How have the various actions of the people described above breached the Corporations Act 2001, and what are the legal consequences of those breaches?

Orangeglo is a proprietary company that supplies premium light fittings to hotels and offices in Australia and Singapore. Once the market leader, Orangeglow is losing sales because of increased competition and a shift in consumer preference towards brighter lighting. The downturn in sales comes after NotVeryNice Bank agreed to lend Orangeglo $2,000,000 to finance the opening of 10 new offices. The loan is secured against assets valued at $5,000,000. A few months after the loan agreement is signed, Chen, Orangeglo’s Chief Financial Officer,

informs the Board that the Covid-19 downturn, combined with production and inventory problems, has devastated the business. Orangeglo needs money fast or one of its many creditors is likely to put it into liquidation. The biggest creditor is NotVeryNice bank.

The Board consists of 4 people, Jim, Simon, Thanh and Kylie. The first three are interested in the technical and design aspects of the business, and they tell Kylie, ‘You’re the smart one with numbers,youworkthisout.’ Kylie’sinternElvistellsherthathehasaplantosolvetheliquidity crisis. Elvis’s schoolfriend Tim works as a dealer at a financial trading company. Tim has information that Titan, a major property conglomerate, is about to purchase another listed property company, Plummet Property, which is nearly bankrupt. When the takeover occurs, Plummet Property’s share price will rise rapidly. If Kylie buys enough shares in the company she will make a huge profit which can be transferred to Orangeglo and provide enough liquidity to pay most of its debts.

Kylie and Elvis approach Chen to release $100,000 from Orangeglo’s cash holdings. They intend to purchase sufficient shares in Plummet Property to potentially make a profit of $2,000,000. Kylie is nervous but Chen is excited. He says, ‘Yes I can authorise that release of funds. Just don’t tell anyone. And I might invest in Plummet shares for myself.’

The removal of $100,000 from the Orangeglo cash account leaves the company unable to pay invoices. Both Chen and the directors ignore creditors’ demands for payment. The company continues to issue new orders and buys office supplies relying on credit granted by the suppliers. Other creditors refuse to supply product to the company and its business comes to a halt. Chen and Kylie reassure the board and company workers that the ‘credit crunch’ will end very soon. They recommend to the directors that the company adhere to a policy of ‘business as usual.’ The directors agree. Soon afterwards, NotSoNiceBank applies to court to appoint a liquidator to windup Orangeglo. The court orders the appointment of a liquidator. A day later, Chen, Kylie and Elvis discover that Titan has decided not to acquire Plummet, and Plummet’s share price falls even further.

Answer rating: 100% (QA)

Corporations Act 2001 under section 197 Directors are liable for the debts and other obligations incurred through corporation as trustee 1An individua... View the full answer