ZinZan Pty Ltd (‘ZZ’) is a small family-owned company that manufactures high-powered speed boats. ZZ was developed from a sole tradership by Bruce. Now semi-retired, Bruce was still actively involved as a member of ZZ’s board. Poppi, Bruce’s daughter was ZZ’s managing director. Over the years, ZZ had often borrowed funds from East Bank (‘EB’), using ZZ’s assets as security for the loans. Under the terms of these loan agreements, EB was empowered to appoint a receiver to take control of ZZ’s secured assets in the event of failure ZZ’s to repay EB. As Australian domestic spending tended to constrict in 2012, ZZ noticed a disturbing downturn in its boat sales. By early 2013, all indications were that ZZ would be unable to repay its current loan to EB.
1.1 Advise EB what it can do to recover its money if ZZ is unable to repay its loan?
1.2 If ZZ is unable to repay its loan to EB, explain in detail what steps ZZ’s board should take, the procedure likely to follow those steps, and why?
ZZ purchased its raw materials from Marine Supplies Ltd (‘MS’). MS had dealt with Bruce from his early days as a sole trader. Consequently ZZ had a privileged credit rating with MS, allowing ZZ to receive goods ordered on 90 days credit. However, by early 2013, ZZ had owed MS an amount somewhere in the vicinity of $50,000 for six months. This debt fluctuated monthly because ZZ maintained a continuing business account with MS. However, from MS’s viewpoint, there appeared a real prospect that ZZ would not be able to repay this debt in full.
1.3 Explain in detail what steps could be taken by MS if ZZ failed to re-pay MS for materials already supplied.
By June 2013, despite ZZ’s board’s best efforts, ZZ had to be wound up. Roy, ZZ’s liquidator, noticed the following ledger entry in ZZ’s records:
Date Details Debit (Dr) Credit (Cr) Balance
Opening balance 45,000
2013/ January 3 MS – stainless steel railing, ballast tanks, synthetic polymer 8,000 3,000 50,000Dr
2013/February 4 MS – aluminium sheeting, Kevlar rope 5,000 3,000 52,000Dr
2013/ March 4 MS – winch 1,000 3,000 50,000Dr
2013/April 2 MS – fibreglass repair ingredients 1,000 1,000 50,000Dr
2013/ May 6 MS – carbon fibre 1,000 1,000 50,000Dr
Closing balance 61,000 11,000 50,000Dr
Roy also learnt that in February 2013 Poppi had convinced ZZ’s board to approve a gift of a ZZ Speedster speed boat and trailer to Bruce, in appreciation of his years of service to ZZ. This gift had a market value of $250,000.
1.4 Advise Roy in relation to MS and Bruce
During the past 20 years Dover Homes Ltd (‘DH’) had become one of South Australia’s largest builders, specialising in housing projects that incorporated shopping centres and golf courses. DH had three executive directors: Charlie, Nino and Rocky. These three had originally worked together as bricklayers, building houses for friends and family. As word spread about the quality of their workmanship they ‘came off the tools’ into supervisory roles. Eventually they formed DH with Charlie as managing director, Nino as director and company secretary, and Rocky as director and chief financial officer.
Each new project undertaken by DH required substantial outlay of capital prior to the realisation of any financial return. The latest project placed DH in a difficult financial position as a downturn in the home buying market meant that DH’s cash flow was way below its usual level of fluidity. Rocky warned Nino of DH’s financial difficulties. Nino shook his head and said, ‘We’re not accountants. We are real builders who can build a complete home with our own hands. So let’s get on with doing just that!’ As a result, neither Rocky nor Nino mentioned DH’s low cash flow to Charlie. At DH’s next board meeting Charlie excitedly outlined plans for the company’s next housing project, to be named ‘Rich Park’. Charlie justified the Rich Park project by citing a government report predicting a rapid rise in South Australia’s population over the next ten years due to the anticipated mining boom. Nino became excited at the prospect of supervising the building of more new homes. Faced with Charlie’s and Nino’s exuberance, Rocky realised that to object to the Rich Park project would be futile. Also, Rocky had a personal reason for agreeing to commit DH to Rich Park. Unbeknown to Charlie or Nino, Rocky’s cousin, Aldo, owned Pezzente Pty Ltd (‘Pezzente’). When Rocky and Aldo met at regular family gatherings, the two cousins would informally share information concerning the latest projects and plans of DH and Pezzente. One outcome of these informal chats was that Pezzente had already purchased the land upon which DH’s Rich Park project would be developed. Aldo had promised Rocky a ‘nice reward’ if DH did go ahead with Rich Park.
On behalf of DH’s board, Rocky negotiated DH’s land purchase from Pezzente. Once this sale was completed Rocky resigned from his position and directorship at DH on the ground of ill-health. Charlie and Nino were very sad to see their old friend leave, and gave Rocky a brand new four wheel drive Toyota Landcruiser vehicle, costing $180,000, as a farewell gift from DH. Twelve months after buying the land from Pezzente, DH’s Rich Park project stalled. There were simply not enough customers buying homes ‘of-the-plan’ before those homes were built to inject sufficient capital into further developing Rich Park. At this point Charlie and Nino learnt from industry gossip that Rocky was working full-time as a building consultant for Pezzente. In fact, Pezzente’s board had become accustomed to acting in accordance with Rocky’s instructions or wishes. Charlie and Nino also learnt that Pezzente’s owner, Aldo, was in fact Rocky’s cousin. The government just announced that the failure of much heralded mining boom to eventuate now meant that South Australia’s population would actually decline over the next ten years.
2.1 Has DH’s board breached a directors’ duty by its decision to go ahead with the Rich Park project and if so, was any defence available for any individual director; and if not, what remedies and penalty would apply?
2.2 In relation to DH’s low cash flow, have Nino and Rocky breached any other directors’ duties and if so, what remedies and penalties would apply?
2.3 Can Rocky be considered as a director of Pezzente?â€¨
2.4 How could DH’s members call a meeting to object to DH’s farewell gift to Rocky?