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Business Law Exam Practice

In: Business and Management

Submitted By anfgeek
Words 1143
Pages 5
Irene, Alvin and Derrick are directors and shareholders of Condos Pty Ltd, a condominium construction company. The market for condominium construction is very competitive and so each of the directors devise expensive advertising campaigns.

Unfortunately, Irene, Alvin and Derrick are not very good financial managers so they have employed a financial accountant, Angela, to manage the financial side of the business. Angela is in charge of paying Condo’s subcontractors.

Angela advises Irene, Alvin and Derrick them to cut back on their advertising campaigns as the company’s cash flow is in peril. The directors tell Angela not to interfere with managerial decisions. Angela finds it increasingly hard to pay Condo’s creditors, and starts only paying select creditors to allow the company sufficient cash to continue operating.

In frustration, Angela resigns. The directors realise the position that Condos is in and put the company into voluntary liquidation.

The liquidator investigations the action of Irene, Alvin and Derrick in the months leading up to the liquidation. Advise the liquidator as to whether the directors may be liable for insolvent trading.

Answer

Issue
Have the three directors, Irene, Alvin and Derrick breached the insolvent trading provisions of the Corporations Act 2001 (Cth) (Corporations Act)?

Rule
Section 588G applies to impose liability upon a person if (relevantly for the facts in question): (a) the person is a director of the company when the company incurs an debt; (b) the company is insolvent when it incurs the debt, or becomes insolvent because it incurs the debt; (c) when it incurs the debt, there are reasonable grounds for suspecting that the company is insolvent or would become insolvent because it incurs the debt; and (d) the director is aware at the time of the debt that there are reasonable

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