Amanda and Emilia do not know what to do. Is their company insolvent? If it is what action would you advise them to take

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Question - Amanda and Emilia are co-directors and members of Griffin Pty Ltd, which imports widgets from Vietnam and sells them in various hardware stores in regional NSW. Griffin has a medium-sized warehouse where it stocks goods, and from which it distributes products.

Griffin recently signed a contract to supply a large hardware store in Orange and Dubbo with widgets. So the company ordered 10 pallets of widgets from its Vietnamese supplier and also paid a substantial deposit. A shipping company who carries goods into Australia has already brought the pallets into the country and has sent their bill to Griffin.

After a couple of deliveries to the hardware store, a safety issue is discovered with the widgets and the government bans the sale of the widgets. the hardware store cancels all further orders of the widgets.

Now, Griffin has no future revenue and its remaining stock of widgets cannot be sold. The shipping company is demanding payment of its invoice; there are also several outstanding bills to the ATO, staff and other suppliers.

Amanda and Emilia do not know what to do. Is their company insolvent? If it is, what action would you advise them to take?

Answer -

Yes, it is clear that their company is presently insolvent. The first action that Amanda and Emilia should take as directors of the company is to stop the operations of the company so that it does not incur any further debt. Section 588 G of Corporations Act 2001 says that it is the duty of directors to prevent insolvent trading. Insolvent trading means a company continuing in operations and incurring further debt while it is unable to pay its existing debt that have become due. If they do not stop insolvent trading, they will be breaching their duties as a director. They will be personally responsible for any further debt that Griffith incurs because of continuing its business operations in spite of the fact becoming clear that it has become insolvent.

Griffith has no further revenue. Its existing stock of widgets cannot be sold because of the government banning the widget. The shipping company's invoice is due and it is demanding payment. Several outstanding invoices due to ATO, suppliers and staff are there. It is very clear that Griffith Pty Ltd has become insolvent.

After suspending the operations of Griffith Ltd, in order to prevent insolvent trading, Amanda and Emilia can file for bankruptcy protection. Under bankruptcy protection they can renegotiate the terms with creditors to whom they owe outstanding payments. At the same time, they can start legal proceedings against the Vietnamese supplier for supplying defective and unsafe widgets to them. They can recover compensation from the Vietnamese suppliers for the losses caused to Griffith because of the faulty widgets.

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