As trustees, perhaps ironically, we work hard to steer people away from bankruptcy, recommending that they negotiate with their creditors wherever possible to avoid the implications of bankruptcy including:
- Disqualification to act as a company director and self-managed super fund non-compliance (big financial penalties potentially apply);
- Impediments to professional qualifications and licences such as for real estate agents and accountants;
- Overseas travel restrictions;
- Ability to obtain credit in the future; and
- Loss of control of assets and exposing trusts and other asset protection vehicles to formal risk of challenge.
If a deal can be struck in an informal setting (but documented via a deed), then there is scope for the debtor and creditors alike to be better off by avoiding a formal financially distressed environment and applicable professional/government charges. The alternative is more modest legal costs associated with deeds assuming there are a dozen or fewer creditors involved. That said, and in the wake of a successful restructuring of Atlas Iron in WA with approximately 7 major creditors, I have seen an informal restructure of a corporate debtor which required over 120 creditors to unanimously sign on… and they did!
In appropriate cases, rather than rely upon a statutory declaration as to assets and liabilities, creditors will be more supportive of a Part X, Personal Insolvency Agreement (PIA) which includes a timely investigation program and recommendation from the trustee with a financial comparison of the estimated PIA versus bankruptcy outcomes.
Those well-intended courses and commercial preferences aside, deals are not achieved in many instances and so we are engaged to investigate a bankrupt’s affairs, to realise assets and report to creditors. In the majority of cases, bankrupts are accepting of the operation of bankruptcy law (for better and for worse) and have limited opportunity to fund or otherwise willingness to offer creditors a return better than will be paid through 3 years of bankruptcy.
For other cases, with the benefit of perspective, an actual bankruptcy that is, the bankrupt and the creditors alike remain empowered to strike a compromise for an annulment of the bankruptcy. This article provides a snapshot of some of my recent experiences in the annulment space and I hope it proves useful to encourage advisers to ‘test us’ as to the options available even after the court has made a sequestration/bankruptcy order and otherwise as an opportunity to learn from the experience of our clients.[/vc_column_text][vc_column_text]
Mining Magnate
Bankrupted by the ATO with respect to a $140,000 debt. His assets were illiquid and he otherwise failed to obtain finance ahead of the court determination. Sale of his coastal residence (Over $3Million) and some shares (Over $2.5Million escrow period) later to pay his creditors in full, the court is set to revisit the sequestration order with no objection from me. In the interim, the costs associated with the bankruptcy were approximately $30,000 plus over $120,000 on the receivership of his company which, as a sole-director company, had otherwise been left rudderless due to his bankruptcy. A good result in the end, but a high price to pay relative to the petitioning creditor’s debt![/vc_column_text][vc_column_text]
Communications Operator
The bankrupt appeared to have a surplus of assets to liabilities but had failed to engage with his petitioning creditor as to his circumstances, adopting instead a course of denial. The court authorities tell us to minimise our costs in such circumstances and to allow the bankrupt some time to re-arrange their affairs including the payment of their creditors in full and in turn obtain an annulment of the bankruptcy. After 12-18 months, however, it was appropriate for us to take a more assertive role and to realise his residential property. An annulment is now imminent subject to lodgement of a number of outstanding taxation returns.[/vc_column_text][vc_column_text]
Regional Mechanic
Prior to the court making a sequestration order, the bankrupt had been proactive in seeking a deal with the ATO, but was unsuccessful, not, it would seem, for failing to offer a commercially sensible sum, but rather as a result of his poor compliance history (appx 10 years’ worth of income tax returns filed at once and not an ordinary BAS compliance history). Notwithstanding the earlier position taken, the tax office was supportive of a section 73 composition proposal on the basis that the bankrupt and his wife would refinance their home, with a lump sum payable into the estate that was around $30,000 better than would have otherwise been available and with a cost saving of over $20,000 as against a trustee sale of property. It was also less than he had offered to pay in the pre-bankruptcy negotiations with the ATO.[/vc_column_text][vc_column_text]
Family Trust and SMSF
AFSA, in its role as Official Trustee, transfer a number of estates out to private trustees each year. There were various complicating factors with this particular file including:
- Residential property under sale contract which included provision for destruction of the residence and sub-division;
- Family law claim;
- Family trust issues; and
- AFSA’s lack of bankruptcy staff on the ground in WA.
Over the course of 18 months, the bankrupt proved to be business-like and supportive of our (and his) obligations to the creditors. Together with his advisers, we were able to work through the property sub-division, sale of the remaining lot, a compromise (payout) on the family law claim and ultimately put a section 73 composition to the creditors in respect to an unpaid entitlement (more simply a debt due) from the family trust on terms that allowed him to remedy the non-complying SMSF position (caused by the bankruptcy) and to manage the sale of commercial property over a 9 month period to release equity to repay the sum.
Each of the above examples required tailored solutions and were only reached after exhausting appropriate solutions and negotiating with creditors and governing bodies.
At SV Partners we are committed to exhausting all available options before recommending Bankruptcy. Our commitment to understanding each client’s individual circumstances allows us to effectively provide realistic and timely solutions. If any of the above scenarios bear a similarity to that of one of your clients, please don’t hesitate to give your local SV Partners office a call to discuss on 1800 246 801.
Article written by Malcolm Field, SV Partners WA