QUESTION 3 - 10 marks total (2 parts worth 5 marks each) Ashton Chirac is a well-known French pastry chef known for his award-winning croissants and baguettes, and for his numerous cookbooks. Recently, questions have been raised about his business structure, the solvency of his companies and his obligations as a company director. In April 2020, three of Mr Chirac's companies - Chapel St Pty Ltd, Flinders Lane Pty Ltd and Black Rock Patisserie Pty Ltd ("Black Rock Patisserie") - went into voluntary administration. According to the administrators' report, sent to creditors last week, the Melbourne upmarket retailer Black Rock Patisserie "may have been insolvent from at least early to mid-2019". Black Rock Patisserie operated a French cafe in Melbourne's South Yarra, under the name "The French". According to a Good Food Guide article from 2019, The French "upends the traditional cafe concept for a multi-course experience delivered one bite at a time, degustation-style" with $45 and $65 menus. The administrators, DW Advisory's Lola Smart and Rose Clarke, have pointed out that Black Rock Patisserie accumulated $1.2 million worth of trading losses since January 2019 and that it has not been paying rent since early 2020. They note the company appears to have had insufficient working capital since the 2019 financial year to meet its short-term obligations, it does not appear to have reported a positive net asset position, and it does not appear to have complied with all of its tax lodgement obligations. The administrators noted only one positive factor of Black Rock Patisserie's financial position: the fact it received financial support from related parties until early 2020. The administrators note their investigations have disclosed potential breaches of the Corporations Act. Mr Chirac is the sole director, secretary, and shareholder of Black Rock Patisserie. His other two companies - Chapel St Pty Ltd and Flinders Lane Pty Ltd - consist of five retail stores, one pop-up store and one production kitchen in Sydney, and three retail stores and one production kitchen in Melbourne. The administrators' finding, based on their investigations to date, is that "it appears likely "these two companies, like Black Rock Patisserie, may have been insolvent from mid-2019". Mr Chirac says Black Rock Patisserie suffered because of low turnover and construction surrounding the shop for the past four years. The administrators say that, based on the limited review so far, the failure was due to poor strategic management of the company, poor financial control and poor turnover combined with high overheads. On the failure of the rest of his companies, the directors, who include Mr Chirac, attribute the financial difficulties to the market downturn, increasing costs to run the business, "mistakes in concepts" and "not surrounding myself with the right people". The administrators say the continued trading losses, particularly in Melbourne, declining revenue over the past 12 months, ongoing financial support for Mr Chirac's Black Rock Patisserie project and high overheads in the production kitchens are to blame. (1) Has there been insolvent trading? Explain the test to be applied and then apply that test to the facts in the question. [5 marks] (ii) Identify all defences relevant to insolvent trading in the Corporations Act and analyse each defence to assess whether it may be available on the facts? [5 marks] QUESTION 3 - 10 marks total (2 parts worth 5 marks each) Ashton Chirac is a well-known French pastry chef known for his award-winning croissants and baguettes, and for his numerous cookbooks. Recently, questions have been raised about his business structure, the solvency of his companies and his obligations as a company director. In April 2020, three of Mr Chirac's companies - Chapel St Pty Ltd, Flinders Lane Pty Ltd and Black Rock Patisserie Pty Ltd ("Black Rock Patisserie") - went into voluntary administration. According to the administrators' report, sent to creditors last week, the Melbourne upmarket retailer Black Rock Patisserie "may have been insolvent from at least early to mid-2019". Black Rock Patisserie operated a French cafe in Melbourne's South Yarra, under the name "The French". According to a Good Food Guide article from 2019, The French "upends the traditional cafe concept for a multi-course experience delivered one bite at a time, degustation-style" with $45 and $65 menus. The administrators, DW Advisory's Lola Smart and Rose Clarke, have pointed out that Black Rock Patisserie accumulated $1.2 million worth of trading losses since January 2019 and that it has not been paying rent since early 2020. They note the company appears to have had insufficient working capital since the 2019 financial year to meet its short-term obligations, it does not appear to have reported a positive net asset position, and it does not appear to have complied with all of its tax lodgement obligations. The administrators noted only one positive factor of Black Rock Patisserie's financial position: the fact it received financial support from related parties until early 2020. The administrators note their investigations have disclosed potential breaches of the Corporations Act. Mr Chirac is the sole director, secretary, and shareholder of Black Rock Patisserie. His other two companies - Chapel St Pty Ltd and Flinders Lane Pty Ltd - consist of five retail stores, one pop-up store and one production kitchen in Sydney, and three retail stores and one production kitchen in Melbourne. The administrators' finding, based on their investigations to date, is that "it appears likely "these two companies, like Black Rock Patisserie, may have been insolvent from mid-2019". Mr Chirac says Black Rock Patisserie suffered because of low turnover and construction surrounding the shop for the past four years. The administrators say that, based on the limited review so far, the failure was due to poor strategic management of the company, poor financial control and poor turnover combined with high overheads. On the failure of the rest of his companies, the directors, who include Mr Chirac, attribute the financial difficulties to the market downturn, increasing costs to run the business, "mistakes in concepts" and "not surrounding myself with the right people". The administrators say the continued trading losses, particularly in Melbourne, declining revenue over the past 12 months, ongoing financial support for Mr Chirac's Black Rock Patisserie project and high overheads in the production kitchens are to blame. (1) Has there been insolvent trading? Explain the test to be applied and then apply that test to the facts in the question. [5 marks] (ii) Identify all defences relevant to insolvent trading in the Corporations Act and analyse each defence to assess whether it may be available on the facts? [5 marks]