(1). Mr T and Mrs T are directors of P Pty Ltd which trades as "Funky Donuts of Manly". Mrs T makes the donuts and serves in the shop while Mr T attends to financial matters. In fact Mrs T was attracted to Mr T before they were married because he was an accountant, and could, she believed, provide her with the financial guidance she lacked.
The business operates from leased premises. The company owns certain stock and fittings valued at $15,000 but other than this has no assets of value. Bad weather has slowed business, however, Mr T's spiritual advisor says the weather will get better. With this in mind Mr T decides to invest in advertising the business so that when the weather gets better he will sell more donuts than before. Accordingly Mr T approaches the company's bank and borrows $50,000 on behalf of the company. He uses all of this money to pay for advertising for the business. Suppliers are owed $60,000 but have held off enforcing their debts because they also believe the weather will get better. There is group tax outstanding for the two part time employees.
Mrs T trusts Mr T's judgement. The rain stops but the customers do not return. The advertising company (owed $50,000) winds P Pty Ltd up and a liquidator is appointed. Discuss the liability of Mr and Mrs T under s.588G.
(2) Albert Side took over his father's funeral business in 2005. He changed the name of the principal operating company to "The Other Side Pty Ltd" (TOS). The directors of TOS are Albert and his wife. TOS has: - 10 funeral parlours throughout Australia, all of which are rented;
- A substantial quantity of equipment (including hearses and cremators) leased from finance companies and secured by personal guarantees from Albert and his wife -
3 subsidiaries as follows:
Dearly Departed Pets Pty Ltd (Pets); Creative Coffins and Stonemasonry Pty Ltd (Coffins); and TOS Embalming and Cryogenics (Cryogenics).
As the increased influence of online shopping has changed consumer behaviour in the second decade of the 21st century it has been much harder to persuade people to spend money on funerals for pets so Pets has been running at a loss for several years. This is unlikely to change in the foreseeable future.
Coffins is a profitable business and operates out of a factory in Geelong that it owns outright. However, most of the profits have been drained off to cover the losses in Pets and to fund the start-up costs in Cryogenics. Those start-up costs have been substantial so, for the time being, Cryogenics is a significant drain on the rest of the TOS group. But independent marketing consultants have reported that the future for the Cryogenics industry is very promising and, as one of the few suppliers of these services in Australia, there is a realistic prospect that in 2 or 3 years, the investment in Cryogenics may pay substantial dividends.
TOS itself is only barely profitable. It is suffering from the drain on funds caused by Pets and Cryogenics and even though Albert has tried to update the company's image it continues to lose market share to its rivals.
The group is financed by loans totalling $10 million from Eastpac Bank (Eastpac). Eastpac has security over all the assets of each company, except the Coffins' factory site. The local manager of Eastpac agreed to release this from the bank's security interest when Albert told him the group was planning to enter into a sale and leaseback arrangement to raise more funds. This has not yet been implemented. The loans from Eastpac are also secured by a personal guarantee from Albert and his wife.
Albert is concerned that he may not be able to keep things alive long enough for the profits from Cryogenics to eventuate. He is particularly worried about his personal exposure under the guarantees he and his wife have given and about the welfare of his employees who have been very loyal during difficult times. TOS has been late in the payment of rent on its main funeral parlour in Sydney each month for the last seven months but has managed to find the necessary funds, usually at about the time the second threatening letter has arrived. On more than two occasions the transfer of funds by TOS to the landlord to cover rent have been rejected for lack of funds. A debt of $4,090 to the local church choir, who often sing at the funerals, is way overdue. One of the choristers is a law student and has helped the vicar to prepare and send a statutory demand. The 21 days expired yesterday.
Albert has approached an insolvency practitioner who has in turn sought your assistance in advising him about what he should do. One option he is considering is selling the Geelong factory site to his family company for less than its full market value.
You are asked to advise Albert about his options, liabilities and what factors might influence the ultimate outcome of any decision he takes. Your advice should consider what Eastpac Bank is likely to do.