CORPORATIONS ACT 2001

FabFuel Ltd is involved in importing oil and fuel to Australia. FabFuel Ltd relied on other companies to manage distribution lines and transport oil and fuel to customers, but has recently purchased a fleet of trucks to be able to provide a more effective service, while reducing cost over the long term. FabFuel Ltd purchased these trucks on credit from General Auto Ltd. General Auto Ltd's directors made sure to obtain security for repayment of the loan. To achieve that, General Auto Ltd negotiated that it would retain ownership of the vehicles until the last instalment has been paid. General Auto Ltd complied with all relevant provisions of the Personal Property Securities Act 2009 (Cth) in order to perfect their security interest in respect of the trucks.

The directors of FabFuel Ltd have little experience in managing a fleet of trucks and distribution lines, and the company is soon starting to experience a series of losses as a result of having acquired these very expensive vehicles and of having attempted to manage distribution themselves. Unfortunately, this has a negative impact on the liquidity of the company, to the extent that directors are becoming concerned that FabFuel Ltd may not be able to keep up with payment of regular costs, such as interest payments on the company's unsecured loan with FinBank Ltd, payments of wages to employees and loan repayments to General Auto Ltd. The directors anticipate demand for oil and fuel to remain stable, however, and in order to buy some time and get over the hump of what the directors perceive to be short-term liquidity issues, the directors of FabFuel Ltd decide to borrow additional funds from Friendly Bank Ltd to improve FabFuel Ltd's cash flow.

Unfortunately, there is a sudden and unexpected drop in the demand for fuel and oil as a result of which FabFuels Ltd's financial situation deteriorates even further. General Auto Ltd is threatening to sell the trucks that FabFuels Ltd bought from them, unless FabFuels Ltd pays outstanding moneys within two weeks. This will cause further financial distress, as FabFuels Ltd will not be able to continue with distribution without the trucks. The directors of FabFuels are also concerned that one of the unsecured creditors may apply for the insolvent winding-up of the company by court order.

Discuss the issues raised by the above scenario from the perspective of directors of FabFuel Ltd, where there is a real possibility that the company may end up in insolvent liquidation. Explain what advice you will provide to the directors and include detailed reasons for your answer.