Reference no: EM133591027
Case Study: James is the managing director of a sports supply company, Clean Sports Pty Ltd. The number of customers has decreased significantly over the last 10 months.However, the company is still locked in to a 3-year lease of expensive premises in the city, which costs $132,000 per annum.James had gone on behalf of the company to the CBA Bank for an increase in the company's overdraft facility to $467,000 from $129,000. The Bank will only increase the overdraft if James, Danny and Bruce being the three directors all give personal guarantees. Reluctantly all three directors agree to give a personal guarantee to the Bank.However, after three months the cost of the rent, staff costs and other overheads have meant that the company is running out of funds. Staff wages of $167,000 are outstanding, which includes directors' wages of $86,872.A supplier of computer software is owed $5,800 and has demanded immediate payment. The amount of $5,800 had been outstanding for 69 days. Bruce decided that the company should pay this creditor the money demanded immediately as the creditor had threatened to wind up the company. Payment was made on 6 September 2023.
Unsecured trade creditors of $98,000 are still outstanding.
Danny's son was at school and needed a computer. Therefore, Danny bought a
computer from the company but only paid $300 for it. The market value of the computer was $680. This transaction took place on 3 February 2023.
The bank will not extend the overdraft further beyond the $467,000.
Bruce is prepared to lend the company a further $50,000.
James comes to see you as an insolvency expert.
Based on the information above please advise James on the following questions he has raised.
Required:
(a) Is the company insolvent or is it a liquidity issue?
(b) If the company is liquidated what are the issues regarding the two transactions involving Bruce (payment of the creditor) and Danny (purchase of the laptop)?
(c) Do the directors in a liquidation have priority to be paid their wages before other employees? please provide the calculations.