Ravi and Susi are directors of Fort Kochi Ltd (FKL). They decide that the company will purchase
Question:
Ravi and Susi are directors of Fort Kochi Ltd (FKL). They decide that the company will purchase new premises and sign an agreement on behalf of the company to buy a new building for $600,000. FKL pays a deposit of $160,000 to the vendor and it is agreed that FKL will pay the balance in 6 months.
Lawrence is the financial officer of FKL. Lawrence prepares the financial report on which Ravi and Susi base their decision to go ahead with the purchase of the new premises. Lawrence had been rather careless in preparing the financial report and it appears that the figures as to predicted future profit had been severely overstated. Neither Ravi nor Susi are accountants.
However, Ravi and Susi knew that the company’s income had dropped in the previous 12 months and the company had few forward contracts. They suspected that the company had been losing money for some time. FKL recently had to extend its overdraft with the bank to pay the deposit for the purchase of the new premises. Further, FKL had been late in making some payments to creditors and owed money to the IRD.
Six months later, FKL is unable to pay the balance of the purchase price to the vendor and is put into liquidation by the Inland Revenue Department (IRD). The liquidator believes that the directors have breached their duties to the company.
Required:
Advise the directors whether they have breached the liquidity duties of the India Companies Act 2013, any defenses they may have and the likely consequences of such breaches.
It is recommended that you use the Legal problem-solving method (ILAC ) to answer this question.
Intermediate Accounting
ISBN: 978-0176509736
10th Canadian Edition, Volume 1
Authors: Donald Kieso, Jerry Weygandt, Terry Warfield, Nicola Young,