You have recently graduated as an accountant/ financial adviser and your first position is with an integrated accounting and financial services organisation in Camberwell called Peabody and Associates Pty Ltd (PA). It is an unlimited company.

West Towers Pty Ltd (WT) is a large private company and is a client of PA. See below for the corporate structure. It is involved in the supply of plumbing components to the domestic and commercial building sector.

Its operations are based in Bayswater, Bendigo and Paramatta.

The business in Paramatta was the result of the acquisition of a smaller company in Paramatta.

However due to rising costs, interest rates and consumer and business confidence being down, the demand for supplies is not so strong as in the past. In addition, commercial builders are taking longer to pay their debts to the company.

This has led to a significant downturn in revenue and also the company is struggling to be able to pay staff and suppliers as well as the Australian Tax Office being the GST outstanding and the pay as you go withholding instalments of tax due on wages.

The CFO has managed to negotiate terms of payments to be by instalments to the key suppliers and also the ATO.

The terms of the instalment plans for repayment are for 12 months from 1 August 2023 and thereafter any outstanding debts must be paid in full.

The chairperson and the Managing Director of WT have requested a meeting with the managing director of PA to discuss the issues.

The Managing Director/Partner of PA, Janelle Powers is away in Adelaide on client business and cannot attend the meeting. She will not be back until Monday 18 September 2023.Therefore, she has requested the senior manager, Faiz to organise the meeting with the clients. You have also been asked:

1. To sit in on the meeting and take notes on the issues raised and then to prepare a written report on the matters for review by Faiz and Janelle. The meeting is scheduled for Thursday 7 September 2023 at 9 am.

You will be expected to take notes of the meeting and then prepare a draft statement of advice for Faiz to review. You are to use the attached template form to prepare your draft statement of advice. Once Faiz is happy with the report, he will send to Janelle for review.

Extracted from the permanent file records of West Towers Pty Ltd (WT) held by PA.

West Towers Pty Ltd is a large private company established in 2013.

Corporate Structure of West Towers Pty Ltd

The Board of Directors of the company consist of:

John Symons: Executive Director

Thomas Manadhar: Executive Director

Joshua Simpson: Chairperson and Independent Director

Brian Brunetti: Non-Executive Director

Johanna Delinac: Nominee Director#

# Nominated by Reece Plumbing Supplies Pty Ltd.

Ngoc Anh Do: Company Secretary

Senior Management of the Company:

John Reece: CEO and Managing Director

Thomas Manadhar: Chief Financial Officer

Ngoc Anh Do: Company Secretary

Janet Boyd: Senior sales manager

Mikhail Kuleshov: Senior factory manager

Shareholding of the company as at 30 June 2022:

Number of Shares %

Reece Plumbing Supplies Ltd 599,684 25.6

John Symons 216,365 9.2

Thomas Manadhar 2,834 0.1

Joshua Simpson 1,524,593 65.1

Total shares 2,343,476 100.00

Reece Plumbing Supplies Ltd was a substantial creditor to the company and in 2020 it converted part of the debt to the above equity in the company.

Based on the last valuation carried by PA at as 30 June 2023 the current share price is 15c per share. The shares were as high as $1.05 at 30 June 2022. Prior to that they were valued at $2.79 in 30 June 2020.

The current market value of the company is 14.5c which is different to the value based on the net tangible assets as at 1 September 2023.

Reece Plumbing Supplies Ltd acquired their shares in the company in the following tranches:

1. 150,000 shares at 80c each fully paid
2. 200,000 shares at 72c each fully paid
3. 249,684 shares only partly paid 40% (at an issue price of 65c).

Reece Plumbing Supplies Ltd converted from debt to equity because of the uncertainty of Wes=t Towers Pty Ltd being able to pay them.

Summary of Draft Financial Statements as at 30 June 2023 (full year)

Statement of Profit and Loss

Sales $19,543,000

Cost of sales ($8,779,000)

Operating costs ($13,048,000)

Net operating loss ($2,284,000)

Statement of Financial position

Current assets $9,879,000

Non-current assets $18,000,000

Total assets $27,879,000

Current liabilities $10,627,000

Non-current liabilities $8,694,000

Total Liabilities $19,321,000

Net assets $8,576,000

Represented by:

Equity:

Shareholders funds $2,343,476

Retained earnings* $6,232,524

Total Equity $8,576,000

• * after deducting the current year loss of $2,284,000.

The companys constitution is also attached.

Issue 1 Financial Issues:

Since the interest rate rises by the Reserve Bank, customers of WT are finding it harder to find new business. In addition, comments by customers of WT to the staff of WT is that customers are delaying payments to them, which puts pressure on the customers of WT and therefore on the cash flows of WT.

The Board and senior management expect demand to pick up in early 2024 when the cost of living and interest rate rises ease but are concerned about how the company can survive until then. The Board and senior management is optimistic that the company can ride out the current economic environment and will actively attempt to trade on.

Projected results for the 6 months to 31 December 2023 show the company making a trading profit of $850,000. And projected for the full year 30 June 2024 a profit of $2,976,487.

John and Joshua have explained that staff costs, operating expenses, inventory issues, and the cost of funding the new factory in Bendigo were the main reason for the trading loss of $2,284,000.

To address some of these issues the Board has retrenched 15% of the staff (35) leaving 198 staff. Further retrenchments may be possible.

The company took out a fixed interest rate loan at 2.5% for $6,000,000 to build the new factory in Bendigo. The fixed interest loan will convert to a 5-year loan with payments on a principal and interest basis from 1 September 2023 at a rate of 5.79% which will increase the payments by $23,242 per month.

The directors are mindful of the need to retain funds for working capital and are reluctant to pay a dividend based on the results for 30 June 2023.

However, Reece Plumbing Supplies Ltd wants a dividend of at least .04 c per share paid to all shareholders.

Issues they seek advice on:

1. Johanna states that as there is a profit even though there was trading loss this year and therefore the company should declare and pay a dividend.
2. Under the constitution can Reece Plumbing Supplies Ltd force the company to pay a dividend? Johanna is a director of the company, who does she ow e her duty to: the company or to Reece Plumbing Supplies Ltd?
3. Looking at our financial position from the above financial statements, would you recommend we pay a dividend to the shareholders?
4. What are the consequences for the board of directors if the company trades on when the above information indicates that the company is not in a very strong financial position?
5. What happens if Reece Plumbing Supplies does not pay the unpaid amount on the third tranche of the shares when requested by the Board?

Issue 2:

Joshua and John believe that the Board of Directors need a person with contacts in the finance sector that can access finance on a short-term basis to help the company.

Carlo Lagos is a well-known financier and is keen to be a board director.

The company of which Carlo is a director has been involved in certain financial transactions and irregularities that have attracted the attention of the regulatory authorities and these activities have been documented on 60 Minutes and 7.30 Report on television.

The company and Carlo have not been charged but John and Joshua think it is important to have him as a director.

Issues they seek advice on:

1. Joshua and John want to appoint him as a director. Can they?
2. Brian is not happy for him to be a director, what can Brian do?