint against a lawyer to the Legal Services Commissioner and formal investigation by the Legal Services Commissioner or the Law Society of NSW. 63 Disciplinary action in this instance requires a formal finding of professional Above n 19. The ARITA Code, above n 24, contains detailed rules about Integrity, Objectivity and Impartiality (pt C.5) as well as Duties and Obligations (pt A2.5) The ARITA Constitution allows for the investigation of complaints or concerns, the conduct of disciplinary proceedings, and the suspension or termination of membership: [16]. See generally for examples of disciplinary action by ARITA, with links to statutory regulator action: ARITA (Australian Restructuring Insolvency and Turnaround Association) Making a Complaint About an ARITA Member (2014) <http://www.arita.com.au/insolvency-you/complaints-and-member-discipline>. See above n 25 and accompanying text. See, eg, Legal Profession Act 2004 (NSW) ss 42, 48, 60, 66. In NSW, the power to issue practising certificates and suspend and cancel practising certificates is vested in the Law Society of NSW. Legal Profession Act 2004 (NSW) s 577. See, eg, the entry in the disciplinary register for a solicitor Barakat, whose practising certificate was suspended by the Law Society of NSW: Office of the Legal Services Commissioner (NSW), Register of Disciplinary Action (26 June 2014) <http://www.lawlink.nsw.gov.au/olsc/nswdr.nsf/lucomplaintsbysurname/ecbc6c5454a9e19c CA257C590076D4E0?OpenDocument>. Appeals are pursuant to the Legal Profession Act 2004 (NSW) s 75. This was previously by way of an appeal to the Administrative Decisions Tribunal (NSW). From 1 January 2014, appeals are to the NSW Civil and Administrative Tribunal. Examples of such appeals can be seen in Barakat v Law Society of NSW [2013] NSWADT 271 (16 May 2013); Weston v Law Society of NSW [2013] NSWSC 94 (27 February 2013). In NSW, a discipline application can be brought against a lawyer by either the Law Society of NSW or the Legal Services Commissioner. Legal Profession Act 2004 (NSW) s 505.

13 2014] PHOENIX ACTIVITY & THE LIABILITY OF THE ADVISOR 483 misconduct 64 or unsatisfactory professional conduct 65 against a lawyer. Neither form of professional discipline requires a finding that the lawyer s conduct caused a client to incur loss. In that sense, they have advantages over civil liability as a way to regulate lawyers who encourage or facilitate phoenix activity. III Litigation Involving Accessory Liability This Part considers two types of accessory liability relevant to fraudulent phoenix activity. The first type is where a person is an accessory to another individual s breach of the law, and is illustrated by Somerville. The second type is where a person is an accessory to a company s breach of the law, and is shown by a range of actions brought under the Fair Work Act. A ASIC v Somerville Somerville is a case dealing with both accessory liability and fraudulent phoenix activity. The legal profession has recognised it as an unprecedented 66 landmark authority 67 and it represents the only occasion on which a lawyer has been bought to account in this way. The decision was also noted by the insolvency profession. 68 ASIC took civil penalty action against Mr Somerville as well as eight directors of companies advised by him, and sought declarations that the directors had acted in breach of Corporations Act ss 181(1), 182(1) and 183(1). The directors consented to such declarations, 69 but Windeyer AJ made it clear that he understood the real aim of ASIC is directed against Somerville as advisor to deter other lawyers in the future. 70 The facts of Somerville provided a very strong case for ASIC. The action related to advice provided to directors by Mr Somerville in relation to 15 Oldco companies that were either insolvent or likely to become insolvent. On each occasion Mr Somerville wrote a letter of advice to the director 71 in very similar 72 terms. After pointing out the disadvantages and impracticalities of entering a scheme of arrangement or selling the business on the open market, the letters advised the directors that the only viable alternative open is to transfer the business to a solvent entity 73 and to pay Oldco for assets transferred to Newco See, eg, ibid ss See, eg, ibid ss 496, 498. Lawyer liable as accessory to directors breaches of duty, Lander & Rogers Insurance ebulletin 28 September 2009 <http://www.landers.com.au/publications/insurance/publicationdetail/ tabid/332/articleid/220/default.aspx>. Farah Meldrum and Robert Finnigan, Phoenix Companies and Solicitors Duties, Yeldham Price O Brien Lusk, October 2009 <http://www.ypol.com.au/articles_oct09_phoenixcompanies.html>. See, eg, Martin Hirst, On the Beat: the Bite of the Phoenix and Betting on a Sure Thing (2009) Insolvency Law Bulletin 37. One director did not consent directly, but indicated to the Court that he accepted that declarations would be made: Somerville (2009) 77 NSWLR 110, 113 [5]. Ibid 113 [6]. Ibid 114 [8]. Most companies were sole director companies. Ibid 114 [8]. The letters only varied in relation to the stated fee for a deed administrator and the consideration for the transfer of assets from Oldco to Newco. Ibid Annexure A.

14 484 SYDNEY LAW REVIEW [VOL 36:471 with V class shares. These shares carried the right to receive dividends from Newco up to the agreed value of the assets transferred. However, the Court found that Mr Somerville and the directors considered payment of any such dividends optional or discretionary [and] there was no proper purpose in any of the transactions other than to keep the benefit of the assets in another company without the burden of liabilities. 74 Mr Somerville s involvement was unquestioned. In addition to the encouraging letters of advice that advised directors of the only way forward, once clients gave instructions to proceed, Mr Somerville prepared the necessary agreements between Oldco and Newco, registered Newco, prepared Newco s returns and resolutions for the V class shares and made sure Oldco was wound up at the right time so as to avoid exposing the directors to personal liability. 75 Hence, Mr Somerville was held liable under ss 181(2), 182(2) and 183(2) as a person involved in the directors breaches of duty. 76 Windeyer AJ summarised the position in the following way: In terms of s 79 [Mr Somerville] advised on and recommended the transaction which breached the sections in questions, he prepared or obtained all documents necessary to carry out the transaction, he arranged execution of the documents in all cases with knowledge of the relevant facts. I think it clear that he aided, abetted, counselled and by carrying out the necessary work procured the carrying out of the transaction. There was a direct causal connection between his involvement and the breach. I find the transactions would not have taken place but for his involvement. 77 It will be recalled that the Court considered it obvious enough that ASIC initiated the case against Mr Somerville to deter other lawyers from advising and assisting directors in phoenix activity. 78 However, the judgment does little to send a message of guidance or deterrence to the legal profession generally. Because Mr Somerville could be described as a one-stop shop for the directors he advised, it was not necessary for the Court to carefully elaborate on the limits of acceptable advice by a legal practitioner. Nonetheless, there were some judicial comments as to whether advice alone might lead to liability as an accessory under s 79. Mr Somerville s counsel had submitted that that would be extraordinary. 79 The Court responded to this submission in ambiguous terms. While conceding that it may be extraordinary in a normal case, Windeyer AJ said this depended on what advice was given: 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 Ibid [42]. Ibid 126 [47]. Ibid 126 [42] [44]. Ibid 126 [48]. Ibid 113 [6]. Ibid 126 [49]. Ibid.

15 2014] PHOENIX ACTIVITY & THE LIABILITY OF THE ADVISOR 485 This statement presents difficulties. First, the reference to in other words is misleading: the second limb is not a restatement of what is said in the first limb. The second limb states what occurred in Somerville itself: not only did Mr Somerville advise, but he also did all the work necessary to carry out the phoenix activity. Contrast that with the comments in the first limb. Although obiter dicta, they appear to reflect Windeyer AJ s view that, in an appropriate case, advice alone could amount to accessorial liability as defined by s 79: it would be sufficient if the advice brings about the breach, that is, if there is a causal connection between the advice and the phoenix activity. The apparent qualifications in the second limb ( and the solicitor does all the work ) opens the way to read down and even, potentially, to game the decision. In our opinion, this muddies the waters regarding the limits of acceptable advice. Windeyer AJ adjourned consideration of the penalty because ASIC had not at that stage addressed what orders, if any, should reflect Mr Somerville s own status as director of an incorporated legal practice. In separate proceedings a few weeks later, 81 ASIC sought Mr Somerville s disqualification as a director for 12 years. However, Windeyer AJ considered that excessive and unnecessarily punitive and noted that [t]o some extent deterrence and punishment are achieved by the publicity resulting from this case and the eventual costs order. 82 He instead disqualified Mr Somerville from managing corporations for six years, 83 which prevented him from continuing as a director of his incorporated legal practice. His Honour spoke of the need for punishment and deterrence: I accept that the considerations of punishment and general deterrence should be considered together, yet it is important to send a message to the public and those closely engaged in corporate activity that conduct resulting in obvious breaches of the law which is likely to cause disadvantage to creditors of insolvent companies and which deprives them of their statutory rights will not be countenanced and this conduct is in general made worse by dressing it in misleading garments. 84 Despite this, Windeyer AJ had already acknowledged that Mr Somerville would still make his living as a solicitor: So far as hardship to Mr Somerville is concerned, it has not been put that he is unable to continue to practice [sic] as a solicitor either as a sole practitioner or in partnership. His corporate structure is one of choice but not an essential choice. 85 These remarks are hard to reconcile. On the one hand, Windeyer AJ expresses a desire to send a message to the public that this sort of behaviour will not be countenanced. 86 On the other hand, he considered a 12-year disqualification from managing corporations excessive, even though he acknowledges that depriving ASIC v Somerville (No 2) [2009] NSWSC 998 (24 September 2009). Ibid [36]. Ibid [39]. Ibid [35]. Ibid [34]. Ibid [35].

16 486 SYDNEY LAW REVIEW [VOL 36:471 Mr Somerville of the ability to act as a director of the corporate legal practice would not cause him real hardship. 87 However, a third hearing was held before Barrett J seeking a stay on the disqualification order. 88 This was because by that time Mr Somerville s practising certificate was in immediate and substantial danger of cancellation 89 the Law Society of NSW had served notice 90 requiring him to show cause why he remained a fit and proper person to hold a practising certificate. 91 It will be recalled that questions of character are critical in a professional discipline context. In the penalty hearing (Somerville (No 2)), Windeyer AJ had made it clear that he did not believe Mr Somerville s sworn affidavit evidence, 92 considered the arrangements a subterfuge 93 and Mr Somerville s conduct serious. 94 Indeed, in the penalty hearing, Windeyer AJ had noted: He continued to give that advice even after he knew that ASIC was conducting the investigations which brought about these proceedings. He agreed that he had been told by Mr Krejci, one of the accountants involved in liquidating some of the companies, that Mr Krejci considered the transactions to be uncommercial but he thought that was incorrect. He said to Mr Krejci that no one had challenged the transactions and until the Court proves otherwise I will continue to promote them. 95 Barrett J denied the request for the stay on the basis that the fact that a stay or like order had been granted is not shown to be something that would or could or might have an influence [on the disciplinary proceedings]. 96 Yet it appears that despite the findings of Windeyer AJ as to Mr Somerville s character, no disciplinary action ever eventuated against Mr Somerville, either by the Law Society of NSW or the Legal Services Commissioner. 97 Part IV below considers the message sent by the Somerville decisions and the lack of subsequent disciplinary actions, and asks whether they achieve ASIC s objective in bringing the proceedings in the first place. B Labour Law Actions As the cases noted above in Part IIA show, it is possible for actions in relation to fraudulent phoenix activity to be brought by other regulators and under other mechanisms. The Fair Work Act, unsurprisingly, does not contain any provisions Ibid [34], [36]. Or alternatively, order granting leave under s 206G to manage a particular company: ASIC v Somerville [2009] NSWSC 1149 (27 October 2009), [1]. Ibid [7]. Ibid [10]. It seems likely that this arose as a result of the publicity surrounding the case. Ibid [7]. This notice was served pursuant to the Legal Profession Act 2004 (NSW) s 61. ASIC v Somerville (No 2) [2009] NSWSC 998 (24 September 2009), [31]. Ibid. Ibid [35] Ibid [30]. ASIC v Somerville [2009] NSWSC 1149 (27 October 2009), [8]. Any cancellation of his practising certificate would need to have been recorded on the Register of Disciplinary Action: Legal Profession Act 2004 (NSW) s 577. The register can be found here: <http://www.lawlink.nsw.gov.au/olsc/nswdr.nsf>.

17 2014] PHOENIX ACTIVITY & THE LIABILITY OF THE ADVISOR 487 requiring directors to act in the best interests of the company or to avoid misusing their positions to the detriment of the company. Rightly, this is the domain of the Corporations Act. However, there are strict liability provisions requiring employers to abide by modern awards and enterprise agreements. 98 Failure to pay wages and other employee entitlements are therefore breaches of the Fair Work Act. As a result of the separate legal entity principle, where the employer is a company, it is the company that is subject to the requirement to pay the entitlements, not the director who controls it. However, liability can be imposed on the director or other corporate officer 99 where they are found to be an accessory to the company s breach. 100 This provides another mechanism against fraudulent phoenix activity causing employees to miss out on their entitlements. This is reasonably straightforward in companies with one director who is also the sole shareholder. 101 Their knowing involvement in the company s failure to pay is easy to establish. Indeed, in circumstances such as these, it is routine for the FWO to seek penalties against not only the company in breach, but also its director. 102 This appears to remove the advantage of liquidating the employer company as a means of avoiding the imposition of the penalty. 103 However, the penalties levied against accessories are set at one fifth of the penalty applicable to the employer. 104 Compounding this is the fact that the FWO only seeks compensation with respect to the lost entitlements from the employer company, rather than from the accessory, despite the Act apparently allowing a compensation remedy to be sought from both. 105 As a result, it is still beneficial to the director to liquidate Oldco and resurrect the business in another guise, even if they incur a modest penalty in doing so. Clearly it would be desirable for the FWO to broaden their claims against accessories to include seeking a compensation remedy. This would make it less attractive for company owners to liquidate their businesses to escape employee entitlement debts. In AMWU v Beynon, a recent case involving manufacturer Forgecast Australia Pty Ltd, the Federal Court acknowledged that two trade unions had standing to seek orders that a director and the new company he created Fair Work Act ss 45, 50. Note, in Fair Work Ombudsman v Centennial Financial Services [2011] FMCA 459 (21 June 2011), a human resources manager was also held liable as an accessory to the company s contraventions of the Fair Work Act in underpaying employees their leave entitlements, and penalties were ordered against him. This was not a phoenix activity case, although the company was liquidated. See Fair Work Act s 550, above n 45 and accompanying text. In the phoenix context, see, eg, Fair Work Ombudsman v Foure Mile Pty Ltd [2013] FCCA 682 (28 June 2013), above n 33 and accompanying text. The outcomes of FWO litigation are available at Australian Government, Fair Work Ombudsman, Litigation <http://www.fairwork.gov.au/about-us/legal/pages/current-cases.aspx>. One of many examples is FWO v Aussie Junk Pty Ltd (In Liq) [2011] FMCA 391 (31 May 2011). Corporations Act s 471B. Fair Work Act s 546(2). The FWO s reluctance here appears to stem from the fact that the Explanatory Memorandum that preceded the Fair Work Act expressly denies the availability of a compensation remedy against accessories: Explanatory Memorandum, Fair Work Bill 2009 (Cth), [2177]. However, the Act itself clearly makes the remedy available: Fair Work Act s 545. See further Helen Anderson and John Howe, Making Sense of the Compensation Remedy in Cases of Accessorial Liability under the Fair Work Act, (2012) 36(2) Melbourne University Law Review 335.

18 488 SYDNEY LAW REVIEW [VOL 36:471 compensate employees for a breach of the civil remedy provisions under the Fair Work Act. 106 This finding therefore recognises that other parties who have standing to seek orders under the Act, the principal one being the FWO, would also be able to seek a compensation order against company directors as accessories to their company s breaches. However, AMWU v Beynon is significant for two other reasons relevant to this article. First, it deals with alleged phoenix activity, and second, it contains an extensive discussion about the circumstances in which accessory liability arises. The sole director of Forgecast, Mr Beynon, also controlled a company called Ideal Pty Ltd. Ideal was the largest secured creditor of Forgecast. Mr Beynon resolved that Ideal would appoint receivers to Forgecast. The receivers ran the Forgecast business for several weeks, then terminated it and made the employees redundant. Those employees did not receive the redundancy payments to which they were entitled under their industrial agreements. 107 Two unions alleged that this was an arrangement designed to allow Mr Beynon to run the business through a new entity, 108 and that Mr Beynon was an accessory to Forgecast s breach of the Fair Work Act. Mr Beynon then cross-claimed against one of the receivers, Stephen Dixon, who was in charge of the company at the time of its non-payment of those entitlements. Gray J agreed that Mr Dixon, as receiver, was in control of the company at the time that it breached the Act and not Mr Beynon. 109 Gray J concluded that despite Mr Beynon s assertions to the contrary, he always intended to buy back the business after the receivership and to shed staff whose entitlements would be met by the government-funded scheme, rather than by the defunct company. 110 However, Mr Beynon could only be an accessory to Forgecast s breach if he was linked in purpose 111 to Mr Dixon, who was, at the time of the employees dismissal, the company s directing mind and will. 112 Because Mr Dixon lacked the purpose of administering the company to enable Mr Beynon to remain in charge without paying entitlements, the unions claim failed. 113 Despite the case being decided in favour of Mr Beynon, and the claim against Mr Dixon being dismissed as a result, this is an important decision for two reasons. First, as noted above, it clarifies that compensation actions can be brought against accessories under the Fair Work Act. Second, it confirms that where the company director and external administrator are linked in purpose in a phoenix arrangement, both can be liable as accessories to the company s breach. In our Automotive Food Metals Engineering Printing And Kindred Industries Union v Beynon [2013] FCA 390 (1 May 2013), [21] ( AMWU v Beynon ). Ibid [1] [3]. Ibid [42] [43], [46]. The pleadings do not mention phoenix activity as such. Initially, Ideal was to purchase the assets, but later Mr Beynon incorporated a further company to buy the Forgecast assets. Ibid [49]. Ibid [59] [60], [68]. The scheme at the time was the General Employee Entitlements and Redundancy Scheme, known as GEERS. Relying on Construction, Forestry, Mining and Energy Union (CFMEU) v Clarke (2007) 164 IR 299, [26]. AMWU v Beynon [2013] FCA 390 (1 May 2013), [69]. Ibid [72].

19 2014] PHOENIX ACTIVITY & THE LIABILITY OF THE ADVISOR 489 opinion, the FWO should look further afield in seeking penalties or compensation from accessories to a company s breach of the Act. Where a legal or insolvency practitioner advises a company director to phoenix their company as a means of the company avoiding payment of employee entitlements, the advisor is linked in purpose and thus an accessory to that company s breach of the Act in the same way that Mr Somerville was an accessory to the directors breaches. In this context, the recent decision of the Federal Circuit Court in Fair Work Ombudsman v Jooine (Investment) Pty Ltd, in relation to an allegation of sham contracting, is significant: This can only be seen as a deliberate attempt to avoid the substantial and protective provisions of the FW Act. Consequently, the penalty made in this matter should be a strong and specific deterrent to Mr Lee and to others who seek to pursue this type of contacting versus employment structure. The deterrent should also extend to the advisors who have facilitated the orchestration of these scams, to prevent their further proliferation of such advice and facilitation. From a limited examination of the contract material and associated documentation, it appears to have been prepared by someone who was familiar with employment law within this country and with a deliberate intention to circumvent the legislative framework that has been put in place to protect vulnerable individuals from exploitation in a labour environment. It would seem unlikely that Mr Lee could have obtained this document and modified it for his own purposes and understanding to avoid the structures of labour law currently in operation. 114 It is noteworthy that the FWO did not take any action against the legal advisor in this case. The next part of this article will address what more the FWO might do to. IV Commentary This Part contains five topics of commentary on the investigation that has preceded it. First, it looks at ASIC s approach to enforcement as illustrated by the Somerville proceedings. Second, it considers the messages conveyed by Somerville. Third, it asks what else professional societies might do in educating and disciplining their members. Fourth, it looks at the role that the FWO and legal services regulators might play. Finally, it ponders the effect on company rescues of an increased emphasis on the actions of advisors. A ASIC s Approach to Phoenix Activity Enforcement As noted earlier, there are existing mechanisms to target fraudulent phoenix activity. While there is no provision in corporate law or elsewhere that expressly uses the term phoenix activity, the fraudulent form of the behaviour will always be a breach by the director of their duty to act in good faith in the best interests of 114 Fair Work Ombudsman v Jooine (Investment) Pty Ltd [2013] FCCA 2144 (20 December 2013), [100]. Sham contracting occurs where a person is wrongly engaged as an independent contractor where their relationship with their employer is properly one of employment, based on relevant indicia such as working for only one employer, working regular hours, and being unable to negotiate their own rate of pay.

20 490 SYDNEY LAW REVIEW [VOL 36:471 their company, and for a proper purpose, 115 and not to improperly use their position to make a gain for themselves or someone else, or to cause detriment to the corporation. 116 These were the provisions used in Somerville. A criminal prosecution can be launched under the Corporations Act s 184 where these duties have been breached with recklessness or intentional dishonesty. The former are civil penalty provisions under pt 9.4B of the Corporations Act and therefore easier to prove than a criminal prosecution. However, this does not mean that ASIC brings civil penalty actions in all, or even most, cases of fraudulent phoenix activity that come to its attention. ASIC s litigation policy makes it clear that the decision to commence litigation is a complex one and that to do so is the exception, rather than the rule. 117 ASIC prefers to disqualify directors for phoenix activity under its own power to do so, 118 rather than seek a more severe outcome through a court-ordered disqualification 119 or by bringing breach of duty action. 120 This is in accordance with the ideas of responsive regulation, 121 because it is quicker, cheaper and more certain than litigation and may lead to greater cooperation from those regulated because it inevitably leads to a lesser sanction on the director than would successful civil penalty proceedings. 122 However, of significance to the present discussion is the fact that a disqualification of the director as an administrative penalty necessarily means there is no public forensic examination of the role played by the director s advisors. The fact that ASIC brought an action against Mr Somerville as an advisor allowed for public scrutiny of the advice he gave. Yet having done so, ASIC only sought his disqualification and apparently did not apply for (and the Court did not order) Mr Somerville to compensate the creditors of the phoenixed companies, or to pay a pecuniary penalty. 123 Perhaps ASIC believed that the public exposure that Mr Somerville received would be punishment enough, although his continuing to practise would appear to belie that. 124 A more effective message of general deterrence to other legal and accounting practitioners could have been sent by a harsher outcome Corporations Act s 181. Ibid s 182. See ASIC, Information Sheet 151: ASIC s Approach to Enforcement (2013) 2, Figure 1. Corporations Act s 206F. Ibid s 206D. Se, eg, ASIC, Phoenix Crackdown Reaps Results (Media Release, 07-05, 8 January 2007), where it was reported that [i]n the last year, ASIC has banned 40 directors for a total of 144 years who have engaged in misconduct following company failures and repeat phoenix activity. Michelle Welsh, Civil Penalties and Responsive Regulation: The Gap between Theory and Practice (2009) 33 Melbourne University Law Review 908, Under the Corporations Act, there are three possible penalties for civil penalty breaches: disqualification from managing corporations (s 206C); compensation (s 1317H); and a pecuniary penalty of up to $200,000 (s 1317G). See further above n 83. ASIC v Somerville [2009] NSWSC 1149 (27 October 2009), [11] [12]. Note that it was not open to ASIC to seek, or the Court to order, cancellation of his practising certificate; this is the province of the Law Society of NSW and NSW Legal Services Commissioner. This shows the importance of disciplinary action by professional bodies as an adjunct to court proceedings. This point is taken up further below.

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