Luca is a director of Cinelli Ltd. Cinelli Ltd sells pet toys called Amuse. The toys are
Question:
Luca is a director of Cinelli Ltd. Cinelli Ltd sells pet toys called ‘Amuse’. The toys are not selling well and the company is running low on working capital. To remedy the situation, Luca obtains an unsecured loan of $500,000. Luca thinks that the company will be able to pay the loan back because it is nearing the end of the year and his projections suggest he will sell lots of toys around Christmas.
Unfortunately, things don’t go as expected and Luca doesn’t sell as many toys as he anticipated. It is now January — a slow period for selling pet toys. Luca is aware of s 588G of the Corporations Act 2001 (Cth) and doesn’t want to breach it. He hires Winky & Dinky Accountants to prepare a solvency report. The report shows that Cinella Ltd has net assets and, based on projections, can pay its debts when they fall due. Based on the report, Luca has the company enter into a contract to purchase $5 million worth of material for toy manufacturing.
It transpires that Winky & Dinky’s report was incorrect, and Cinelli Ltd is placed into liquidation. Does Luca have any liability under s 588G of the Corporations Act?
Financial Reporting and Analysis Using Financial Accounting Information
ISBN: 978-1439080603
12th Edition
Authors: Charles H Gibson