Advise the directors of t-and-d have breached

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Reference no: EM133479284

Problem

Lalon, Lowell and Layla are the only directors of Toys and Dolls Ltd (T&D), which is based in Sydney. T&D sells toys and dolls. T&D's business is currently experiencing a market downturn and as a result the business is operating on low working capital. To address the company's downturn, in October 2022 the directors decide to borrow $2 million from a bank. This resolution is supported 2:1 at a board meeting, with Layla in dissent. Lalon and Lowell think that the company will be able to repay the loan because it is nearing the end of the year and their estimates suggest they will sell lots of toys and dolls around the upcoming Christmas period, although Layla is not so optimistic.

Unfortunately, things do not go as Lalon and Lowell expected, as the company's sales are much lower than they anticipated. The Christmas trading period ends, and it is now a slow period for selling dolls. All three directors are aware of s588G of the Corporations Act 2001 (Cth) and do not want to breach it. They are also aware of the defences available against a breach of s588G. Before making any more decisions, the directors hire an accounting firm called Specialist Accountants and Auditors (SAA) to provide a solvency report of the company. The report finds that T&D has net assets and, based on projections, can pay its debts when they become due and payable.

Both Lalon and Lowell are pleased to see such a positive report, however, Layla is still sceptical about the prospect of the company's business. Nonetheless, relying on SAA's report, Lalon and Lowell decide to borrow another $5 million and enter into a contract as T&D to purchase $7 million worth of material for doll manufacturing in Sydney, again overpowering the resistance of Layla. Layla asks to appoint a voluntary administrator instead of further borrowing. As a protest against the majority decision to borrow such a large amount of money, Layla immediately resigns from her position as a director, and the company goes into liquidation by the end of May 2023.

Task

Advise the directors of T&D whether any or all of them have breached s588G of the Corporations Act 2001 (Cth), drawing on the elements and requirements of the directors' duty to prevent insolvent trading and a breach thereof. Your advice must include, among other things, the relevant tests applicable to the determination of civil liability for a breach of s588G and remedies available for breaches of this section as a civil penalty provision.

Reference no: EM133479284

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