In an ongoing crackdown on rogue ‘pre-insolvency advisors’, ASIC is imposing harsher penalties on entities recruiting clients to participate in illegal phoenix schemes.
A recent ASIC led investigation examined the affairs of Cap Coast Telecoms Pty Ltd and its former director, Richard Ludwig. It was alleged Ludwig sought advice from former pre-insolvency advisors John Narramore and Stephen O’Neill, who assisted with illegally phoenixing Cap Coast Telecoms, thereby avoiding their financial obligations to the ATO and other creditors.
The phoenix activity carried out by Narramore and O’Neill involved illegal removal of company assets before Cap Coast Telecoms went into insolvency. Fictitious invoices were issued from companies under the control of Narramore and O’Neill to Cap Coast Telecoms. These payments were deposited into the accounts of the various companies and when all funds were transferred, Cap Coast Telecoms was wound up on 19 January 2019. The three parties involved in the asset extraction achieved considerable financial gain, while creditors were left out of pocket, with the company owing $2,955,128 in unpaid debts.
With illegal phoenix schemes estimated to be costing the Australian economy between $3 billion and $5 billion annually, action on preventing this conduct has arisen as a recent key focus for ASIC. John Price, Commissioner of ASIC, voiced his concern on the issue, stating a multi-agency approach has been taken to “disrupt, stop and punish” those who seek to provide illegal phoenix advice.
Although generally restricted to administration of the Corporations Act 2001 (Cth), ASIC has sought harsher penalties for the conduct of Narramore, O’Neill and Ludwig – pressing charges under the Criminal Code Act 1995 (Cth).
Director and two pre-insolvency advisors charged
On 5 September 2019, Narramore pleaded guilty to one breach of intentionally dealing in the proceeds of crime for $100,000 or more under s400.4(2) the Criminal Code Act 1995 (Cth). The Brisbane District Court sentenced Narramore to four and a half years in prison, with a non-parole period of 20 months. While handing down the sentence, Judge Everson condemned the conduct, describing it as a serious case of money laundering – deployed by a sophisticated scheme primarily motivated by unlawful financial gain.
O’Neill pleaded guilty to one breach of intentionally dealing in the proceeds of crime for $100,000 or more and is due to appear in the Brisbane District Court later this year.
Further charges were laid on Ludwig, who, in addition to being charged with one breach of intentionally dealing in the proceeds of crime for $100,000 or more, was also charged under the Criminal Code Act 1995 (Cth) and 10 counts of breaching his directors’ duties under the Corporations Act 2001 (Cth). He is yet to enter a plea. His matter has been listed for sentence in February 2020.
Despite the serious misconduct of the Narramore and O’Neill – not all practitioners involved in the liquidation process of Cap Coast Telecoms were at fault. The appointed liquidator of the company, Mark Hutchins of Cor Cordis, referred the case to ASIC suspecting potential malpractice.
This action acts as a statement by ASIC, warning pre-insolvency advisors that illegal phoenix activity will not be tolerated. Insolvency practitioners are trusted to administer their duties honestly, competently and fairly, and advisors misappropriating the funds and assets of a business before it winds up has wide impact on the community. Thus, ASIC’s tightening safeguards on avoiding loss to creditors should be well received by business and act as a reminder to insolvency practitioners of their strict obligations.
Where to from here?
If you’re a business owner wondering if the advice that you’ve been given is too good to be true, contact our Commercial Litigation team to find out more. There may be light at the end of the tunnel and we can help you work with a reputable insolvency firm towards a better outcome.
If you’re an insolvency practitioner wanting to know more about this matter, please contact our Commercial Litigation team on (07) 3211 2233 and they’ll be more than happy to fill you in.
Article prepared by Hanley Milford and Stephanie Philippou