Real Property is one of our major investments in life, it is our dream. We would do just about anything to protect this investment. Recently SV Partners Director, Jason Porter, released an article about doomed property investments and what can happen when your investment in property fails. Large real estate investments can be lucrative but unless you have the right expert advice, it can lead you towards the bankruptcy creek without a paddle!
If property does fall in the hands of a Bankruptcy Trustee (‘Trustee;), the interest of the Bankrupt becomes vested in the trustee and the Bankrupt cannot deal with his/her interest. What options are there for a Bankrupt to try to save their property?
Trustees’ administer a large number of bankrupt estates that hold real property. According to the Statistics from AFSA, 63% of recoveries in bankrupt estates administrated by private trustees are from asset sales**. This is a large percentage – ‘In Bankruptcy, Property Matters!’
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 to sell real property?
What can a Bankrupt do to keep their property?
Once you are made Bankrupt your greatest fear is the loss of your property. There are still some options for the Bankrupt to keep their property. One is to obtain an annulment of the Bankruptcy or if the property is jointly owned, the co-owner could purchase the interest from the Trustee.
1. Annul the bankruptcy
The Bankrupt can annul the bankruptcy by either making an arrangement with creditors to pay a certain cents in the dollar dividend (provided it is greater than the realisable assets) and the arrangement is accepted by creditors or pay all debts in full. In this situation the Trustee would not sell the property and it is therefore retained by the Bankrupt.
The Bankrupt usually raises the funds from family or friends to annul the bankruptcy or alternatively seek to refinance the subject property. Where there is sufficient equity, a trustee would consider allowing the Bankrupt to arrange finance of the property to enable the provision of funds to annul the estate. The Bankrupt must make the financier aware of the Bankruptcy (it is an offence to not disclose the bankruptcy when obtaining credit) and it then lies with the financier to approve the loan. Provided the amount loaned will annul the bankruptcy and the Trustees caveat is removed from the property, financiers generally will consider approving the finance.
2. Sale of trustee’s interest to co-owner
Where the property is jointly owned, the co-owner(s) can purchase the interest of the trustee in the property for market value. The interest in the property is sold by way of a Deed of Transfer. The sale by Deed will not clear the mortgage or other encumbrances, these will become the co-owner’s liabilities as well as any other levies such as council rates.
A Trustee would normally accept an offer equal to the market value of the property less the outstanding mortgage and the estimated cost savings of a real estate agent (if it was sold on the market) divided by the relevant interests of the registered owners. The only additional costs to the co-owner(s) would be the stamp duty that may be payable on the transfer, and dealing with the mortgagee when registering the transfer on title of the land. This is only a small cost in comparison to losing the property altogether.
The above two are some valid ways a Bankrupt is able to ensure the property remains ‘in the family’ after becoming Bankrupt.
The dishonest Bankrupt
It has been known for a person who is looking down the barrel of Bankruptcy and wanting to protect their assets to take some desperate measures. Transferring assets particularly real property to their spouse (to defeat creditors or for nil or less consideration) is one example of how some attempt to remove property from the Trustees grasp. Another way is the use of Family Law provisions as a vehicle to divert assets. Desperate times calls for desperate measures!
A trustee can commence proceedings to set aside the transfer. Before a Trustee would commence proceedings, the Trustee would consider the costs involved and whether sufficient funds would be recovered for the benefit of creditors. If the costs to recover the asset are higher than the recovery, a trustee is unlikely to commence any recovery action and the Bankrupt retains the property.
What are the considerations for a trustee to sell real property?
A trustee has a duty to recover property for the benefit of the estate. Property is defined to cover all assets not just real property. BUT is the Trustees duty to realise property, governed in any way?
All trustees must follow certain performance standards that are set out in the Bankruptcy Act. Section 19 of the Bankruptcy Act also provides a duty on trustees to take reasonable steps to recover property for the benefit of the estate.
Division 2.3 of the Performance Standards deal with realising assets.
Firstly, the trustee must realise only those assets:
(a) that will give a cost-effective return to creditors; or
(b) that contribute to the payment of the costs of the administration; or
(c) that may be realised in accordance with a personal insolvency agreement.
This states (ignoring (c)) that unless there will be funds available to at least pay the costs of the administration, the trustee should not realise the property.
Secondly, the trustee can only claim the amount that fairly represents the interest of the asset that has vested in him as trustee and he/she must obtain advice from an independent expert in assessing:
(a) the extent of the trustee’s interest in any realisable asset; and
(b) the value of the property or offers for the property.
The fact that the trustee must obtain expert independent advice as to the value of the property tells us that there is increased responsibility on a trustee to sell the property at market value.
Finally, the Trustee must act independently and impartially in undertaking transactions and dealings relating to the disposal of the property of a Bankrupt, debtor or deceased person.
The trustee cannot follow advice from the bankrupt or creditors when selling the property; the trustee must act on his own independent advice to ensure he/she is not influenced in any way in relation to the sale.
To summarise the above, a Trustee has a duty of care to ensure the interests of creditors and the Bankrupt are considered and sell the property at market value.
Market value is crucial. If the property does not provide sufficient funds to pay some or all of the costs of the bankruptcy or an annulment, then the question of ‘why did the trustee sell the property?’ and ‘For whose benefit?’ The Bankrupt and/or creditors are able to take action against the Trustee if they believe the Trustee did not sell the property for market value. The Trustee will then need to support his decision in Court.
Market value is realistically dictated by the market (the buyers). However, the Trustee should take the following steps at a minimum to ensure market value is obtained:
- Obtain a registered valuation.
- Obtain market appraisals from two or three real estate agents to compare and select the most suited agent. This would include setting an appropriate price to market the property and determine best method of sale, private treaty or auction. This should be done in consultation with the real estate agent and also consider the valuation.
- Approve a minimum four week marketing campaign as recommended by the agent.
- Before an auction, set the reserve at the valuation price and if it does not reach the reserve, negotiate with the highest bidder. If still no luck, remarket the property via private treaty.
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(s) refuses to co-operate with the sale?
Well there are not a lot of options actually. There is really only one – seek an Order from the Court to obtain possession if the property was registered to the Bankrupt solely or an Order of possession and sale where there are joint owners.
In NSW, section 66G of the Conveyancing Act allows the appointment of Statutory Trustees to enable them to sell the property where one party refuses to sell. Other states have similar provisions. Statutory Trustees have the power to apply to the Court to issue Writs of Possession where the Sheriff would attend the property and evict the tenants. Upon obtaining vacant possession the Statutory Trustees will then sell the property and account for the proceeds to the Bankruptcy Trustee and the Co-owner. Under this appointment the co-owner has no control over the sale and there are also potential for the Court to Order the costs of the application be paid by the co-owner. The Statutory Trustees must comply with the Orders of the Court.
Statutory Trustees are not limited to a Bankruptcy scenario, they can also be appointed in:
- Family Law matters where one of the aggrieved partners decides not co-operate with a sale of the property pursuant to the Orders of the Family Court.
- A business partnership has broken down and one partner refuses to sell.
- Disputes amongst the Co-owners
- Beneficiary of a Deceased Estate – Where there is a refusal to sell by one of the beneficiaries.
We at SV Partners are well versed in sale of properties (with all likely scenarios) including a sale where Statutory Trustees are appointed.
If you wish to speak to an expert in relation to any real property concerns, please call 1800 246 801 or visit svpartners.com.au for more information.
**AFSA Website Table 14: Monies administered by registered trustees in administrations under Parts IV and XI of the Bankruptcy Act 2013-14 year. Asset sales does include other type of assets such as shares. Real property would be the major asset type represented in these figures.