Updated: Feb 10, 2021
BACKGROUND Our client had established an auto trim business in a regional location in 2004. Over the past few years however, the business had suffered poor sales which caused cash flow issues ultimately having a negative effect on the mental health of our client. The operation was conducted through a discretionary trust. When we were approached the business had just been advised that a formal payment arrangement proposal with a trade creditor was declined. This event, coupled with insurmountable personal debts in the form of credit cards, and loans provided by the trust to our client, necessitated quick action as we determined the business could not continue to trade given its’ current financial position. STRATEGY We undertook an assessment of the business in conjunction with our client and his accountant. The view was formed that the business was viable and had over a period of 14 years provided a reasonable salary to our client and generated very modest profits. On this basis, we recommended a strategy to address the claims faced by our client, namely:
the existing business debts which revealed personal liability of $107k; and
Personal credit card debts totaling $110k.
The strategy we developed consisted of two parts. Firstly, a restructure of the business was commenced. This involved the appointment of a valuer to provide a written report to determine the current goodwill value of the business. Once this value was substantiated, a formal sale agreement was documented, supported by the valuation of the goodwill, and values ascribed to the nominal plant and equipment owned by the business. The sale was completed quickly to a third-party purchaser under our guidance. Outstanding staff entitlements were offset against the purchase price and the cash component was therefore minimal, some $5k. It was noted that given the nature of the business, the terms of the sale included our client entering into a formal employment agreement with the purchasing entity at the same salary as was historically paid to our client. Secondly, our client then entered bankruptcy in a controlled and organised manner. This was fully disclosed to the purchaser of the business prior to the sale being completed. When assessing the implications of bankruptcy, it was noted that our client had the following personal assets:
Unencumbered motor vehicle valued at $12k;
Tools of trade, approximate value of $3k.
As the principal objective of our client was to maintain ownership of his sole asset i.e. the motor vehicle, our strategy incorporated a loan of $7k being provided by his partner to place funds into the bankrupt estate for distribution by the trustee in bankruptcy. We ensured that this loan was fully documented and was secured against the motor vehicle with the security interest perfected on the Personal Property Securities Register (PPSR). In this way, our client maintained ownership of the motor vehicle. Separately, as the value of the tools of trade was under the prescribed limit under the Bankruptcy Act regulations, his tools of trade were also retained. TAKE HOME Whilst the strategy formulated and implemented to bring finality to these issues was effectively straight forward, the process and outcome proved to be life changing for our client. We cannot stress enough, the importance of getting the right advice when faced with financial difficulties. Faced with the prospect of losing his motor vehicle and being unable to secure future employment due to his specialised skill set and location, our client was overwhelmed by stress and sank into depression. He believed all hope was lost. Through the implementation of our strategy, our client was able to:
Retain his motor vehicle;
Secure future employment; and
Begin to rebuild himself financially without the burden of juggling insurmountable debts.
When assessing a client’s position, we explore all available options to achieve the best possible outcome, whilst ensuring that all laws and regulations are complied with.