Fur Pty Ltd (Fur) has three directors: William, Michelle and Janet. William was the managing director of the company while Janet and Michelle are non-executive directors of the company. Janet, an experienced business woman, is not involved in the affairs of the company. She leaves the running of the company to William and she relies on him. She believes that if there is a problem with the company William will contact her. Michelle is William's wife. She is not involved in the affairs of the company and she always relies on William and never questions his management of the company because she loves and trusts him.
Since his appointment in 2004, William has kept all cheque butts, bank statements, invoices and receipts in a filing cabinet drawer in the company's office. Due to the pressures of work, he has not been able to write up the details in any cashbooks, journals or ledgers for 5 years.
In June 2011, the company's financial position worsens and it stop making payments to a number of its creditors. William knows the company is in financial difficulty but does not mention it to the other directors because he does not want to worry them. He believes that the company's financial problems are related to a curse and he has taken steps to remove the curse by going to a witch who blessed the company and told him that the company's financial situation will improve. William wrote a report telling the directors that the company has never been in a better financial situation. His report did not refer to any particular information that may justify his assumption. As a result of the report, the board of directors decides to pay dividends to the members. The company keeps entering into more contracts after the payment of dividend. Two months later, the company goes under liquidation and a liquidator is appointed. The liquidator starts investigating the affairs of the company.
Questions
1. Can the company pay the dividend under the circumstances? Justify your answers
2. Did the company keep proper financial records? What is the consequence of the breach?
3. What are the duties that the directors may have breached in this scenario?
4. Consider whether the directors have breached their duty to prevent insolvent trading. What are the remedies that may apply for such a breach?