By Melissa Fenton and Craig Holland -
Snapshot
- Resist offering advice in a social setting.
- Professional negligence claims are immensely difficult to defend in the absence of contemporaneous records.
- Keep client lunches focused on building relationships not taking instructions or providing advice.
In May 2015, Justice Garling of the Supreme Court of NSW delivered judgment in Abu-Mahmoud v Consolidated Lawyers Pty Ltd [2015] NSWSC 547, finding a solicitor liable for $2.3M in damages for providing negligent corporate restructuring and tax advice during two client lunches.
Background
The plaintiff alleged he met the solicitor at a restaurant on two occasions to obtain legal advice in relation to avoiding any personal liability to the ATO.
The plaintiff’s full financial arrangements were complex. Relevantly, the plaintiff’s various companies, including Fairchild Developments Pty Ltd (Fairchild) whose major asset was a shopping complex (Fairfield property), had borrowed several million dollars from St George Bank. The loan was secured in part by the plaintiff’s personal guarantee.
It was alleged the solicitor advised the plaintiff and his business partners they should incorporate a new company and:
- the new company should purchase the Fairfield property at the lowest possible commercial price from Fairchild;
- the plaintiff and partners should resign as directors of Fairchild and appoint a director ‘who has nothing to lose’;
- the $400,000 tax liability would remain with Fairchild; and
- the new director should place Fairchild into voluntary administration and then liquidation. Fairchild would be wound up with the tax liability outstanding, and the liability would
be avoided.
There were significant problems with the advice. One was that the ATO had the power to issue notices to the plaintiff and his partners making them personally liable for the tax liability.
The second major problem was that the appointment of a liquidator to Fairchild was an event of default under the terms of its loan agreement with the bank. The effect of default was that the loan balance became payable immediately.
Fairchild exchanged contracts on the Fairfield property with the new company. The plaintiff and partners vacated their positions as directors of Fairchild and Fairchild was placed into voluntary administration. As the voluntary administration was an automatic event of default, the bank appointed receivers and managers over Fairchild.
Numerous issues plagued the sale of the Fairfield property and the sale eventually fell through, with the property being sold to another party for less than the amount outstanding on the loan. The plaintiff’s personal guarantee was called upon to satisfy the outstanding amount. The plaintiff claimed against the solicitor, alleging he provided negligent advice.
