Now that the mining boom is over many businesses are struggling to survive the downturn in economic activity

James is the managing director of a sports supply company, Clean Sports Pty Ltd. The

number of customers has decreased significantly over the last 10 months. However the

company is still locked in to a 3 year lease of expensive premises in Collins Street, which

costs $132,000 per annum.

James had gone on behalf of the company to the CBA Bank for an increase in the companys overdraft facility to $467,000 from $129,000. The Bank will only increase the overdraft if James, Danny and Bruce being the three directors all give personal guarantees. Reluctantly all three directors agree to give a personal guarantee to the Bank. However after three months the cost of the rent, staff costs and other overheads have meant that the company is running out of funds. Staff wages of $167,000 are outstanding which includes directors wages of $86,872. A supplier of computer software is owed $5,800 and has demanded immediate payment. The amount of $5,800 had been outstanding for 69 days. Bruce decided that the company should pay this creditor the money demanded immediately as the creditor had threatened to wind up the company. Payment was made on 6 September 2013. Trade creditors of $98,000 are still outstanding.

Dannys son was at school and needed a computer. Therefore Danny bought a computer from the company but only paid $300 for it. The market value of the computer was $680. This transaction took place on 3 February 2013. As at 18 September 2013, being the date that James comes to see you, there is cash at bank of $65,789, trade debtors are $212,650, of which $35,148 has been outstanding for more than 120 days. Debt collection action has been commenced against these debtors and it is expected on 25% of them will be collected and the balance of the $35,148 uncollectable. The company has fixed assets being computer equipment and furniture of $128,000 being its written down value. The total amount of the outstanding creditors is $235,000. The bank will not extend the overdraft further beyond the $467,000 and of the directors only Bruce is prepared to lend the company a further $50,000. The other directors and shareholders of the company will not contribute any further funds. James comes to see you as an insolvency expert. Based on the information above please advise James on the following questions he has raised.

Required: Is the company insolvent or is it a liquidity issue? If it is insolvent what are the consequences for the company and its directors and do they have any defence? Should the directors appoint an administrator or apply to wind up the company? What are the consequences of both actions for the directors and which would you recommend? If the company is liquidated what are the issues regarding the two transactions involving Bruce and Danny? Do the directors in a liquidationhave priority to be paid their wages before other employees? In your answer please refer to relevant case law and legislation.