Real estate is often our most significant life investment. People form sentimental attachments to their family homes, and will go to great lengths to safeguard it.
If property does fall in the hands of a Bankruptcy Trustee (Trustee), the interest of the Bankrupt vests in the Trustee and the Bankrupt cannot deal with their interest. What options are available for a Bankrupt to save their property?
In a bankruptcy, property matters to:
- The Bankrupt – What can I do as a Bankrupt to keep my property?
- The Trustee – What are the considerations for a Trustee when selling real property?
1. What can a Bankrupt do to keep their property?
When a property owner is made bankrupt, their greatest fear will often be the loss of their family home. However, there are still pathways which may allow for the Bankrupt to retain their property. The first option is to pursue an annulment of the bankruptcy. Alternatively, if the property is jointly owned, the co-owner could purchase the interest from the Trustee.
Annulment of the bankruptcy
There are two methods available for the annulment of a bankruptcy:
- Putting forward a proposal for creditors’ consideration and approval. The proposal will typically include payment or payments to the Bankrupt Estate which would result in a greater return to creditors than would otherwise be achieved through the ordinary administration of the Bankrupt Estate; or
- Making payment of all debts of the Bankrupt Estate in full. This includes the Trustee’s fees and costs up to the date of annulment, interest on interest bearing creditor claims and realisations charge payable to the Australian Financial Security Authority.
Both instances would avoid the sale of the property, which would be retained by the Bankrupt.
In pursuing these outcomes, a Bankrupt typically raises funds external to the bankruptcy from family or friends. Alternatively, if sufficient equity exists in the subject property, a Trustee may consider allowing the Bankrupt to refinance the property to source the requisite funds. A Bankrupt must make prospective financiers aware of the bankruptcy (it is an offence to not disclose a bankruptcy when obtaining credit over a limit (currently $7,032)). Provided the amount loaned is sufficient to annul the bankruptcy, financiers generally will consider approving the finance, assuming other serviceability criteria are met.
Sale of a Trustee’s interest to the co-owner
Where a property is jointly owned, the co-owner can purchase the Trustee’s interest in the property for market value. The interest in the property is sold by way of a Deed of Transfer. Under this method, a mortgage and other encumbrances will remain in place and these, as well as any other levies (such as council rates), will become the co-owner’s liabilities.
When considering offers provided by a co-owner, a Trustee should factor in such things as the property’s market value, any encumbrances attributable to the Bankrupt, and the costs saved by not selling the property on the open market (including the agent’s commission and marketing costs). If the co-owners offer exceeds the Trustee’s estimate of the Bankrupt’s interest through a sale on the open market, they should accept the offer. A Trustee is not required to communicate their calculations to a co-owner, as this would prejudice any offer provided by a co-owner.
The only additional costs to the co-owner would be the stamp duty that may be payable on the transfer, and the mortgagee’s fees when registering the transfer on title of the land. This may be a small cost in comparison to losing the property altogether.
The above two are some valid ways a Bankrupt can ensure the property remains ‘in the family’ after becoming Bankrupt.
The dishonest Bankrupt
It is not unusual for a party facing bankruptcy to make a rash and desperate attempt to protect their family home. Desperate times calls for desperate measures! This comes in many forms, including:
- transferring an interest in the property to their spouse below market value, or for no consideration whatsoever;
- creating fictitious or overstated encumbrances through family members or other parties; and
- using Family Law provisions as a vehicle to divert assets.
The Act provides Trustees with wide powers to set aside such transfers. Following an appointment, Trustees undertake investigations into such matters and may take steps to set aside any voidable transactions identified. Further information regarding voidable transactions can be found on our here. It also bears mentioning that such activity may constitute an offence under bankruptcy and the maximum penalty for contravention includes imprisonment for up to five years.
2. What are the considerations for a Trustee when selling real property?
A Trustee has a duty to recover property for the benefit of the estate. Property is defined to cover all divisible assets, not just real property. BUT is the Trustee’s duty to realise property, governed in any way?
All Trustees must follow certain performance standards that are set out in the Bankruptcy Act 1966 (Cth) (the Act). Section 19 of the Act also provides a duty on Trustees to take reasonable steps to recover property for the benefit of the estate. Further guidance on Trustees’ administration of Bankrupt Estates is provided by the Australian Financial Security Authority (AFSA), which is the government body responsible for the regulation of Bankruptcy.
Relevantly, a Trustee has a duty of care to ensure the interests of creditors and the Bankrupt are considered, which requires the Trustee to sell the property at market value.
As the name suggests, market value is dictated by the market. In the event of a sale on the open market, a Trustee should undertake the following to ensure market value is obtained:
- obtain market appraisals and sales and marketing campaigns from multiple real estate agents;
- select the most suitable agent based on the appraisals and campaigns. This includes setting an appropriate price to market the property and determine the best method of sale, either private treaty or auction;
- commence the marketing campaign in accordance with the appointed agent’s recommendations; and
- before an auction, consider setting a reserve.
If dealing with a difficult co-owner, the Trustee should also consider engaging a registered valuer to prepare a formal valuation report. This report can assist in showing the Trustee sold the property for market value. Additionally, the Trustee should obtain a formal valuation report when selling a Bankrupt’s interest to a co-owner, as this will satisfy creditors that market value was obtained.
As long as the Trustee can show he or she took all steps to sell at market value, the interest of creditors and the Bankrupt are protected (as well as the Trustee’s interest).
Where co-operation is refused
What options are there for a Trustee to sell real property where the Bankrupt and/or the co-owner refuse to co-operate with the Trustee?
If the Trustee is unable to obtain vacant possession of the property with the cooperation of the Bankrupt and other occupants, they must seek an Order from the Court to obtain vacant possession. This may result in authorities attending the property to forcibly evict the occupants.
If the co-owner refuses to cooperate with either a joint sale or the acquisition of the Trustee’s interest in the property, then the Trustee will be required to seek the appointment of a Statutory Trustee for the sale of the property. Under this appointment, the co-owner has no control over the sale and there is also potential for the Court to Order the costs of the application be paid by the co-owner.
We at SV Partners are well versed in sale of properties (with all likely scenarios) including a sale where Statutory Trustees are appointed. Further information regarding Statutory Trustee appointments can be found on our here.
If you wish to speak to an expert in relation to any real property concerns, please call 1800 246 801 or visit SV Partners for more information.
Article written by Brett Harron (Senior Manager) – Gold Coast