McDaniel Ltd. (McD) is a wholly owned subsidiary of Kentucky Financial Company Ltd. (KFC), both companies registered in the United Kingdom. KFC intends to sell its shareholding in McD and has invited bids for that purpose.

Gotham Bank Ltd. (Gotham) has made a bid to purchase all the issued share capital of McD. The purchase price of the shares is 50 million. Gotham proposes to finance the share purchase by a loan amounting 25 million from KFC. The balance of the purchase price will be paid using:

1. 15 million loan from KFC to Gotham which is secured by a floating charge on the assets of McD; and
2. 10 million cash from Gothams own resources.

McDs audited accounts show that it has assets valued at 100 million. McD has liabilities in the sum of 80 million. The accountants of McD advise the Boards of Directors of both McD and KFC that the proposed transactions with Gotham are prejudicial to McDs interests.

The Board of Directors of McD approve a resolution to enter into both transactions. The Board of Directors of KFC also passes a resolution to authorise the loan to Gotham.

Advise the Boards of Directors of McD and KFC as to their potential liability in respect of the resolutions.