INSTRUCTIONS
In
Law of Associations
, there is only
ONE ASSIGNMENT
.
This assignment is compulsory and must be submitted by all students.
The assignment will constitute 20% of the final mark in this subject.
The maximum word length for this assignment is 2000 words (excluding citation footnotes and bibliography).
Compulsory Assignment Question
The Green Metal Industry Pty Limited (in liq) (Company) was wound up in January 2021. The Company manufactured a highly flexible metal from scrap metal for use in the building industry. The manufacturing process used renewable energy (Green Metal). Joanne and Tom were directors of the Company since its incorporation in 2012.
The Company had previously ceased trading in September 2015. According to Joanne and Tom the Company ceased trading because there were two major clients of the Company, namely Factory Windows Pty Limited (Factory Windows) and Home Constructions Pty Limited (Home Constructions) who had failed to pay outstanding accounts owed to the Company in the amount of $400,000.
Both Factory Windows and Home Constructions went into liquidation in early 2014 but the Company received no dividend from the respective liquidations. This led to a reduction of funds to the Company which caused Joanne and Tom to cease trading in September 2015. Leading up to the period of ceasing to trade the Company paid its former employees, contractors and secured creditors in full.
The Company lodged its last BAS Statement in June 2016. As at 30 June 2016 the Company owed the Australian Tax Office (ATO) $40,000 but was unable to pay that amount.
In December 2019 the Company decided to begin trading again and purchased scrap metals from Junk Metals Pty Limited (Junk Metals) for $180,000. The terms of payment was 90 days from 31 December 2019. The Company had previously dealt with Junk Metals and had always been able to negotiate longer terms of payment.
The decision to begin trading again and to purchase scrap metal from Junk Metals was made as a consequence of the Company entering into an agreement with Donald T Housing Pty Limited (Donald T) to supply Green Metal. The agreement price with Donald T was $900,000 to be paid upon delivery of the Green Metal to Donald T by the Company (Donald T Agreement).
Both Joanne and Tom say that they expected that by entering into the Donald T Agreement the Company would make substantial profits enabling the Company to pay its existing and future debts and have a significant cash reserve.
Because the manufacturing process to manufacture Green Metal used renewable energy Joanne and Tom also expected to be able to sell carbon credits on the market. Joanne and Tom however had not previously sold carbon credits on the market and were not able to estimate the income, if any, from any sale of carbon credits.
At the time of purchasing the scrap metal from Junk Metals, the Company:
(a)did not have sufficient cash to pay Junk Metals and was not able to obtain a bank overdraft;
(b)the Company’s Financial Statements as at December 2019, being the date that the Company began trading again, showed a deficiency of assets over liabilities of $50,000;
(c)the Company’s running account balance with the ATO indicated that the Company was not able to pay its tax debts as and when they fell due.
Notwithstanding the Company’s financial position as at the time of purchasing the scrap metal from Junk Metals both Joanne and Tom believed from their experience in manufacturing the Green Metal that they would be able to complete the Donald T Agreement within 90 days and therefore would be able to pay Junk Metals within its trading terms of 90 days and pay the ATO.
Unfortunately, because of unforeseen and severe manufacturing problems being experienced by the Company the manufacture of the Green Metal pursuant to the Donald T Agreement was delayed and the Company was not able to perform the Donald T Agreement within 90 days. The manufacturing problems experienced by the Company were only temporary.
Despite numerous requests by Junk Metals during the period March 2020 and May 2020 for payment, the Company failed to pay Junk Metals for the amount owed of $180,000. The Company was not able to negotiate an extension of the payment terms with Junk Metals.
Junk Metals served on the Company a Statutory Demand for $180,000 which the Company could not pay and as a consequence the Company was wound up in January 2021.
The Liquidator is seeking orders for compensation from Joanne and Tom for insolvent trading. The Liquidator is seeking from Joanne and Tom $300,000 for debts incurred and unpaid including to the ATO and Junk Metals.
Advise Joanne and Tom of their prospects of resisting the Liquidator’s action. Your answer must include an analysis of the essential elements necessary to be shown for the Liquidator to be successful and an analysis of any statutory defence or statutory relief from liability that Joanne and Tom 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.