QUESTION TWO

You are a graduate analyst working for a Melbourne insolvency and debt-recovery firm and are provided with the following instructions from your client.

Edin Zecic read a prospectus in November 2017 and bought $750,000 worth of units in Love a Nut Pty Ltd (LNPL), a company acting as a trustee and registered entity of a registered Managed Investment Scheme that operates seven Tofu Nut plantations through Australia. Edin is excited by this investment because he wants to invest in an Australian primary production but does not want to operate his own plantation.

At the time Edin purchased the shares, the prospectus revealed that:

1. Yarra Valley Credit Union lent $10 million to LNPL in April 2018, with 10% per annum interest, payable monthly, on an interest-only basis and the loan principal due in ten years. This loan is secured by a registered security interest over the Tofu Nut Plantation, all shares in LNPL, and all other assets of the company. All this security is currently worth $15 million;

2. Simone Chancellor, a director of LNPL, also provided her Portsea holiday house as security for the April 2018 Yarra Valley Credit Union Loan, which is mortgaged to the bank for up to $3 million;

3. Amir Mohammed, one of the directors of LNPL, lent the company $200,000 in November 2017. He also holds $500,000 worth of units. He was one of the first unitholders and manages the Victorian Tofu Nut Plantation. Further, in February 2020 the board of directors of LNPL approve:

a. A payment of $125,000 to a director - Jessica - for a Tesla car for business purposes; and

b. A payment of $100,000 to repay Amir. He is promised a share of the next crop n September 2020 as payment for the rest of the loan.

By November 2019 the value of investments in the Tofu Nut Plantation have doubled in value because LNPL has had the largest crop ever. Using the money lent by Yarra Valley Credit Union, LNPL has established 10 more tofu nut plantations. There is a lot of media coverage and everyone wants to be part of it. However, by the last week of September 2020, a series of bad weather events affect 7 of the Tofu Nut Plantations. This includes a hurricane in Brisbane, a severe drought in New South Wales, floods in Victoria, and hailstorms in Tasmania. The expected crop falls by 70% and the company runs into financial difficulties.

In January 2021 Amir resigned as a director of the company and issued a statutory demand for the company's failure to repay the loan.

A voluntary administrator is appointed over LNPL on 1 February 2020. Edin now seeks your advice.

Your manager has asked you to answer the following questions based on the legal issues raised by the allegations above. If there are any further facts that you would need to complete the analysis, state what questions you would ask and why these are necessary.You must refer to the relevant cases and statutory law in your answers.

d) Assuming the company moves into liquidation, on the facts, what is the order of payment in this liquidation?