Kremlin Spirits Pty Ltd (Kremlin) operates a business from premises it owns in Brisbane importing premium quality vodka. Its directors are Vasili and Svetlana (his niece). Kremlin has three shareholders: Vasili, Svetlana and Mikhail. Mikhail has lent considerable amounts of money to Kremlin over the years. Vasili controls the company’s business activities, while Svetlana does not concern herself with the day-to-day management of Kremlin’s business so that she does not really understand the business or its finances. Svetlana is currently undertaking a Bachelor of Commerce on a part-time basis and Vasili has told her that he would like her to take over the accounting side of the business when she finishes her degree in 2021. 

Due to the popularity of Australian wines, the vodka business falls into a slump. By early March 2020, Vasili is selectively paying trade creditors of Kremlin, having insufficient funds to pay all debts as they fall due. To prop up the company’s fortunes, however, Vasili arranges for the company to obtain a loan of $30,000 from an old friend to spend on advertising in April 2020. Despite the advertising campaign, a liquidator was appointed to wind up the company in June 2020.

Advise the liquidator in respect of the following matters under the Australian Corporations Act 2001 Cth:

(a) Whether there is any basis for recovering funds from the directors personally? If so, are there any defences that Vasili and/or Svetlana can rely on? (10 marks)

(b) In January 2020, Mikhail demanded that Kremlin should repay him some of the money it owed him. Vasili and Svetlana decided that Kremlin should pay half of the debt back to Mikhail. (5 marks)

(c) When Kremlin was established, it borrowed $100,000 from Large Bank. The loan was secured by a non-circulating security interest over the company’s premises and a circulating security interest over its assets and undertaking. Vasili and Svetlana also provided personal guarantees to the bank. When the circulating security interest was granted, neither Kremlin nor the Bank registered it on the Personal Property Securities (PPS) register. The necessary forms were provided to the bank, but a clerk at the bank lost the forms before they could be lodged. (5 marks)