Question 3 Company in financial difficulties (10 + 10 = 20 marks) Dairy Fresh Pty Ltd (DF) manufactures yoghurt, cream and custard products in a large factory it owns in Melbourne. DF's factory is equipped with sterilising and heating machinery and refrigerated storage facilities. These are all owned by DF. In 2014, DF borrowed money from its bank, Bank Better, to upgrade its manufacturing process. In order to obtain the loan, DF granted a security interest to the bank over all its current and future property, including the new machinery DF was purchasing as part of the upgrade of the manufacturing process. Book debts and stock in trade were also included in this security interest. The security instrument provided that it would be a default if the value of the stock in trade fell below $100,000. DF usually held approx. $200,000 of stock in its business. DFs stock included long life dairy products as well as those with a shorter use by date. All DF products needed to be correctly stored and many needed refrigeration. Unfortunately in the summer of 2015 there was an outbreak of illness normally associated with bacteria in milk. Amongst those affected was a child, and legal action was taken against DF alleging that a DF product was the cause. As a result of the publicity around the case, ABC Supermarket, DFs largest customer, returned all its DF stock. These products were returned on a very hot day and many were now of poor quality, close to their use by date and unable to be resold to any other customers. Page 26 In addition, the value of the remaining products dropped. The final result was that the value of DFs stock in trade fell below $100,000. This meant DF was in default of the loan conditions from Bank Better. This gave the bank the right to appoint a receiver. The directors are now concerned about the company's viability, believing they may be unable to pay suppliers immediately. Required: (a) Discuss what course of action the directors should take if they are concerned about the company's viability. (10 marks) (b) Discuss the consequences to the company and directors if Bank Better appoints a receiver. (10 marks) Question 3 Company in financial difficulties (10 + 10 = 20 marks) Dairy Fresh Pty Ltd (DF) manufactures yoghurt, cream and custard products in a large factory it owns in Melbourne. DF's factory is equipped with sterilising and heating machinery and refrigerated storage facilities. These are all owned by DF. In 2014, DF borrowed money from its bank, Bank Better, to upgrade its manufacturing process. In order to obtain the loan, DF granted a security interest to the bank over all its current and future property, including the new machinery DF was purchasing as part of the upgrade of the manufacturing process. Book debts and stock in trade were also included in this security interest. The security instrument provided that it would be a default if the value of the stock in trade fell below $100,000. DF usually held approx. $200,000 of stock in its business. DFs stock included long life dairy products as well as those with a shorter use by date. All DF products needed to be correctly stored and many needed refrigeration. Unfortunately in the summer of 2015 there was an outbreak of illness normally associated with bacteria in milk. Amongst those affected was a child, and legal action was taken against DF alleging that a DF product was the cause. As a result of the publicity around the case, ABC Supermarket, DFs largest customer, returned all its DF stock. These products were returned on a very hot day and many were now of poor quality, close to their use by date and unable to be resold to any other customers. Page 26 In addition, the value of the remaining products dropped. The final result was that the value of DFs stock in trade fell below $100,000. This meant DF was in default of the loan conditions from Bank Better. This gave the bank the right to appoint a receiver. The directors are now concerned about the company's viability, believing they may be unable to pay suppliers immediately. Required: (a) Discuss what course of action the directors should take if they are concerned about the company's viability. (10 marks) (b) Discuss the consequences to the company and directors if Bank Better appoints a receiver. (10 marks)
