Commercial and Corporate Law for Accountants

Assignment  - Case Study

Darwin Soil and Water Testing Pty Ltd

Ravi runs a soil and water contamination testing business. He decided to form this small Pty Ltd Company to take over his sole-trader business when demand for soil and water contamination testing increased following recent media coverage of toxic chemicals (PFAS) having being accidentally released into the environment over a number of years.

Upon registering the company he became sole shareholder and director. Ravi sold his sole-trader business to the company at an inflated price and in doing so lent the company $90,000 to meet the purchase, registration and set-up costs. As security for that loan, Ravi arranged a mortgage over a vacant block of land which was then transferred to the company as part of the sale of the business.

In its first year of trading (2016) the company made profit. By the end of the second year (2017), however, the business slumped mainly because the principal contractor (Department of Defence) turned to internal sources to do its testing. Ravi became concerned his company may be insolvent and an administrator was appointed. The administrator established that the company only had assets worth $95,000 in
total. But the company owes $210,000 to creditors (including $90,000 owed to Ravi as the only secured creditor).

Questions: What options are available to the administrator? Is Ravi entitled to get the $90,000 back and, if so, on what basis? If Ravi is successful, how much will unsecured creditors get back? (You need to show your calculations and use legal cases to support your answers).