Question 4

Rapid Stop Limited ("Rapid Stop") is a manufacturer, distributor and supplier of Motor Vehicle alternators. Rehan is a director of Rapid Stop. He was formerly the managing director of Rapid Stop. Rehan has not been re-appointed as managing director, however he continues to act as managing director with the knowledge and acquiescence of the board of directors.

Due to the abundance of cheaper imported alternators from other countries, the demand for Rapid Stop's more costly car alternators has decreased. Some of Rapid Stop's major clients have reduced or cancelled their orders, which has affected Rapid Stop's cash flow significantly. All of Rapid Stop's assets have been given as security to its bank for the loan provided by the bank to Rapid Stop. The bank has refused to supply Rapid Stop with further finance and the company has been unable to find alternative ways of raising capital. In March 2020 Rapid Stop's major client goes into liquidation. This puts Rapid Stop's cash flow under further pressure and the company therefore delays payments to its creditors. The creditors initially do not enforce payment, but most of the creditors begin to put Rapid Stop on 'cash on delivery' ('COD') terms whereas they had previously allowed at least 30 days' credit. Other creditors even send lawyers' letters threatening to commence legal action against Rapid Stop to enforce payment of the debts owing. Certain cheques given to creditors as payment are dishonoured, in other words they 'bounce'. The company taxes of $105 million are due and payable by the end of July. On the 1st August 2020, Rehan enters into a contract for the relining of a blast furnace used in the production of the steel casings of their products as, without the repair being done, the production of alternators by Rapid Stop would come to a halt. Rehan does not consult the board of directors before entering into the contract and the other directors are unaware of the existence of the contract. The cost of the repair is $50 million, leaving Rapid Stop with assets of only $75 million. As at the date of completion of the repair, the company taxes remain unpaid and no extension of time has been agreed to by the Australian Taxation Office. The other directors deny that Rapid Stop is bound by the contract.

REQUIRED:

With the aid of the IRAC legal problem solving approach advise Rehan in detail whether he has breached the insolvent trading provisions of the Corporations Act 2001 (Cth) including whether he could successfully raise any defence.