Problem
Alex and Pascal are the directors and shareholders of "New-Concepts Pty Ltd". The company keeps its goods at a small warehouse from where it also distributes all its products. Two months ago, the company entered a contract to supply a large quantity of their product to a local manufacturer. Alex and Pascal were excited and ordered twelve additional shipments of the product from their supplier and have paid a large deposit. The shipping company which brings the goods into Australia is now waiting for payment.
After the first delivery to the local manufacturer, a defect is discovered in the product and the government puts a banning order on the sale of items that contain their product as an ingredient. The local manufacturer cancels all further orders.
The company now has no future revenue; there are stocks of goods which cannot be sold. The shipping company needs to be paid. There are various other bills to the tax office, employees and others who have provided services and have yet to be paid.
Task
I. Alex and Pascal are desperate, and do not know what to do. They approach you for advice on whether the company is insolvent. Use the IRAC legal problem-solving approach to explain the relevant provisions of the Corporations Act 2001(Cth) that would determine whether a company is insolvent and the circumstances under which a duty to prevent insolvent trading arises. Provide relevant case law as authority for your answer.
II. Based on the provisions of the Corporations Act 2001 (Cth) identified in part (I), explain to the directors whether the company is likely to be found insolvent and whether they have breached the duty to avoid insolvent trading. Are there any defenses available to them?