Raj and Petunia are directors of Canadian Holdings Ltd (CHL). They decide that the company will purchase new premises and sign an agreement on behalf of the company to buy a new building for $600,000. CHL pays a deposit of $160,000 to the vendor and it is agreed that CHL will pay the balance in 6 months.

Prince is employed as the financial officer of CHL. Prince prepares the financial report on which Raj and Petunia base their decision to go ahead with the purchase of the new premises. Prince had been rather careless in preparing the financial report and it appears that the figures as to predicted future profit had been severely overstated. Neither Raj nor Petunia are accountants.

However, Raj and Petunia knew that the companys income had been reducing in the previous 12 months and the company had few forward contracts. They suspected that the company had been losing money for some time. CHL had to extend its overdraft with the bank to pay the deposit for the purchase of the new premises. Further, CHL had been late in making some payments to creditors and owed money to the IRD.

Six months later, CHL is unable to pay the balance of the purchase price to the vendor and is put into liquidation by the IRD. The liquidator believes that the directors have breached their duties to the company.

Required:

Advise the directors whether they have breached the liquidity duties of the Companies Act 1993, any defences they may have and the likely consequences of such breaches.

Word Limit: 700 words