QUESTION ONE

Read the following case and answer the questions that follows

John, the chief executive, takes almost total responsibility for the management of KAPILA construction limited and the other two Directors, Ben and Davis, plays little part in the affairs of the company. In march 2006, John provided the company with a loan in order to help with a liquidity problem. Four months later, it was agreed that the loan be made long term and KAPILA construction created a floating charge over all its property real and personal in favor of John.

In January 2008 the company raised a further loan, this time from Newdouble Construction Depot, together with plant and machinery in the depot. The machinery had been supplied by Perrikan (heavy construction) limited under a contract which reserved title in the machinery to suppliers until payment had been made in full. The payment has not been made.

In February 2008, the board of directors decided to distribute a dividend payable out of the money received from the sale of another of its depot even though the company trading account showed a large deficit. By April 2008 the company was in serious financial position but, although John knew about these difficulties he delayed informing Ben and Davis of the need to put the company under liquidation.

At the begining of May, an unsecured creditor obtained a winding up order from the court on the grounds of the insolvency of KAPILA construction limited. The liquidator has discovered that the company's assets appear to be insufficient to pay the secured creditors and that in addition there are numerous unsecured creditors together with unpaid tax demands. Moreover, the company's employees have not been paid since April.

Questions

i. Analyze the above case scenario and identify the weaknesses of the management of this company (15marks)

ii. Assume you are the liquidator; demonstrate how you would handle this situation (15marks)