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Homework answers / question archive / Develly Pty Ltd owns and operates an 8-bedroom guesthouse, ‘Trevelian’, located in a tourist area approximately a two-hour drive from an Australian capital city

Develly Pty Ltd owns and operates an 8-bedroom guesthouse, ‘Trevelian’, located in a tourist area approximately a two-hour drive from an Australian capital city

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Develly Pty Ltd owns and operates an 8-bedroom guesthouse, ‘Trevelian’, located in a tourist area approximately a two-hour drive from an Australian capital city. The company was set up by couple, Maxine and Rob Johnson, who are both directors and shareholders. The business has been operating since 2014. The room rates charged by Develly are competitive and the guest house has high occupancy throughout the year as the local area is popular in all seasons. The guesthouse business was going so well that, in 2017, the Johnsons decided that Develly should purchase land adjacent to the guesthouse and build a wedding venue/restaurant to expand the business. The land was purchased for $850,000 which, in hindsight, was an excessive price. Develly budgeted $500,000 to build the restaurant. The company hired a top architect who came up with a distinctive design. The local council and some neighbours had objections to the design. Alterations to the design and discussions with council took many months and final planning approval was not obtained until late 2018. Develly hired a local building company, StarBuild Pty Ltd, to construct the building. Given the unusual nature of the design, StarBuild refused to offer a fixed price contract so the contract stipulated that Develly would make payments at an hourly rate according to actual work performed. Construction commenced in early 2019 but there were many delays due to disputes between Develly and StarBuild. In December 2019, StarBuild indicated to Develly that it will not be returning to site to complete the contract. It is estimated that approximately 50% of the building has been completed. Develly claims that the quality of work performed by sub-contractors hired by StarBuild is poor and needs to be re-done. Develly also claims that StarBuild have not constructed the build to date in accordance with the approved plans. StarBuild claims that the original design was too complicated, the plans not detailed enough and that requests to Develly to provide further information were ignored. StarBuild also claims that Develly made many alteration requests which caused further difficulties. Develly had borrowed the entire cost of the land and build from the Regional Banking Corporation who holds security over Develly’s assets. The build to date has cost $750,000 which is the total amount paid to StarBuild. Develly and StarBuild have hired lawyers to advise them of their legal rights. Develly is unable to service the $1.25m debt to the Bank from the revenue earned from the Trevelian Guesthouse. The Bank is very concerned about the situation. In relation to the above facts, answer the following questions: 1) What are the key issues faced by the directors of Develly? 2) Have the directors of Develly breached any duties to the company under sections 180- 184 of the Corporations Act 2001 (Cth)? If so, which duties? Provide reasons. 3) If Develly cannot make payments on the $1.25m mortgage, what are the Bank’s rights? 4) Explain whether the directors of Develly are in danger of breaching the insolvent trading provisions of the Corporations Act. 5) Should the Develly directors appoint a voluntary administrator? Explain your answer

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