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Matilda, Jane and Sam are directors of Fun Fruits Pty Ltd, which is in the business of selling pre-cut fruit packs to retailers in Brisbane. They each own equal shares in the company. The company has one employee, Juan, who cuts fruit. Matilda and Jane had another business which was run as a partnership, and this business provided freshly caught seafood to restaurants in Brisbane.

Matilda and Jane make Juan deliver this seafood to restaurants while he was being paid by Fun Fruits Pty Ltd to cut fruit. As a result, the company missed a few orders with retails who cancelled their contracts with Fun Fruits Pty Ltd. Sam is very unhappy about this, and a toxic environment develops in the company. Sam takes a 5 month leave of absence for stress from 1 May 2020, and he does not take part in managing the company for the next 5 months. 3

The business of the company was performing well until 10 July 2020, when the media reported that people in Brisbane and Sydney had fell ill with Hepatitis A and food poisoning linked to unhygienically handled pre-cut fruit. Due to this down turn in demand for pre-cut fruit, the business entered into financial difficulty and it is unable to pay its debts when they fall due. There is a large amount of unused fruit in their warehouse and on order from farms in Queensland. Matilda and Jane develop a plan to increase income for the business and make use of unused fruit. They decided to make the fruit into fruit juice, and on 15 July 2020 they buy pasteurizers (which are used to heat fruit juice to a level which kills pathogens like bacteria and viruses, etc). They did not want the company to be wound up.

On 10 August 2020 an unsecured creditor of the company, who is owed $10,000, finds out about the company’s financial troubles, and they put pressure on Matilda and Jane to pay them the $10,000. The company is also owed money from four retailers who have failed to pay $20,000 in invoices each (totaling $80,000). On Sam’s return to the company on 1 October 2020 he finds that the company is in serious financial trouble (having $1.2 million in liabilities) and that it has entered into liquidation, and he is very upset. The liquidator finds that if only the company’s unsecured assets are sold there would not be enough money to cover Juan’s employee entitlements such as superannuation, or pay unsecured creditors.

Use your knowledge of Australian company law to advise:

(a) whether any common law and/or statutory directors’ duties have been breached

(b) what remedies are available to the company, and what penalties might be imposed on directors, for these breaches

(c) who can bring action to seek compensation from the directors in breach of directors’ duties, and how

(d) how the liquidator in this scenario can obtain funds needed to pay creditors, and the order of priority in which she would pay the creditors