Question

ANSWER IN ILAC WAY

Digital10 Pty Ltd (“Digital10”) is a web design and app development company that delivers web applications, e-commerce & digital marketing across a range of channels & technology platforms. The business has been running since 2013 and is located in Brisbane, but the company wants to expand its business operations into other areas of Queensland. Brad, Elena, and Jack are the directors and shareholders of Digital10. Brad is the managing director and is primarily responsible for managing the company. Elena is primarily responsible for app development. Jack is responsible for preparing the company’s accounts and financial reports.

In 2018, in an effort to expand its business into other areas of Queensland, Digital10 entered into a contract with Triad Advertising for $30,000 to create an advertising campaign to promote the business. However, Design10 has not yet paid the two invoices which were issued by Triad Advertising in September 2018 and August 2019. When Triad Advertising complained to Brad, Brad blamed Jack for not keeping proper accounting records. It was discovered that Digital10’s accounting software stopped functioning and Jack had been keeping the company’s accounts in a handwritten journal since June 2017.

In early 2019, Brad decided to upgrade the company’s graphic design software to the Netteach software platform which was developed by a local company, iDesign Pty Ltd (“iDesign”). Brad contacted NDB Bank about Digital10 obtaining a loan of $200,000 to purchase the Netteach software and the licence to use the software. He convinced Elena and Jack to agree to this loan. Brad neglected to tell Elena and Jack that he and his wife Zoe are also directors and shareholders of iDesign. Furthermore, he did not explain that iDesign faced liquidation. His primary purpose in buying the software from iDesign was to save iDesign from collapse. Elena suspected that Brad was personally connected with iDesign, however, she did not disclose her suspicion to Jack.

By May 2019, Digital10’s business has started to decline rapidly. As a consequence, Digital10 failed to repay the $200,000 loan owed to NDB Bank. Unfortunately, the reality is that the drop in Digital10’s profitability was caused by Brad’s new gambling and drug addictions. He had been distracted and was spending less time concentrating on the business. As a result, six months later, in December 2019, Digital10 was placed into liquidation on the application of one of its creditors.

ASIC have asked for your advice about Brad, Elena and Jack’s potential liability under the Corporations Act 2001 (Cth). You do not need to discuss s184 or any other criminal provisions. You do not need to discuss remedies as part of your answer. You do not need to discuss whether Brad has breached any duties to iDesign.

ILAC FORMAT FOR ANSWER

Answer 1

Let us discuss the case using ILAC format

1. Issue - It is clearly an issue of morality. Brad is a very irresponsible partner of the firm. He cheated by not telling Elena and Jack about the illiquidity of the iDesign. Made the company Digital10 purchase it even though it was not a profitable venture. Moreover rather than trying to work on to improve the organization Brad further went on to lose money in drugs and gambling. This has resulted into liquidation of Digital10
2. Law - According to Corporations Act 2001, all the directors and officers should discharge their duties in the manner that is beneficial to the organization.
3. Application - Here we can see that Brad did not discharge his duties to the benefit of the organization but rather gave way to his own whims and fancies thus leading to the downfall of the organization. Also Elena was suspicious of Brad's activities but she did not disclose anything to Jack which shows her neglect as well
4. Conclusion - We may conclude that Brad is guilty of the demise of the organization Digital10. Also Elena is partially responsible for showing a blind eye to her suspicion.