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Compulsory Assignment Question
Bathroom Design Pty Limited (in liq) (Company) was wound up in September 2021.
The Company operated a business of designing and installing home bathrooms.
Elizabeth and Jonathan were directors of the Company since its incorporation in 2004.
Elizabeth and Jonathan are married. Elizabeth had de facto control of the Company and
made all decisions relating to the Company. Although Jonathan was a director of the
Company he took no part in the Company and made no decisions relating to the
operation of the Company. Jonathan took the responsibilities of raising the children and
homemaker.
Jonathan relied entirely on Elizabeth and had no knowledge of or made any decisions on
the financial affairs of the Company. Jonathon says that Elizabeth always told him that
the Company was able to pay its debts as and when they fell due. Elizabeth is a qualified
Accountant and Auditor and Jonathon relied on her assurance.
The Company had previously ceased trading in January 2018. According to Elizabeth
the Company ceased trading in January 2018 because at that time there were two major
construction clients of the Company that went into liquidation owing the Company
$600,000. This led to a reduction of funds to the Company which caused the Company to
temporarily cease trading in January 2018. Leading up to and including the period of
ceasing to trade the Company paid its former employees, contractors and creditors in
full.
However, at the time of temporarily ceasing to trade in January 2018 the Company did
owe the Australian Tax Office (ATO) $100,000 which the Company was then not able to
pay.
In February 2019 Elizabeth decided that the Company should begin to trade again.
The decision to begin trading again in February 2019 was made by Elizabeth as a
consequence of the Company entering into an agreement in February 2019 with a major
construction company Mega Constructions Pty Limited (Mega Constructions) to design
and install bathrooms in homes built by Mega Constructions (Mega Agreement).
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Elizabeth says that she expected that by entering into the Mega Agreement the
Company would make substantial profits enabling the Company to pay its existing and
future debts and have a significant cash reserve.
Elizabeth told Jonathan of the Mega Agreement and having complete faith in Elizabeth,
Jonathan also expected that the Agreement would make substantial profits for the
Company enabling it to pay its existing and future debts.
In order to perform the Mega Agreement the Company entered into a number of
agreements with suppliers to supply goods and services to the Company (Supply
Agreements). The payment terms of the Supply Agreements were strictly 90 days from
delivery of goods or services.
At the time of entering into the Supply Agreements, the Company:
(a) had an overdraft facility with the Money Bank (Bank) of $80,000;
(b) Elizabeth and Jonathan had joint personal savings of $30,000 that could be
drawn upon to pay Company debts if required;
(c) had assets in the form of machinery to the value of $30,000 but the machinery
would probably take up to 90 days to sell if required;
(d) the Company’s running account balance with the ATO was $110,000 but
Elizabeth was able to negotiate with the ATO an extension of time to pay until
June 2020.
Unfortunately, after only 18 months from entering into the Maga Agreement, Mega
Constructions went into liquidation in August 2020 owing the Company $350,000. As a
result the Company could not pay its suppliers under the Supply Agreements or pay the
ATO. The Company had used all of its overdraft and owed the Bank $80,000.
Before the Company could find other business one of its major suppliers served a
Statutory Demand on the Company pursuant to a breach of the Company’s Supply
Agreement and the Company was wound up in September 2021.
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The Company’s Liquidator now seeks orders for compensation from Elizabeth and
Jonathan for insolvent trading. The Liquidator is seeking from Elizabeth and Jonathan
$300,000 for debts incurred to the ATO and creditors, including the Company’s Bank
and former suppliers.
Advise Elizabeth and Jonathan of their prospects of resisting the Liquidator’s
action. Your answer must include an analysis of the essential elements necessary
to be shown by the Liquidator to be successful and an analysis of any statutory
defence or statutory relief from liability that Elizabeth and Jonathan may have to
the Liquidator’s action. In your answer you must have regard to relevant sections
of the Corporations Act and relevant case law.
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