Luxe Marbles Pty Ltd (LM) is a supplier of superior European marble, granite and stone

products, and operates mainly in Sydney. Its managing director and major shareholder is

Lance Wright. The company has 40 other shareholders who are mainly family and friends of

Lance. The business has been doing well so Lance decides to issue bonus shares to all

existing shareholders and also to the company's 100 employees (taking the total number of

shareholders to 140). The shares carry a dividend of $2 per share. The large increase in the

number of shares on issue will make the dividend payment much larger this financial year

which will put a strain on the company's cash. However, Lance is not worried as trading

conditions are holding up.

Three months later things change for the worse as one of LM's largest customers, Redi-Build

Ltd goes into liquidation. The customer owes LM close to $1 million in unpaid supplies, and

the company's supply contracts do not allow it to take back any supplies remaining with the

customer. Lance decides to help the company by borrowing $5 million from a friend and

business associate, Amy Lee. Lance signs the loan agreement on and behalf of Luxe Marble

Pty Ltd. The loan agreement with LM provides that Amy will receive a fixed rate of interest

at 8% and will also receive 10% of any future profits that LM makes. Amy has rights to

inspect the financial statements of the company to verify the calculation of profits each

quarter and may require that the company be wound up if more than $3 million in assets are

lost or if losses exceed more than 25% of the company's assets.

Unfortunately, trading conditions continue to deteriorate and the losses generated since

Amy's loan were made total $200,000 so Lance comes up with a plan to save the business.

All future liabilities will be incurred by a new company that Lance sets up on LM's behalf

called White Knight Pty Ltd (White Knight). The directors of White Knight are Lance and

Amy. White Knight has no tangible assets of its own and no employees. Its sole shareholder

is Henry Ho, who is Amy's tax accountant (and who himself has no assets in his own name).

Creditors are assured that the new company "is really a new department of LM and has the

company's full financial support and commitment as well as the support of wealthy investor

Amy Lee." All revenues earned by White Knight are paid directly to LM. LM does have

assets worth $2 million at this time.

3 months later after the restructure White Knight is in liquidation. During that 3-month period

White Knight incurred $300,000 worth of debts. LM provided partly paid shares worth more

than $500,000 to White Knight so that White Knight could show valuable assets to creditors,

but 3 months after registration LM cancelled the shares for no explanation and no

consideration leaving White Knight with no assets and no way to pay its debts. In theory, it

could have sold the partly paid shares during the initial 3 months to pay its debts but Henry

generally did nothing without consulting Amy first.

You are representing SupplyCo Ltd, which is owed $100,000 from LM for debts incurred

after Amy made her loan, and a further $100,000 from White Knight. Advise SupplyCo Ltd

as to its potential rights using principles.