Q4

The Tolhurst family has run an electrical business, TT Pty Ltd (TT), in Ryde for the last 50 years. Tom Tolhurst is the present managing director and his sister Beatrice is the company receptionist and also a director. There are 2 employees. The business has been running at a loss for 6 months. There are 7 main unsecured creditors with debts totalling $68,000. However a new government subsidy program has provided some hope. The program subsidises up to 80% of the wages of an apprentice electrician for 2 years. Tom sees this as an opportunity to take more clients and expand.

The company is financed by a loan of $200,000 from Eastpac Bank (Eastpac). Eastpac has security over all the assets of the company. The loans from Eastpac are also secured by a personal guarantee from Tom and his wife. Tom is particularly worried about his personal exposure under the guarantees he and his wife have given and about the welfare of his employees who have been very loyal during difficult times. TT has been late in the payment of rent on its Ryde shopfront premises each month for the last five months but has eventually managed to find the necessary funds, usually at about the time the second threatening letter has arrived. Bank transfers from TT to creditors to pay outstanding debts have often been rejected due to no funds being available. The company owes a particularly large debt ($45,000) to Gem Electrical Supplies Pty Ltd (Gem) that is overdue. Gem has served astatutory demand. The 21 days has expired.

Q: Tom sees his accountant who tells him not to worry and just keep trading. He tells him to pay Gem $10,000 to hold them off and not to tell anyone about the company's other debts. Should Tom be worried?