Case Study 09-6 | Course Paper

Running head: Case Study 09-6 1

Background:

Tommy Toe, the manager of UpBeat Inc., a successful corporation located in Greenville,

S.C. was whistling. Sales last quarter of the year exceeded what is monitored in his budget but

there are signs and indicators say that the next quarter will be better than this quarter. But

through the Audit found that the ratio of debt to equity has deteriorated in addition to a lack of

liquidity and the company must maintain tax payments, suppliers and employees in terms of

salaries and payments.

Facts:

Called on local bank and commanded them to work on the sale of some of the

accounts receivable and so increase the liquidity ratio.

Sold $ 50,000,000 million of account receivable 90% at face value to the local

bank.

The Sale agreement includes two provisions.

Transfer Provision 1 — the bank has to obtain permission from UpBeat if

it decides to sell/pledge the accounts receivable, which UpBeat could not

unreasonably withhold.

Transfer Provision 2 — UpBeat has the option to repurchase the accounts

receivable at a fixed price if it obtains sufficient liquidity from new

investors or other sources.

Case Study 09-6 2

Tommy got a legal opinion from a lawyer for the sale of accounts and re-issue

included a “would” opinion.

The transferred assets would be beyond the reach of the powers of a bankruptcy

trustee.

Together Tommy and his auditor evaluated the legal letter and found it adequate

to support legal isolation of the accounts receivable transferred.

Issues:

For each of the transfer provisions included in the agreement, determine whether