Comparative Insolvency Law

Take Home Examination 2018

 

SUBMISSION INSTRUCTIONS:

The LAW5CIL take home exam.

You will need to login to Moodle with your username and password at https://www.latrobe.edu.au/lms/login/then select the subject LAW5CIL and click on the LAW5CIL ELECTRONIC EXAM SUBMISSION link and then select the upload a file button.

 

EXAMINATION INSTRUCTIONS:

You must answer all of the questions. The questions total 100 marks. Please use your best efforts to complete this exam in no more than 3,500 words including footnotes. There is no need to do excessive research for this exam. Your course materials, the Corporations Act2001 and some general research should suffice.

 

Where possible, please try to draw comparisons from the text/readings/slides and offer your analysis of the material.

 

1. Explain the difference between a “cash flow” test and a “balance sheet” test for commencing a corporate insolvency case. Which is more accurate in determining whether a company is insolvent? How do these tests work (and please give examples) and which test do you think is better?

 

[5 points]

 

2. Pizza delivery company, Pizza Perfecto, recently bought an old motorbike to add to its fleet of delivery vehicles. Before the motorbike hits the road, the company takes it to Pizza Paint vehicle workshop for a complete respray in metallic blue. Pizza Paint’s terms and conditions retain title to all goods it supplies as part of its work until all invoices have been fully paid. To protect their retention of title, Pizza Paint registers a security interest on the PPSR against the Australian Company Number (ACN) of Pizza Perfecto before receiving the Motorbike for the respray work. Pizza Perfecto goes into liquidation before paying Pizza Paint for the work or the paint. As the liquidator

moves in to sell all vehicles, Pizza Paint wants to make a claim for the value of their paint. How might Pizza Paint be able to do this? Will Pizza Paint be successful?

 

[5 points]

 

3. Handmade Furniture Ltd (the Company) is an Australian company that has a contract with Townhouses Galore Pty Ltd (TG) to supply display furniture in all of their display homes. TG is a construction company specialising in building townhouses in the North of Melbourne. Over the course of 12 months, the Company sends invoices to TG totalling $60,000.  All of these invoices are outstanding. The Company has spoken with the director of TG, Mr T, to let him know that no further display furniture will be provided until the outstanding invoices and paid. Mr T reassures the Company that the non-payment was an oversight and that the invoices would be paid shortly. However, Mr T knows that it was not an oversight.  He knows this because he has not been able to pay any bills on time lately because he has been in hospital and unable to meet with prospective purchasers and sell any townhouses. The following week, a company called Townhouses Everywhere Pty Ltd (TE) contacts the Company to contract its services. The Company is suspicious as TE’s director is listed as Mr T, they operate out of the same corporate offices as TG, and they seem to be completing TG’s townhouse developments, using TG’s contracts, machinery and materials. The following week, XYZ liquidators contact the Company, notifying them that TG is in liquidation and that there are no assets to pay creditors.

 

At the first meeting of creditors, XYZ Liquidators advises that their preliminary investigations show that:

· Mr T had transferred TG’s assets to TE just days before the liquidator’s appointment

· The assets were transferred to TE, but nothing was paid for them

· Mr T refuses to hand over TG’s full financial records, even though the liquidator has been asking for them

 

Mr T comes to see you, Fancy Lawyer, for advice. Advise Mr T about his potential liability and any defences that may be available to him.

 

[20 points]

 

4. Ella is just starting out in business.  She supplies milk to milk bars on 30 day terms of credit and has been so busy that she can barely keep up with the orders. Milky Milk Pty Ltd contact her to supply an order for 3000 crates of milk to be delivered in one week. Ella was ecstatic! This would mean she could buy that new bag she had her eye on. She sends through the security agreement and Milky Milk Pty Ltd sends a signed version right back to her.  She is so busy however that she completely forgot to register her security interest on the PPSR.  Two weeks later Milky Milk Pty Ltd, not being able to sell all of the milk (it went off), files for voluntary administration. Advise Ella as to her options, if any.

 

[10 points]

 

5. Busy Bus Pty Ltd (BB) leases buses to for use in winery tours. Red Rider Pty Ltd (RR) is a company offering winery tours through the Yarra Valley. RR already has some buses that they own, but demand in tours means that another is needed, at least for the short term.  RR leases a bus from BB for a period of two years. BB emails RR asking them to agree to the standard terms and conditions (incorporating a security agreement) for the lease. The email also describes the VPN for the bus. A director of RR, Mr Rouge, sends an email response with an electronic signature of the Chief Executive, agreeing to the terms. Before the bus is delivered to RR’s premises, BB registers a financing statement on the PPSR. BB is able to register a purchase money security interest (PMSI) as the lease is for more than 12 months. This is their first dealing with RR.

Ten months later things have slowed considerably. RR is not getting much income from their winery tours and is finding it difficult to make ends meat so Mr Rouge, one of the company’s directors, decides to sell tickets to winery tours that they don’t intend to run. He sells 100 tickets, but it is still not enough to help get them out of the financial mess the company is in.

 

As if that wasn’t enough, Mr Rouge crashed the bus that he was leasing from BB. It was a total write off, but at least no-one was injured and it was insured. To his relief, his insurance company paid him out in full. He hasn’t told BB about the accident, and he doesn’t intend to replace the bus as the tours aren’t selling very well.  He would rather use the money to keep the company afloat. Besides, he has other buses he owns that can use for the tours if he needs to. Two months later, and one year after delivery of the bus, YellowBank, which has a previously registered general security interest over all the assets of RR, appoints receivers over RR to enforce its security interest. Advise BB and YellowBank of their rights. Who ranks in priority? What are the parties entitled to recover, if anything? Is Mr Rouge facing any liability? If so, what could he be facing?

 

[25 points]

 

6. Mira Birra Ltd (“MB”) is a public fashion company which is listed on the Australian Stock Exchange (“ASX”). The board of directors consists of Mira, Emma and Nathan who each hold 20% of the company’s shares. The remaining shareholders are investors trading on the ASX. The price of clothing has recently fallen in Australia due to lack of demand.  Consumers have little extra money to spend on fashion after paying their huge mortgages. Because of this, MB has encountered a cash flow problem whereby they have been unable to pay various suppliers in accordance with now outstanding invoices. The Head of Finance, Daniel, has secured continued supplies with these suppliers by agreeing to make pre-payments on each future order. He doesn’t want the directors to be aware of how bad it has become, so he doesn’t mention the outstanding invoices in his monthly report. However, this has culminated in the company failing to comply with their tax and rental obligations for several months.

 

The Australian Taxation Office (“ATO”) became infuriated by delayed payments from MB and, consequently, served a statutory demand on the company for $50,000 on 1 March 2009. In order to make this payment, the directors of the company entered into a loan agreement with Fast Money Ltd (“FM”) but only after the company executed an ALLPAP (which was subsequently registered on the PPSR) and each director executed a personal guarantee over the repayment of the principal loan ($50,000). The directors made the payment to the ATO but two months later realised they were starting to find it hard to pay back the loan to FM. As they are all responsible directors, they appoint a voluntary administrator to MB and hope that they can come out of administration via a DOCA. Advise the directors as to their potential liability, discuss how the administrators might increase the asset base of MB, and discuss how creditors might be paid out and in what order.

 

[25 points]

 

7. Explain the concepts or Territoriality, Universality and Modified Universality. Which theory do you think is most favourable? Give reasons for your answers.

 

[10 points]