Hi, I am studying accounting and this subject is about company law (2106AFE).

Thisassignment needs to be answered as ILAC form which are Issue, law, application and conclusion.

Laws and Cases are based on Corporation act 2001.

Workbook Submission #2 instructions Tips for completing the assessment 1. You must use the ILAC method when answering the question. 2. There is no absolutely right or wrong answer to this assessment. 3. You are given extensive materials (and a framework) for completing a section 588G question in your Week 9 Workbook. 4. The facts, times and persons are \"mixed up\" for a reason - clients do not approach you with the perfect set of facts that answer each of the issues neatly. You need to pull the facts apart (deconstruct), and attach the relevant facts to the key features of a section 588G action (refer section 588G framework). This is an analytical skill. Drawing up a timeline of events may be a good start. 5. There is no word count limit on this assessment. Additional Research If you wish to conduct additional research for your answer, I would suggest the following texts and online resources (in addition to your prescribed text): CCH Intelliconnect suite of databases, in particular: \"Australian Company Law Commentary Premium\"; and \"Australian Insolvency Management Practice Commentary\". You may also wish to search for relevant cases in the CCH databases. Type 'CCH intelliconnect' when conducting a library catalogue database search. Pamela F. Hanrahan, Ian M. Ramsay, Geof Stapledon, Commercial Applications of Company Law (17th edition), CCH Australia Limited, 2016 Recommended and further readings under the \"Readings\" tab on L@G. Facts You are employed as an accountant for a leading insolvency, restructuring and turnaround firm. You have been asked by the Liquidator to prepare a section 533 report on Phoenix Pty Ltd (In Liquidation) (the Company), which went into liquidation in August 2017. The Liquidator asks that you advise her on the liability of the Company's key management and directors for insolvent trading, pursuant to sections 588G and 588M of the Corporations Act 2001 (Cth) (the Act). Greg (CEO) and two independent directors (Lisa and Wendy) have been on the board of the Company for many years. The board meets every 6 weeks. Sam (CFO) is not on the board, but has been employed as the CFO since 2015. Sam is CPA qualified and reports weekly to the CEO. In May 2017, Mark (Chief Restructuring Officer or CRO) joined the board on a shortterm engagement, to restructure the Company. He is a partner of a rival insolvency firm. The report as to the Company's affairs, that the CEO provides the Liquidator on appointment, says that the causes for the Company's failure were due to the loss of financial support from their banking syndicate, a lack of management oversight and poor record keeping. Your investigations reveal: Sam and his team recorded financial information in MYOB, but only reconciled bank accounts half-yearly (at bank covenant reporting time), allocated inventory purchases directly to the COGS account, and only tested for depreciation of assets yearly. The Company was reliant on the banking syndicate to pay its debts, and to reinvest in new assets. Net cash flows from financing activities for FY17 was $1million, yet net cash flows from operating activities was negative ($2million). The Company's banking covenants were: net assets greater than $zero, liquidity ratio greater than 1.5x and net operating cash flows greater than $zero. The Company's draft management accounts for December 2016 showed that none of these covenants had been met. Due to the poor record keeping, the Company only reported the covenant breaches 3 months late (in March). The banking syndicate engaged Mark to perform an investigative accounts report on the Company to determine whether the Company was viable and what the banking syndicate should do. Whilst the report was being prepared, the banking syndicate refused to provide further funding. In early May 2017, Mark reported to the banking syndicate on the basis that the underlying business of the Company could be restructured and recommending that he be appointed as CRO. The banking syndicate agreed to this, but required the consent of the Company's Board. At the May 2017 board meeting, Greg finally informed the board of the funding issues and recommended that Mark be appointed as CRO. The board agreed. Lisa and Wendy claimed that they were unaware of the funding issues until the May 2017 board meeting. Between December 2016 and May 2017, total liabilities owed to unsecured creditors increased from $1.5million to $4million. Greg took 20 sick leave days during this period for the common cold. Sam's team was inundated with angry creditors, refusing to supply goods until payment in full was received. Employee wages were met, but PAYG tax (totaling $500k) and superannuation ($100k) remained unpaid. The ATO remained in regular contact with Sam, during which time the Company defaulted on 4 repayment arrangements with the ATO. Between June 2017 and August 2017, total liabilities owed to unsecured creditors increased another $250k. Although the banking syndicate had agreed to Mark's appointment, they still refused to provide further funding, believing that Mark would sell the business of the Company to an interested private equity firm. That deal never came to fruition, leading to your appointment. Advise the Liquidator on what action (if any) she can take against Greg, Lisa, Wendy, Sam and Mark for breach of the duty to prevent insolvent trading (s 588G of the Act) and the remedy (if applicable). Diagrams: Duty to prevent insolvent trading Is ue: Does section 58 G ap ly to [name of relevant director]? Step 1: Does section 588G apply to the director? Under section 588G(1), section 588G applies to the director if: 1. The person is a director at the time the debt is incurred 2. The company: (a) is insolvent at the time the debt is incurred; OR (b) becomes insolvent by incurring the debt. 3. At the time the debt is incurred, there are reasonable grounds for suspecting that the company is insolvent, or will become insolvent Debt is incurred For example: The terms of a bank loan may require the company to make a monthly payment. That represents an unconditional obligation to pay money to the bank in the future. The debt is incurred when the loan contract is signed. A debt for rent is incurred when the tenant executes the agreement to lease, and not on the days when rent is due but not paid: Russell Halpern Nominees Pty Ltd v Martin. A case example of 'debt incurred' is Hawkins v Bank of China Case example: Hawkins v Bank of China Facts: Company A provided a guarantee to the bank that was owed money by Company B and Company C (Companies A, B, C were in the same corporate group). Company B and C were unable to repay their loans to the bank as they were insolvent. Held: A debt is incurred when, by its conduct or operations, a company has a conditional, but unavoidable, obligation to pay a sum of money at a future time. Company A incurred a debt to the bank when the guarantee was signed. At that time Company A had a conditional, but unavoidable obligation to pay a sum of money to the bank should Company B and C default on repayment of the loan. Insolvency Section 95A is the starting point for interpreting the word \"insolvent\". Section 95A defines insolvency. A person is solvent if the person is able to pay all the person's debts, as and when they become due and payable. A person who is not solvent is insolvent..... Hmmmm.... The Courts work out when a company has the ability to pay debts by using a \"cash flow test\" and identifying indicators of insolvency. There are also presumptions of insolvency. Cash Flow test The cash flow test is this: are there sufficient cash resources to pay debts when they fall due? Cash resources include money which could be obtained through the sale of realisable assets or borrowing against the security of the company's assets (Powell v Fryer). Insolvency indicators In ASIC v Plymin & Ors, the Court provided a number of indicators of a company's insolvency: Poor relationship with financiers; Creditors unpaid outside trading terms, Special arrangements with selected creditors to pay the debt off, Legal documentation (e.g. summonses, solicitor's letters) relating to nonpayment of debts; liquidity ratio