Regal Cinematic (Burleigh) Ltd owns and operated a cinema in Burleigh Heads on the Gold Coast.

Patra, Yu Yan and Rebecca are the only directors of Regal. Patra was appointed the managing

director due to her extensive knowledge about operating cinemas. Both Yu Yan and Rebecca are

non-executive directors. Regal has a number of unrelated shareholders.

Over the last few years, Regal's financial position has steadily deteriorated. While Patra is aware

of this, she has not passed any financial information on to the other directors or indicated concern.

In fact, she has repeatedly told them that the company is performing wonderfully. Yu Yan and

Rebecca have received the company's financial reports, but they never look at them closely

because they assume that Patra or the company's auditors would alert them to any problems.

By January 2018, things have started to get dire for Regal. Attendance at its cinema has dropped

significantly after a competitor opened a new cinema nearby that offers premium in-cinema dining.

Regal's cash reserves are running low and Patra is post-dating cheques to avoid running out of

money. In a few instances, cheques have been presented when Regal had insufficient funds and

they bounced. On 20 January 2018, the manager of Regal's bank calls Patra with the news that the

bank will be forced to suspend the Regal's overdraft facilities unless the company improves its

financial position.

At a board meeting on 1 February 2018, Patra informs the board that she has a revolutionary idea

for Regal. She proposes that Regal enter into leases for two more cinemas located in Burleigh

Heads. She suggests that undertaking this transaction will mean revenue increases, and could even

make Regal a potential takeover target for its competitor. Yu Yan and Rebecca are intrigued and

tell Patra to do whatever she has to do to get the transaction finalised.

After the meeting, Patra approaches a commercial leasing agent who informs Patra he has two

cinemas available for lease. The agent says the cinemas are in wonderful condition and will be just

what Regal needs. Patra inspects the cinemas with her friend Farid, who is an accredited residential

building inspector. Patra thinks the cinemas are acceptable and Farid says he can't see any

structural problems with the buildings.

On 1 March 2018, the Regal board has another further meeting and Patra gives an update regarding

the leases. She also says that Regal needed $2 million to place signage on the new cinemas. Patra

says she has reached an agreement with Regal's bank for it to loan the company $1 million, and

she suggests that Yu Yan and Rebecca each contribute $500,000 in exchange for shares in Regal.

Yu Yan and Rebecca agree.

On 5 March, the leases are signed, Yu Yan and Rebecca transfer a combined $1 million to the

company and a credit agreement is entered into with Regal's bank for $1 million. The new signage

is completed on 10 March and Patra has arranged a grand opening for 15 March.

However, on 13 March Patra receives a letter from the Gold Coast City Council saying that Regal

is not permitted to open the two new cinemas because they do not have adequate fire exits and the

fire sprinkler system needs to be replaced. After some preliminary investigations, Patra discovers

that it would cost over $5 million to install additional fire exits and upgrade the sprinkler system.

By 20 April 2018, the directors have no alternative but to place Regal into voluntary administration,

and the company subsequently goes into liquidation.

The liquidator now wishes to commence an action against the directors (a) alleging the directors

breached their duty of care, skill and diligence; and (b) for insolvent trading. What would you

advise Patra, Yu Yan and Rebecca about their respective situations?