Question
Broadway Ltd was a successful manufacturer and supplier of parts used in the computer industry. It had traded profitably for many years but in the
Broadway Ltd was a successful manufacturer and supplier of parts used in the computer industry. It had traded profitably for many years but in the last two years the impact of the conflict in Ukraine, COVID 19 and raising inflation had caused the company to suffer large financial losses.
The four directors of the company have called a board meeting and requested you, the Chief Financial Officer (CFO) to attend and provide an explanation to the board of directors.
As CFO you have produced a set of up-to-date financial statements showing that the company only has 3 months of cash flow left to meet its current creditors. After that the company will be regarded as insolvent.
The CFO stated that she had approached the company's banks but they were not prepared to lend any more funds to the company.
Therefore, the board of directors authorised you to approach Manchero Merchant Bank Ltd which is known as a lender of last resort. The merchant bank agreed to lend $500,000 for 3 years at 5% per month (60% pa) unsecured. In the market place, the interest rate for this type of loan was 45% pa. The loan was made on 1 October 2021.
As the CFO to the company, you also recommend that the individual directors make a loan of $50,000 each to the company to help the company over the short term.
Two of the directors agreed to lend $100,000 each but only after the three months had expired as the company had sufficient funds until then. The directors wanted security over the inventory of the company. The funds were advanced by the directors on 1 January 2022.
However, the business environment has deteriorated rapidly and on 3 March 2022, the company was put into liquidation.
The accounting practice you work for has been appointed as the liquidator of Broadway Ltd. You are required to look at transactions done by the company prior to the date of liquidation.
You come across the above transactions.
REQUIRED:
As the liquidator you are required to explain the nature of the above transactions and what are the consequences for the company and
- Manchero Merchant Bank Ltd and(5 marks)
- The two directors that loaned the funds.(5 marks)
Refer to the relevant legislation and case law.
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