Julio and Henry have decided to form a company, H&J Bikes Pty Ltd to run the bike

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Julio and Henry have decided to form a company, H&J Bikes Pty Ltd to run the bike business.

They have been invited to expand to Melbourne and decide to manage risk by setting up another company called Fast Bikes Pty Ltd. This new company which is separate to H&J Bikes Pty Ltd, signs a lease in Brighton (a suburb in Melbourne) and has a three directors, Julio, Henry and Sasha.

It is Sasha who invited Julio and Henry to invest in Melbourne and she arranged the lease of the shop front. Sasha had been running her own bike shop at Brighton and sold the business and 'good will' to the new company, Fast Bikes Pty Ltd, for AU$150,000. The owner of the leased shop front is a property management company called Big Land Pty Ltd and Sasha is a director of that company.

It turns out that there was no good will in Sasha's old bike shop business and the business was not worth $150,000. The lease was also overvalued with rent charged at $1000 a month when the market rate is $750. Julio and Henry had relied upon documentation Sasha provided to them at the time Fast Bikes was registered as a company.

Sasha runs the Brighton shop whilst Julio and Henry look after the Tasmanian shop. Henry travels to Melbourne once a month to check inventory and work at the shop for a few days. Sales are not as high as Sasha promised and Henry is a little worried about meeting budgets and cash flow.

Sasha finds out about an opportunity to supply bikes to a Victorian government department. She bids for this under her own name and runs the contract outside the Fast Bikes Pty Ltd business with all profits going to her under her own Australian Business Number.

Interest rates are increasing and payments on the $150,000 company loan (to buy Sasha' business) are making cash flow very tight. Julio finds out from a real estate agent that they are paying over market rate for the lease.