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Case study on liquidator of Tech Gadgets Ltd

Your boss, Gregg Cash, is a registered liquidator and on 30 August 2017 was appointed by the Supreme Court of Queensland as liquidator of Tech Gadgets Ltd (TGL).

A search of ASIC records reveals that the directors of Tech Gadgets Ltd are Susan Main, Paul Smith and Ben Jones. They have all been directors since the company was incorporated in 2010.

Tech Gadgets Ltd has an issued share capital of 2,000 shares. Susan, Paul and Ben each own 200 shares in TGL, with the remaining 1,400 shares being owned by Tech Stars Ltd. TGL has not adopted a Constitution.

The directors of TGL had board meetings on the last Friday of each month when they met at their business premises at Woolloongabba. Susan was the chairperson.

From 1 April 2017 to 30 June 2017 Paul planned to be on holidays in Japan. Before he went he appointed Victoria Peters to act in his position. Victoria accepted this appointment. When TGL held its June 2017 meeting Victoria was at her daughter’s school swimming carnival so she phoned in and was on speakerphone. The day before the meeting Victoria had an afternoon coffee with Michael Bronte,a director of Tech Stars Ltd.During his chat with Victoria, Michael mentioned a number of times that the Tech Stars Ltd board knew that Victoria was keen to progress her career in TGL and that she would like a permanent director position. He said that Paul was up for re-election as a director of TGL and that the Tech Stars Ltd board would support appointing Victoria instead of Paul if Victoria proposed to the board of TGL that they use Miracle Batteries Pty Ltd as the sole supplier of batteries for all their devices. Miracle Batteries Pty Ltd is a wholly owned subsidiary of Tech Stars Ltd.

Victoria followed Michael’s request and put forward a proposal to use Miracle Batteries Pty Ltd as the sole supplier of batteries. Victoria argued very strongly saying that reviews of Miracle Batteries Pty Ltd’s product showed it to be a market leader. Victoria had not actually read any reviews of the company and had no knowledge about battery types. Susan and Ben told Victoria they did not know anything about batteries and if she had researched the company and was confident in their products then they would support the decision. After about 4 minutes, all directors voted in favour of using Miracle Batteries Pty Ltd as the sole supplier of batteries to TGL and the resolution passed. Victoria was very pleased with her skills in negotiating an outcome that she hoped would secure her a position as a director of TGL.

In July 2017 TGL’s business started going downhill. A competitor had recently released a new product, the super-pad, which resulted in significantly reduced sales of the company’s bestselling product, the quick-pad. In a bid to keep their cash-flow the company decided not to pay its June BAS* (which was $46,000) to the Tax Office and delayed paying the invoice from Miracle Batteries Pty Ltd for $58,000. The directors thought the Tax Office wouldn’t chase them as vigorously as other creditors, and as Miracle Batteries Pty Ltd a related entity it would give them some flexibility. Susan was also aware that the account payable area were post-dating cheques, but she didn’t mention this to the other directors.

On 15 August 2017 the directors were approached by Edward Burke, a young entrepreneur. Edward had designed a new tech product, the i-shoe. The directors loved the product and thought that if they could manufacture it they would definitely have a product superior to their competitors and TGL would be successful again. They immediately called a board meeting and resolved to pay Edward $500,000 for his invention. They agreed to pay him within 7 days as they wanted to start manufacturing as soon as possible.

On 16 August 2017 TGL approached the bank for finance to pay the amount owing to Edward ($500,000) and for money to manufacture the i-shoe ($3 million). Every bank they approached declined to give finance. The directors informed Edward they would not be able to pay him the $500,000 as agreed. On 23 August Edward brought a winding up application against the company in the Supreme Court of Queensland and the Court ordered the company be wound up on the basis that it was insolvent.

* A BAS (Business Activity Statement) is a document lodged with the Australia Taxation Office (ATO) which reports information which a company owes to the ATO and money which the ATO owes the company.

Question 1

Which persons and/or entities are a director of Tech Gadgets Ltd for the purposes of the directors’ duties in sections 181-183 of the Corporations Act 2001 (Cth)?

NOTE: In answering this question you are not required to determine if there is a breach of duty, whether any party has a defence available or the potential consequences of breach.

Question 2

Assume that Victoria is a director of Tech Gadgets Ltd. Advise Victoria if she has breached any director duties.

NOTE: In answering this question you are not required to address any defences or potential consequences of a breach of directors’ duties.

NOTE: There may be more than one directors’ duty that applies here.

Question 3

Assume Susan and Ben appear to have breached their duty to take reasonable care. Advise whether they would successfully raise reliance (s 189) or any defences in the Corporations Act.

Question 4

Advise whether Ben has breached his duty to prevent insolvent trading.

Question 5

Advise Edward whether he can personally bring proceeding against each of the directors for compensation for breach of s 588G?

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