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Barry Lane
14 August, 2008  
Lawyers and asset protection

Corporate plod attacks legal advice as ASIC takes its first action against a solicitor for “phoenix trading”. Is nothing sacred anymore?

imageIt was reported in The Oz last week that the corporate watchdog, ASIC, had North Sydney lawyer Tim Somerville in the gun for “allegedly advising (company) directors how they could transfer assets to a new company controlled by the same directors, at negligible cost”.

In other words, the corporate plods were accusing Tim of advising some deserving corporate types in the essentials of “phoenix trading” or the transferring of assets minus liabilities from one company to another.

It does wonders for the balance sheet if all the assets remain in their rightful place unencumbered by pesky liabilities like trade creditors, employee entitlements and miscellaneous other nuisances like rates, taxes and charges due to various levels of government.

ASIC director of enforcement, Jan Redfern, was quoted as saying:

“Phoenix activity is a significant issue and 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.”

imageIn a letter of advice to a number of directors, who are also in Jan’s (pic) sights, Tim allegedly said that if there was a risk of insolvent trading a new company could be incorporated that would be controlled by him.

The old (asset rich) company would hold shares in the new (liability free) company. Those shares would have rights to receive all dividends paid by the new company to the old until an amount equal to the value of the business of the old company was received.

When eventually paid, that amount would be available to pay creditors of the old company.

Conditions precedent to the flow of dividends would include, one expects, profits from the “new business” and a desire on the part of those controlling the new company to pay dividends so that creditors of the old company eventually get their money.

Employees of the old company would be overjoyed to learn that they would be sacked and re-employed on the same terms and conditions by the new company with the old company remaining responsible for all wages and holiday pay up until the transfer.

Ditto for former trade creditors one assumes. They would be asked to supply the new company so there would be a “seamless” transfer of the old company’s business to the new.

Why former trade creditors and employees would want to cop such an arrangement was not explained.

Since the dawn of commerce there has been a tug of war between creditors and debtors.

The law reports are full of disputes between those who have and those who want to receive: lenders and borrowers, vendors and purchasers, landlords and tenants, trustees and beneficiaries, bankers and customers and husbands and wives.

imageA visit to Somerville & Co’s website shows what Tim (pic) and his firm can do for you if you’re in need of some assistance in the asset protection department.

“Somerville & Co specializes in innovative structures to protect the assets of both individuals and companies from the dangers of insolvency. The best solution is to protect assets as early as possible. But, even at the time of insolvency, all is not lost…

“Somerville & Co can propose many other legal ways to preserve the value of a business and other assets held by an insolvent company, while still preserving the rights of the creditors. Administration should only be used where it is clearly the best alternative…

For personal insolvency, the recent changes to the Bankruptcy and Family Law Acts require careful consideration. But under the legislation, the assets of a family can still be protected from creditors. Somerville & Co has very extensive experience of protection of family assets under the Family Law Act, and have represented successful litigants in leading cases in the Family Court and the Federal Court.”

All is not lost when you can show those pesky creditors a trick or two.

As we might expect, the best protection against those wanting to be paid their money involves implementing the best business structure.

Here’s the Somerville & Co message:

“It is vital to get the structure right as early as possible. The earlier it is done, the lower the capital gains tax and stamp duty, and the greater the scope for effective CGT and other planning.

“Unlike other lawyers, we pay particular regard to minimizing workers compensation premiums. Structuring the entities which employ the workforce can make a huge difference to the bottom line, especially in high risk industries, or where the business has been hit by a claim.

“Determining the best business structure will depend on many factors. Does the client want to run the business at a profit in the long term, paying the least income tax? Or is it a short term plan to build then sell the business, paying as little capital gains tax as possible? What are the dangers to shelter the business and its principals from? How does it all fit in with the rest of the client’s financial, legal and personal affairs? [blah, blah, blah] ...

“An hour working together at the whiteboard will usually lead to the best overall structure…

“Once the structure is decided, the tasks are allocated between the accountant and Somerville & Co, leading to a seamless result for the client.”

So there it is. Tim can advise how to hold on to all that’s holy to you while keeping the creditors at bay.

All strictly legit of course, no funny business. Scout’s honour.

Let’s hope for Tim’s sake that ASIC’s pursuit of him does not become a re-run of the tax commissioner’s quest for the scalp of Neil Harry Mark Forsyth QC, that former stellar adviser to the tax avoidance industry of the 1970s and 80s.