GreenFields Agriculture Pty Ltd supplies produce to supermarkets. The company’s director, Arun, receives:

Weekly emails from the bookkeeper warning of unpaid BAS and PAYG tax
Multiple letters of demand from suppliers
Advice from the company’s accountant that cash flow is “critical”

Arun does not review the company’s financial statements and continues to place large supply orders.

Which of the following should the directors have done? (Two possible answers)

Question

GreenFields Agriculture Pty Ltd supplies produce to supermarkets. The company’s director, Arun, receives:

Weekly emails from the bookkeeper warning of unpaid BAS and PAYG tax
Multiple letters of demand from suppliers
Advice from the company’s accountant that cash flow is “critical”

Arun does not review the company’s financial statements and continues to place large supply orders.

Which of the following should the directors have done? (Two possible answers)

BlackTom AI · Accepted Answer

Directors have a statutory duty under the Corporations Act to prevent insolvent trading and to act with care and diligence. When a director receives repeated warning signs — unpaid BAS and PAYG notices, supplier demand letters, and an accountant advising cash flow is “critical” — those are reasonable grounds to suspect the company may be insolvent or heading toward insolvency. Once those grounds exist, continuing to incur new debts can expose directors to personal liability.

1) Relevant knowledge points and concepts
- Corporations Act duties (s180 duty of care; s588G prohibition on insolvent trading): directors must take steps to avoid incurring debts when insolvency is real or likely.
- What sensible steps are: obtain professional advice (accountant, insolvency practitioner, restructuring advisor) and, where necessary, stop trading to limit further debts and losses to creditors.

2) Step-by-step reasoning
- Evidence: weekly warning emails about unpaid tax, letters of demand from suppliers, and explicit accountant advice that cash flow is critical. These collectively give reasonable grounds to suspect insolvency.
- Legal consequence: if Arun continued trading and placed large orders after these warnings, he risked breaching the duty to prevent insolvent trading and could be personally liable for debts incurred thereafter.
- Appropriate responses: seek professional help to investigate options (work out a restructure, voluntary administration or liquidation advice) and stop trading (or at least stop incurring further unsecured liabilities) until solvency is clarified.

3) Intermediate logical steps
- Warning signs → reasonable suspicion of insolvency → duty to act → obtain expert advice and cease trading to avoid further creditor harm.

4) Why the correct answers are correct
- “Sought profesional help” (i.e., obtain insolvency or restructuring advice) allows informed decisions and may provide defenses under law.
- “Stopped trading” prevents accumulation of further debt that could worsen creditors’ position and expose the director to liability.

5) Why other responses would be incorrect
- Ignoring warnings or continuing to place large orders would likely breach duties and increase personal exposure. Merely hoping cash flow will improve without professional assessment is inadequate.

Conclusion: The appropriate actions are Sought profesional help and Stopped trading, which matches the provided correct answers.

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