Reference no: EM132689663

Guy, Frank and Belle were the only directors of Racing Colours Ltd (RCL), they owned and operated a car spraying business in Melbourne. Guy was the managing director due to his extensive knowledge of the industry. Frank and Belle were non-executive directors. RCL also has several other shareholders.
Over the last few years RCL's financial position was steadily deteriorated. Guy was aware of this but did not pass any financial information onto the other directors, instead reassuring them that the company was performing wonderfully. Frank and Belle were given the company's financial reports, they never looked at them closely as they assumed that the auditors or Guy would alert them to any problems.

• By July 2018, RCL's finances were in an awful state. The cash reserves were running low and Guy was post-dating cheques to avoid running out of money. In a few instances, cheques were presented when there were insufficient funds and they bounced. On July 21, 2018, the manager of RCL's bank - Bad Bank Ltd - called Guy and said that he would be forced to suspend the company's overdraft facilities unless the company improved its financial position.

• On August 1, 2018, Guy informed the board that he had a revolutionary idea for RCL. He proposed that RCL enter leases for two more Spray shops. He said this would increase revenue, and it would even make the company a potential takeover target. Frank and Belle were intrigued and told Guy to go ahead with the idea.

• After the board meeting, Guy approached a commercial leasing agent who informed Guy he had two shops available for lease. The agent said the shops were ready to start business. Guy inspected the shops with his friend George who is an accredited residential building inspector. Guy thought the shops were acceptable and George said he couldn't see any structural problems with them.

• On September 11, 2018, the board had a further meeting and Guy updated the board regarding the leases. Guy told the board that RCL needed $2 million to place signage on the new shops. Guy said he had reached an agreement with Bad Bank whereby it would loan the company $1 million and suggested Frank and Belle each contribute $500,000 in return for shares in RCL. Frank and Belle agreed.

• On October 5, 2018, the leases were signed, Frank and Belle transferred $1 million to the company and a credit agreement was entered with Bad Bank for $1 million. Guy arranged a grand opening scheduled for October 15, 2018.

• On October 13, 2018, Guy received a letter from the local council saying that RCL) was not permitted to open the two new shops as they did not have adequate ventilation and the fire sprinkler system was out of date. Guy discovered that these repairs will cost over $5 million.

• Knowing that the company was doomed, Guy transferred a motor vehicle which was owned by RCL into his name on the basis that he thought the company owed him something for all his hard work in connection with leasing the two new shops and transferred its last $50,000 in the company's bank account to Bad Bank because he knows this will reflect badly on him and his management of the company.

• On November 20, 2018, the directors place RCL into voluntary administration and it was subsequently placed into liquidation. The liquidator now desires to commence an action against the directors.

REQUIRED:

Question 1. Discuss whether the directors have breached their duty of care, skill and diligence, and insolvent trading?

Question 2. Further, the liquidator desires to recover the motor vehicle and the $50,000 paid to the bank, under Part 5.7B Div 2 of the Corporations Act?