Ahmed (accountant), Ben (entrepreneur) and Chen (operational skills) formed Drastic Designs Pty. Ltd. in 2006. They were executive directors and equal shareholders. The companys focus was initially on designing and selling handbags. Progress Bank lent them funds and took a security interest by way of a floating charge over the companys stock in trade.

In June 2009 Ben heard that the organisers of the Autumn Fashion Show were calling for tenders (bids) to design the stage for the fashion parade. Ben was excited at the prospect of bidding and thought it would assist the companys growth. Ahmed advised against putting in a tender (bid) for such a large project that was completely different to anything the company had done before. Chen thought it would be a good challenge. A resolution was passed (2:1) that the company would make a bid. Ahmed resigned from the Board in protest and Ben took over the role of managing director. Bens girlfriend, Nula, joined the Board as a non-executive director to replace Ahmed. As she had some financial skills, she helped with the tender details. Drastic Designs won the tender.

Since Ahmed was not available to help with the financial side of the business, Ben hired Sam, a recent Bachelor of Commerce graduate, as book-keeper and generally to advise them on the accounting side of the business. Ben and Chen relied heavily on Sam. When asked by suppliers when they were going to be paid, Chen just told them to see Sam he is in charge of that sort of thing.

By November 2010 it was apparent that the Autumn Fashion Show tender had been underpriced and that the project had lost $150,000. Sam made a list of outstanding debtors and paid those who were the most demanding.

In December 2010 Drastic Designs signed a one-year contract to redesign several office buildings. This meant that Drastic Designs had to employ more staff and buy more equipment. At the January 2011 Board meeting Nula expressed her concern that there was inadequate financial information being produced by Sam.

In February and March 2011 Drastic Designs was late paying its interest payments to Progress Bank, which threatened to take action if payment was late again. The bank refused Bens request for further finance. Several unsecured creditors wrote expressing their concern with the fact their accounts were more than 90 days overdue. It is now May 2011.

Required:

(a)?Discuss whether Ahmed, Ben, Chen, Nula and/or Sam are in breach of their insolvent trading duties under the Corporations Act 2001 (Cth). (15 marks)

(b)?It is apparent that Drastic Designs is in financial distress briefly identify and then explain the options for the directors and creditors and the potential impact of those options on Drastic Designs.?(15 marks)?? ??

Refer to relevant sections of the Corporations Act 2001 (Cth) and to relevant cases, if any, in your response.