Applied Company Law Assessment
Question 1
Eddie, Ming and Hanh are the only shareholders and directors of Sparrow Pty Ltd, a trading company that supplies food products to cafés around Sydney. In recent times, Sparrow’s cash flows have been pressured because a few large customers, including CafeNow (a large franchise coffee shop with hundreds of outlets), have been late in paying their invoices. This has meant that on a number of occasions Sparrow has not had sufficient funds to pay its bills.
At the same time as the company’s cash flow troubles, the employees write to the directors about an intention to take industrial action in an attempt to recover unpaid wages and entitlements. The cash flow problems are increased, when the company’s bank, Bright Bank Ltd, contacts the directors about falling behind on their monthly repayments. The loan from Bright Bank Ltd is secured over all of Sparrow’s equipment. In an attempt to ease the financial situation, Eddie on behalf of the company seeks out an unsecured loan from Quick Bucks Pty Ltd for $50,000 which is guaranteed by the directors of Sparrow Pty Ltd.
Question: From the above scenario first identify who are Sparrow Pty Ltd’s main creditors? Next, advise each of the main creditors, with reasons, and with reference to the relevant sections of the Corporations Act 2001 (Cth), as to which form of external administration would best suit their needs. What assumptions of fact do you need to make in your answers? (i.e. what further information do you need)
Question 2
You are the partner in charge of the audit division in your accountancy firm AAA Accountants. In August 2022 you were engaged by Oz Rock Constructions Ltd (ORC) to provide an audit report to be used solely for the purposes of loan negotiation with Community Bank of Australia Ltd (CBoA). Whilst auditing ORC’s company records of its shareholdings you noticed shares held by a “Mrs Han”. The address of that shareholder is the same address of the Senior Partner in your accountancy firm and Mrs Han is the wife of that Senior Partner. CBoA reviewed the audited financial statements and refused to lend further funds to ORC. ORC then went to Fast Cash Pty Ltd (Fast Cash) and obtained a $10 million loan from Fast Cash. Six months later ORC went into receivership and defaulted on its loan. Fast Cash discovered ORC’s inventory accounts were significantly overstated. Fast Cash have commenced legal action against your firm which you are seeking to defend.
Discuss whether AAA Accountants can defend the legal action by Fast Cash. In your brief to your lawyers advise of what actions you took and all necessary steps to ensure there was compliance with the Corporations Act 2001 (Cth) and the general law. Make assumptions of fact where necessary. What would be your strongest defence against Fast Cash?
