Vidmark Ltd (Vidmark), a video marketing services company, was registered in July 2016 by Arjun, Barbara and Charles. Each of them had subscribed for 10 x 1.00 ordinary shares in the capital of the company and had become a director. No one else owns any shares or takes part in the management of Vidmark.

Shortly after incorporation, each director entered into a five-year service agreement with Vidmark at an annual salary of 50,000. The service agreements contained the following clause:

During the term of this agreement and for 12 months following the termination of this agreement, you shall not enter into any contracts for the supply of video marketing services with any person who is, or in the previous 12 months has been, a Vidmark customer.

Initially, Vidmark was very successful. It rapidly gained a reputation as a provider of creative, effective, on-line advertising videos, delivered on time. Although its annual accounts showed it had earned a healthy profit in each of its first two years of operation, no dividends were paid out. The profits had been retained as working capital and Vidmark had bought expensive executive company cars for each of its directors to use.

By the end of Vidmark's third operating year, Arjun and Barbara had become unhappy with Charles. He was spending an increasing amount of time and company money attending parties and marketing events at which they believed he was building his own rather than Vidmark's reputation. Arjun and Barbara also wanted to pay a dividend. The accounts showed that Vidmark had made a profit of 20,000 in year one, an annual profit of 25,000 in year two, and had broken even in year three, i.e., although it had not managed to make any profit in year three, it had not made a loss either.

In August 2019, at a general meeting attended by all three of them:

(i)a unanimous resolution was passed to declare and immediately pay a 30,000 dividend; and

(ii) Arjun and Barbara passed a resolution removing Charles as a director.

Charles was very unhappy. He refused to leave Vidmark, until he received payment of his part of the dividend and he further demanded that Arjun and Barbara buy his shares from him. Arjun and Barbara immediately transferred 10,000 to Charles's personal bank account and agreed to consider what to about his shares. He drove off in his company car yelling that he would sue them for getting rid of him. They were relieved to see the back of him. Later that week, Barbara agreed that Charles could buy his company car from the company for 5,000. Charles has never paid for the car and periodically sends emails threatening to sue Vidmark for compensation.

In September 2019, Charles registered a company called Mastervid Ltd (Mastervid). He was the only shareholder, director and employee of this company. Charles sent emails to all Vidmark's customers, signed "Charles, Creative Director, Mastervid Ltd", inviting them to a party to launch "Mastervid: the best video marketing service provider you will ever experience".

In the following six months, many of Vidmark's customers moved their accounts to Mastervid. In January of this year, Arjun and Barbara realised that Vidmark was insolvent. They continued to trade, and in, February 2020, Vidmark incurred a 10,000 debt to Softy Ltd (Softy), a trade creditor. In March 2020, Arjun and Barbara were informed that Vidmark's accountant, Neil, had been unwell for many years and had compiled the company's accounts negligently. Vidmark had in fact made a profit of 10,000 in year one, a further 10,000 in year two, and had made a loss of 5,000 in year three.

In April 2020, Vidmark was forced into liquidation by HMRC to whom it owes 50,000 VAT and 15,000 corporation tax. The company has granted no charges. It owns two cars, valued at 15,000 each, and little else of value. It has 12,000 in its bank account and is owed 8,000 by its customers. The car sold to Charles is also worth 15,000. In addition to its debt to Softy, Vidmark owes a number of other unsecured creditors a total of 25,000. The liquidator has already incurred 15,000 in expenses. Charles has submitted a claim that he is owed compensation for the untimely termination of his five-year service contract.

(a)Advise the liquidator on Vidmark's rights, and the steps the liquidator can and should take to assert those rights, and Vidmark's liabilities, arising in relation to:

the dividend;

the sale of the car to Charles; and

Charles' service agreement.

(b)Discuss the relevant rules concerning how Vidmark's assets are distributable among the various creditors.You should also refer to the missing information and uncertainties that the liquidator would need to obtain and resolve in order to determine how much each creditor (or class

of creditors) would be entitled to.