MLL318 Unit Planner and Seminar Questions PDF

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MLL318 Unit Planner and Seminar Questions...

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MLL318 Corporate Insolvency Law UNIT PLANNER AND SEMINAR QUESTIONS T3-2021

MLL318 Corporate Insolvency Law WEEKLY ACTIVITIES On a weekly basis, before class, students are expected to: • • •

read the chapters set out below and work on the practice questions provided for each topic the prescribed textbook is Murray, Michael and Harris, Jason, Keay’s Insolvency: Personal and Corporate Law and Practice, (Thomson Reuters, 10th edition, 2018) You can access the prescribed textbook online here https://ebookcentral-proquestcom.ezproxy-f.deakin.edu.au/lib/deakin/detail.action?docID=5452474

The following tables provide you with information about the topics, chapters you need to read and seminar questions for each week. Week 1 (commencing 8 November 2021) Topic

Introduction and overview

Prescribed Readings

Keay’s Insolvency: Personal and Corporate Law and Practice (Chapter 1)

No seminar in week 1

Week 2 (commencing 15 November 2021) Topic

Voluntary and compulsory winding up

Prescribed Readings

Keay’s Insolvency: Personal and Corporate Law and Practice (Chapter 10 & 11)

SEMINAR QUESTION: In 2019, Gregory was appointed as a director of Quick Fit Ltd. As partof his new strategy, he signed a $2 million loan contract with RPP bank. The contract for the company’s loan has a clause that allow the bank to demand early repayment if certain conditions are not met. One of these conditions is that trading stock as a percentage of total current assets must not fall below 50 per cent. The financial report that company’s prepared by the end of June 2020 showed that the ratio of trading stock to total current assets is 44 per cent.

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MLL318 Corporate Insolvency Law The bank has indicated to Gregory that it is not prepared to advance Quick Fit Ltd any more funds. Further, it has indicated that it wants its debenture and mortgage loan repaid given conditions have not been met. The bank has advice Gregory that unless things improve in the next months, it will appoint a receiver. Gregory has no further fund source to contribute to the company, so he reached out to all shareholders and only one of them is prepared to lend $100,000 to the company but wants security for the loan against the trading stock. The company has now unfortunately reached the stage that it is not operating profitably. Various creditors – from the banks to suppliers – are asking for their money. • •

What can the company do? What can the company’s creditors do?

Week 3 (commencing 22 November 2021) Topic

Provisional liquidation

Prescribed Readings

Keay’s Insolvency: Personal and Corporate Law and Practice (Chapter 12)

SEMINAR QUESTION: Joe, the director of Sample Homes Pty Ltd building company, knew his business was in trouble. For 6 months he had been paying contractors late and had accrued $60,000 in overdue payments. His costs had blown out on major projects and he was unable to pay his suppliers, contractors, employees, loans and taxes. Joe sought advice from his accountant, Trevor, who said he needed to take urgent steps to stop the company collapsing. Trevor introduced Joe to Carlos, a pre-insolvency adviser who offered to restructure the business for $40,000. Carlos then moved Sample Homes bank accounts, plant and equipment, project contracts and employees to a new company that operated as normal and kept the liabilities with Sample Homes. He also arranged for Sample Homes to be wound up as an insolvent business. Carlos advised Joe to change the name of Sample Homes to its Australian Company Number and to register a new company called Sample Homes (Vic) Pty Ltd. He told Joe that registering a company that had a very similar name would not alert the building industry that there had

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MLL318 Corporate Insolvency Law been a change. Joe questioned the legality of the restructure, but Carlos assured him it was fine. Carlos then appointed Joe as director of the new company and got an associate to value the assets of the old company for an amount well-below market value. Carlos prepared an Asset Sale Agreement to give the impression that Sample Homes (Vic) had purchased the assets legitimately. Carlos had Joe sign the Asset Sale Agreement on behalf of each company and advised him not to pay the amount stated in the Agreement. Work continued on existing projects and employees were unaware that they were employed by another company. With no assets left in Sample Homes and minimal records, Carlos appointed a friendly liquidator who conducted limited enquiries about the cause of the company's failure and lodged a basic report to ASIC advising there were no assets to recover that could be used to pay creditors. The liquidator then applied to have the company deregistered. Discuss whether Joe, Carlos and the liquidator breached any legal obligations under the Corporations Act? Week 4 (commencing 29 November 2021) Topic

The effect of winding up

Prescribed Readings

Keay’s Insolvency: Personal and Corporate Law and Practice (Chapter 13)

SEMINAR QUESTION: Homer Pty Ltd borrowed $500,000 from the Springfield Bank and granted it a security interest in some of its plant and equipment. Homer Pty Ltd failed to pay last two interest instalments. The other day the bank was notified that the directors of Homer Pty Ltd had appointed a voluntary administrator. Advise whether the Springfield Bank is legally entitled to immediately seize the plant and equipment subject to the security interest? Would your answer be different if the Springfield Bank’s security interest covered all assets of Homer Pty Ltd?

Week 5 (commencing 6 December 2021) Topic

Assets available to the liquidator

Prescribed Readings

Keay’s Insolvency: Personal and Corporate Law and Practice (Chapter 14)

Seminar question: Not long ago, Johnson Manufacturers Pty Ltd was wound up in insolvency on the application of one of its major unpaid suppliers. While the company’s liquidator was examining the company’s inadequate financial records, he noticed that seven months before

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MLL318 Corporate Insolvency Law its liquidation the managing director of Johnson Manufacturers Pty Ltd deposited company funds into his sister’s bank’s account. She then used the money to buy herself a penthouse apartment in the city. Explain whether the Corporations Act enables the liquidator of Johnson Manufacturers Pty Ltd to recover any money from the managing director or his sister in this situation.

Week 6 (commencing 13 December 2021) Topic

The administration of the winding up

Prescribed Readings

Keay’s Insolvency: Personal and Corporate Law and Practice (Chapter 15)

SEMINAR QUESTION: Barry is the managing director of Home Entertainment Ltd, which carries on business as a retailer of home entertainment electrical goods. The company owns 15 stores which are located throughout Australia. Franz is also a director but for the past 18 months has lived in Monaco where he conducts a large family-owned business. During this period Franz has taken no part in the business of Home Entertainment Ltd, apart from signing documents when requested by Barry. The company fell into increasing financial difficulties from early last year and by March this year a large number of creditors were owed debts outside their negotiated trading terms. Several of the company's major suppliers refused to extend credit and only supplied further goods if cash was paid on delivery. Other creditors had taken legal action and were paid their debts only after obtaining court judgments. Home Entertainment Ltd.’s bank indicated that it was no longer extending the company's overdraft facility and was looking to reduce the overdraft limit. As a result, a number of cheques made out to suppliers were dishonoured during April. Barry decided that the best way to improve the financial position of the company was to conduct a widely publicised sale at discounted prices. In May Barry purchased, on behalf of Home Entertainment Ltd, 100 LCD televisions valued at $325,000 from Screen Imports Pty Ltd, a business owned by Hal, an old school friend of Barry's who was a major supplier of goods to Home Entertainment Ltd. Hal's usual terms were payment within 30 days of delivery, however he agreed to Barry's request to do him a favour and extended credit for the full purchase price for 60 days. Barry then sold several televisions owned by Home Entertainment Ltd to Surround Sound Pty Ltd for $105,000 and paid the proceeds of these sales into his own personal bank account. This money was mainly used to part-purchase an apartment for Barry's daughter. After the sale was completed in June, Barry realised that the financial position of Home Entertainment Ltd had deteriorated further. In July Barry sold several televisions and sound equipment to his sons Harvey and Wilfred for $80,000, which was half their purchase price. They were able to sell these goods through their contacts in the trade for $180,000 and retained the proceeds for their personal use.

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MLL318 Corporate Insolvency Law In August, Hal asked Barry for payment of the debt owing to Screen Imports Pty Ltd. Barry indicated that Home Entertainment Ltd was in severe financial difficulties and was unable to pay its creditors in full and was likely to go into liquidation soon. He then paid Hal $120,000 which he said was the best he could do, given that he had known Hal for so many years. Home Entertainment Ltd went into court-ordered liquidation in October and it was apparent to the liquidator that there were insufficient assets to meet the claims of unsecured creditors. Advise the liquidator of any actions which she can bring and possible defences which may be available in relation to: (a) the debt to Screen Imports Pty Ltd; (b) the payment to Hal; (c) the sale of equipment to Surround Sounds Pty Ltd; and (d) the sale of equipment to Harvey and Wilfred.

Assessment Task One due Friday 17 December at 8:00 pm AEST Intra-trimester break: 20 December 2021 – 5 January 2022 (Inclusive)

Week 7 (commencing 6 January 2022) – class and seminar day/time to be rescheduled Topic

Criminal offences and civil claims against company directors

Prescribed Readings

Keay’s Insolvency: Personal and Corporate Law and Practice (Chapter 16)

SEMINAR QUESTION: Eagle Soft Rock Ltd is a medium-sized company that operated several hotels, the largest of which was called Hotel California. It had the following four directors, Frey, the managing director and significant shareholder, Henley, Walsh and Schmit, the independent nonexecutive directors. Dylan, the company's chief operating officer and finance manager, was in charge of Eagle Soft Rock Ltd.’s finances and was responsible for providing the directors with monthly budgets and profit forecasts. Dylan's remuneration included a large annual bonus payable if the company's expenses were less than an agreed amount. About a year ago, Frey went on an extended overseas holiday. While he was away the company's business began to decline. Occupancy levels at its hotels fell, resulting in a fall in its gross income, and its expenses increased alarmingly. This began to have an impact on the company's cash flow and in January last year its liquidity ratio was well below 1. During the early months of this year, it was constantly late in remitting goods and services tax collected from hotel guests to the ATO. Amounts due to the Eagle Soft Rock Ltd.’s many suppliers were not paid until they sent solicitors' letters of demand for unpaid debts. Some major suppliers refused to supply goods or services to the company unless they were paid for on delivery. Even then, Dylan arranged for those suppliers to be paid with company cheques that its bank later dishonoured. For a long time, the Eagle Soft Rock Ltd directors were unaware of the company's financial difficulties. In order to protect his bonus, Dylan began to 5

MLL318 Corporate Insolvency Law supply them with obviously false financial information that indicated the company was doing well. Matters came to a head in June when employees of Eagle Soft Rock Ltd went on strike fornonpayment of their wages. The directors then discovered the company's true financial position and sacked Dylan. At that time Eagle Soft Rock Ltd owed over $10 million to over 100 different unsecured creditors. In July, when Frey returned from his overseas holiday, he began intensive negotiations to borrow a large amount from the company's bank which was already owed $5 million on an unsecured basis. During the negotiations, the bank insisted that Eagle Soft Rock Ltd reduce its debt by repaying $500,000 fortnightly. Frey arranged for the company to use its diminishing cash reserves and reduced the debt to the bank to $4 million. The bank negotiations dragged on for a whole month but in the end the bank decided not to lend anymore money. At the end of July, the amount Eagle Soft Rock Ltd owed its unsecured creditors increased to $12 million. Several significant events occurred in August. First, despite the company's financial position, its directors paid a dividend to its shareholders, including Frey. Secondly, the directors sold Hotel California to Frey's family company. While the contract price was the market value of the hotel, it was to be paid in 50 equal annual instalments over the next 50 years. A general meeting of Eagle Soft Rock Ltd.’s shareholders approved the sale. Thirdly, one of Eagle Soft Rock Ltd.’s many unsecured creditors successfully obtained a court order winding up the company on grounds of its insolvency and appointed McCartney as liquidator. Advise McCartney what legal action can be taken against (a) The directors of the Eagle Soft Rock Ltd (b) Eagle Soft Rock Ltd.’s bank.

Week 8 (commencing 10 January 2022) Topic

Termination of the winding up

Prescribed Readings

Keay’s Insolvency: Personal and Corporate Law and Practice (Chapter 17)

SEMINAR QUESTION: Blue Star Hotels Ltd operates a chain of hotels in NSW and Victoria. Its directors are Tom Sharp, Charles Dickens and Mary Wollstonecraft. On 1 April Taylor’s Linen Hire Ltd presented a demand to Blue Star in respect of a $ 2,500 laundry bill owed by the hotel group. Blue Star was unable to meet this debt. On the basis of this insolvency, Taylor’s Linen Hire then filed an application for winding up on 23 April. The application was successful, and Ivan Trump was appointed as liquidator under a winding up order granted on 1 May. Ivan has requested that the directors meet with him on 5 May and provide him with a report on the company’s affairs. Advise him as to what impact the following facts have on the liquidation, giving full authority for your answer: On 12 April Blue Star registered a circulating asset security interest in favour of Wholesale Liquors Ltd, securing a debt of $ 100 000 owed to Wholesale for wine supplied by it in February and March.

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MLL318 Corporate Insolvency Law

On 2 April the Board of Blue Star, in an attempt to deal with its cash-flow problems, borrowed an amount of $ 200 000 from Grasping Bank, paying the bank an application fee of $ 50 000 and agreeing to a 25% per annum interest rate. Leonard Royce, who is in charge of the fleet of limousines run by the hotel, tells Ivan that the contract with Ultra Lube Ltd, which services the vehicles, is up for renewal. Ultra-Lube requires that its clients sign a maintenance contract that is of a minimum of 4 months’ duration. Ivan has found the following in Blue Star’s files: a contract dated 1 February for the purchase of 25 ivory chess sets from Dunhill Ornaments Ltd (which Blue Star would sell in gift shops in its hotels) on terms of payment after 6 months, and a letter dated 21 April varying the terms of the contract by adding to it a new clause in terms of which Blue Star agreed to transfer ownership in the goods back to Dunhill, and to sell them on consignment from Dunhill at 20% commission. Ivan has also discovered a receipt for a one-way ticket for a flight which leaves for Argentina on 3 May, booked by Mary Wollstonecraft, who has so far refused to co-operate with Ivan. Tom, Charles and Mary are owed $ 20,000 each in respect of salary and $ 5,000 each in respect of leave entitlements. The hotel chain’s 500 employees are owed $ 1,000,000 in respect of salaries and $ 40,000 in respect of leave entitlements. Week 9 (commencing 17 January 2022) Topic

Non-liquidation arrangement (Receivership and Voluntary Administration)

Prescribed Readings

Keay’s Insolvency: Personal and Corporate Law and Practice (Chapter 18 & 19)

SEMINAR QUESTION: About a year ago McMahon Industries Pty Ltd leased a shop at a shopping mall owned by Whitlam Shopping Centre Ltd. The monthly rent was $10,000. Bill and Sonia, the sole directors of McMahon Industries, entered into a contract with Whitlam Shopping Centre Ltd under which they guaranteed to pay the rent if their company failed to do so. As it was in financial difficulties, McMahon Industries Pty Ltd had not paid the monthly rent on its shop for the last three months. Whitlam Shopping Centre's credit manager, Margaret, heard that last week Bill and Sonia had put their company into voluntary administration. Advise Margaret whether Whitlam Shopping Centre can immediately start court action to evict McMahon Industries from the shop for non-payment of rent and whether it can sue Bill and Sonia under their guarantee.

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MLL318 Corporate Insolvency Law

Week 10 (commencing 24 January 2022) Topic

Non-liquidation arrangement (Deeds of Company Arrangement and Restructuring and workouts)

Prescribed Readings

Keay’s Insolvency: Personal and Corporate Law and Practice (Chapter 20 & 21)

SEMINAR QUESTION: Vandalay Chocolate Sprouts Pty Ltd, which operated its business from a factory it rented from Industrial Park Ltd, had been experiencing extreme financial difficulties and its financial records were a hopeless mess. It was continually late in paying debts owed to its suppliers and employees' wages. With Christmas coming up, its directors were uncertain whether the company would be able to pay its employees their holiday pay entitlements. The company's main creditors were: o its bank, which is owed $1 million. This loan was unsecured but was guaranteed by the directors of Vandalay Chocolate Sprouts Pty Ltd; o Industrial Park Ltd, which was owed $75,000 arrears of rent; and o its employees, who were owed $350,000 unpaid wages. About three months ago the company was paid $100,000 by one of its customers. This was deposited into the company's bank account, reducing the amount due to the bank. How would each of the creditors referred to above be affected if Vandalay Chocolate Sprouts Pty Ltd were placed in voluntary administration? Would your answer be different if the company was wound up in insolvency? Explain

Week 11 (commencing 31 January 2022) Topic

Reform areas and revision

Prescribed Readings

N/A

SEMINAR QUESTION: Eric, Mary and Mei Ling are the only shareholders and directors of Acme Pty Ltd, a trading company that supplies food products to cafés around Brisbane. In recent times, Acme’s cash flows have been pressured because several large customers

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MLL318 Corporate Insolvency Law including CafeNow (a large franchise coffee shop with hundreds of outlets) have been late in paying their invoices. This has meant that on several occasions Acme has not had sufficient funds to pay its bills, particularly rent. The owners of its warehouse (Leaseco Ltd) has written several letters warning that if Acme is late in paying its rent, it will be evicted from the premises. At the same time as the company’s cash flow troubles, the e...