Explain the options available to Rajiv’s company if the directors are concerned the company may be at risk of insolvent trading

Practice Question 1

You have been appointed as the accountant for a small proprietary limited company ‘Midnight Soil Pty Ltd’ (The Soils). The ‘Soils’ conducts tests to see if soil is contaminated and whether (or not) that land can be used for approved purposes (or not). The Soils has five directors. They have all agreed that at their next board meeting they would discuss paying a dividend of 22 cents per share. However, you have identified there is a potential cash flow issue due to the company’s recent loss of a major contract. You have assessed that the company is able to cover this revenue loss in the short term because it has a positive net asset position carried over from the previous financial year. Your further opinion is that cash flow problems will arise during the next quarter and you have put this in writing to the Soils Board.

Based on your advice, two directors call you before the next board meeting to ask if there is anything that can stop the proposed dividend if three of the five directors vote in favour of paying the dividend now.

Advise the two directors. Use relevant cases and legislation to support your answer.

Practice Question 2

The directors of Happy Trails are keen to purchase a block of land. Rajiv is one of the directors of Happy Trails, the company which has had two years of poor trading and is now unable to pay its debts when they fall due. Rajiv seeks your advice on the options available in the circumstances. He is concerned the company may be insolvent but is hopeful that ‘the business could be profitable again if creditors allow a little time to make some changes.’

A. Explain the options available to Rajiv’s company if the directors are concerned the company may be at risk of insolvent trading.

B. What sort of risk could Rajiv face if he borrows more money to help the company but then can’t pay it back? Your answers must refer the relevant sections of the Corporations Act 2001 (Cth) and case law.

Total 2000 words – 1000 words each

No Introduction, No Conclusion

Question 1 – Chapter 20 – Accounts, Auditors and Dividends

Question 2 – Chapter 22 – External Administration and Insolvency

References – 4 each question (Total 8)