Question 5

Harry, Irene and Henry are the directors and shareholders of Tomb Raider Pty Ltd. Tomb Raider are a swimming pool construction company.

The market for pools in Australia is very strong and highly competitive. Each of the directors deals with this by devising expensive advertising campaigns, and attempting to undercut their competitors' prices.

Unfortunately, Harry, Irene and Henry are not good financial managers. In recognition of this they employ a financial accountant, Brad, to manage the financial side of the business. Brad is paid a good salary for this, but he has no say in the company's activities.

Brad advises Harry, Irene and Henry that they have to refrain from their undercutting practices, because their cash flow position is in peril. The directors tell Brad not to interfere in managerial decisions, but just make sure there is money to pay the subcontractors. Brad finds this increasingly difficult and begins to undertake a programme of only paying select creditors. The company has few options left to generate sufficient cash to fund continuing operations.

In frustration with the company's troubles, Brad resigns. The directors are then served with a director penalty notice from the Australian Taxation Office and they respond by putting the company into voluntary liquidation. The liquidator investigates the actions of Harry, Irene and Henry in the months leading up to the liquidation and seeks your advice as to whether the directors incur any liability for the debts of the company