Sapphire Queen Pty Ltd ("Sapphire Queen") leases and operates a fleet of cruise ships that take mainly elderly passengers for holidays around coastal Australia and the Pacific. Sapphire Queen has four directors, Dave, Kanga, Stuart and Britney.

Dave is the Chief Financial Officer ('CFO') of SQ. Kanga is the managing director of Sapphire Queen and is also in charge of marketing SQ's cruises to the public. Stuart is a maritime expert who ensures that the Sapphire Queen ships are seaworthy and that all regulations are complied with. Britney is the manager of on-board entertainment and frequently travels on the Sapphire Queen ships to ensure that passengers have a rich variety of entertainment to choose from. Britney is not interested in business matters and simply does what Kanga tells her to do in relation to board matters.

During December 2018, one of SQ's ships, Island Sapphire Queen was damaged by a hurricane. The electricity generators and toilet facilities failed as a result and many passengers became sick after an outbreak of gastroenteritis.Much negative publicity ensued as a result of passenger photos. However, Sapphire Queen paid its usual Christmas bonuses to the directors. They received $5k each on 20 December 2018. Likely not insolvent yet

SQ future bookings fell dramatically. By 1 March 2019 Sapphire Queen has fallen behind in paying both its staff and fuel bills. A ruling from the Tax office at the same time unexpectedly increased the tax instalment Sapphire Queen was expecting to have to pay. Sapphire Queen approached Cheatem Bank ('Cheatem') also on 1 March to arrange a loan but Cheatem declined to lend Sapphire Queen more money (than it has already lent SQ).

Insolvent? Discuss indications of insolvency

Kanga hires a consultant company Arrow to provide advice to help Sapphire Queen overcome its problems.Arrow spends a few hours on the internet researching Sapphire Queen and then provides a letter of advice with a disclaimer at the top of the letter. In the advice, Arrow recommends Sapphire Queen hire the band Boyband for its cruises as a drawcard to increase bookings and that Sapphire Queen employs an expensive advertising strategy to promote Boyband's performances.

Reliance on consultant - defence?

Kanga presents the plan at the next scheduled meeting of the Board of Directors ('the BoD') on 1 April 2019. Britney does not attend the meeting because she is cruising on Fantasy, another of one Castle's ships. Dave is worried about whether the financial position of Sapphire Queen will allow it to incur so much debt and tries to alert Kanga and Stuart of his concerns but they ignore him. Possible defence for Dave

The directors vote on the proposal.Britney is not present, Dave votes against it but the proposal passes with the votes of Stuart and Kanga. On 1 May Sapphire Queen signs a $3 million contract with Boyband to perform gigs on Castle's ships while they cruise the Pacific. Payment is to be made in 3 equal instalments with the first one due on 5 October 2019.Was SQ trading while insolvent. Breach of s.588G?

Bookings do not improve - the elderly passengers would rather play Bingo than attend a Boyband performance. Stuart begins discussions with SQ's rival shipping line Fiesta Pty Ltd ('Fiesta') to take up a position as their maritime advisor. Breach of section 181

In August, Stuart tells Fiesta about SQ's secret methods of speeding up passenger embarkation and accepts a lucrative offer to work for Fiesta. Breach of section 181 Sapphire Queen is unable to pay Boyband on 5 October. On 12 October 2019 Boyband services Sapphire Queen with a Statutory Demand and on 21 November 2019 Boyband applies to the court to wind up the operation. The court appoints a liquidator on 15 December 2019.

REQUIRED:

a) Referencing provisions of the Corporations Act and relevant case law, advise your manager about whether there are grounds for ASIC to bring civil or criminal action against the directors.

b) If ASIC's prosecutions team decides to pursue action, what penalties could ASIC seek from the court?