the managing director of a medium sized Internet company,

QUESTION

Joe is the managing director of a medium sized Internet company, E-Site Pty Ltd. E-Site PtyLtd is a family company owned by Joe and his two nephews, Dave and Mick. Dave andMick are also directors of E-Site Pty Ltd but take no active part in the day to daymanagement of the company.Over the last year, E-Site Pty Ltd has experienced several episodes of cash flow shortage inits business operations. These cash flow shortages are due to E-Site Pty Ltd’s contractualcommitment to the company’s supplier of internet access, who requires payment within sevendays of the end of each month and purchasers (customers) of E-Site Pty Ltd services delayingpayment for up to two months after being billed. Some of the customers claimed that E-SitePty Ltd’s web servers were “crashing” too often with the result that the customer’s web pagewas not accessible for up to two days at a time. Customers were either refusing to pay theirbills when this occurred or demanding a reduction of the billed amount.To overcome the server “crashing” problem, Joe committed E-Site Pty Ltd to the purchase ofone million dollars in new computer servers and external modem equipment. This newequipment was paid for out of the accumulated profits of E-Site Pty Ltd. E-Site Pty Ltd hadinvested the accumulated profits in the short-term bond market. The investment in the newequipment had virtually depleted the accumulated profits and, in doing so, removed thecompany’s only alternate source of income, which income E-Site Pty Ltd relied upon whencash flow was tight in the internet service business.Joe has just received a letter from the newly appointed liquidator of E-Site Pty Ltd’s largestcustomer, Electronic Sales Ltd, advising that it was highly unlikely that Electronic Sales Ltdwould be able to pay E-Site Pty Ltd the $750,000 owed to E-Site Pty Ltd for internet servicesprovided. Joe immediately realised that a loss of this magnitude could very possibly meanthat E-Site Pty Ltd may not be able to meet its current financial commitments. You mayassume that the Electronic Sales Ltd’s liquidator is correct.The directors of E-Site Pty Ltd wish to avoid winding up the company.(a) Advise the directors of E-Site Pty Ltd of the most appropriate alternative form ofexternal administration to an immediate winding up of a company available under theCorporations Act 2001 (Cth). Discuss the procedure involved in the most appropriatealternative you identified and, supported with reasons, the most probable outcome.and(b) Assume E-Site Pty Ld is being wound up compulsorily by the court and that aliquidator has been appointed to wind up the company. Advise the liquidator, withreference to the Corporations Act 2001 (Cth), of the powers available to him or herthat may be used to increase the size of the pool of funds available to make paymentto creditors.

ANSWER:

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