Updated: Mar 4
Background In last month’s case study “I know what I am doing! It will all be fine”, we looked at Craig and Jane and the issues that they experienced due to attempting an “unplanned” corporate business exit. As Craig was not an expert in managing an orderly exit from the business he had failed to consider security interests registered over company assets and did not understand which creditors had priority for payment. Due to poor planning and management of the available funds the end result was Craig being forced to enter bankruptcy due to claims from personally guaranteed creditors. When people are facing bankruptcy, the most important asset unsurprisingly, is the family home. Now the forced sale of a family home can cause all sorts of disruption and costs not to mention the other family issues including the need to change schools and lose friends.
Strategy – Preparing for Bankruptcy Some people think bankruptcy means you lose the family home. Nothing could be further from the truth. For Craig & Jane the main priority was to keep their jointly owned family home. Fortunately, there was minimal equity in the property of circa $60,000. Craig’s share was worth $30,000. He agreed to sell his equity to Jane for this amount, and the transaction was documented by a solicitor. Jane was employed and had a reasonable income and was therefore able to pay for the equity by instalments over a 12-month period. To substantiate this sale, we provided the solicitor with a valuation and confirmation of the debt owing to the secured creditor at the time. Over time, payment was made from an account in Jane’s name to an account in Craig’s name. Craig obtained employment and used some of the money that he received from Jane to purchase a motor vehicle, since he no longer had the use of a company vehicle. A bankrupt is allowed to retain a motor vehicle that has a maximum of $8,000 in equity. We carefully documented how Craig had dealt with the monies he had received from the sale of his equity.
Creditor Pressure Forces Craig to Enter Bankruptcy Creditor pressure was increasing and finally Craig made the move of entering bankruptcy. In Craig’s case this was inevitable, but by taking this action himself he was able to maintain control of the situation. There were 2 monthly payments still due from Jane for the equity purchase. The debt Jane owed Craig was now payable to the bankruptcy trustee. The trustee would initially be paid from these funds. The Trustee in Bankruptcy reviewed the sale of Craig’s equity in the house and found it commercial, making no claim. The family home was protected. Now, if you remember from last month’s case study, the default of the business purchaser pushed Craig into bankruptcy a little quicker than may otherwise have happened. He was bitter in relation to the situation with the unpaid vendor finance arrangement. Craig assisted the liquidator in mounting an action against the business purchaser. Due to Craig’s assistance a settlement with the purchaser was finalised and additional funds of $50K were made available to creditors of the company. As expected, the liquidator did make a claim on a couple of larger creditors who had received preferential payments. As these transactions had been so carefully documented by Craig and the creditor, it was hard for the creditors to argue that they were unaware of the liquidity of the company. Funds were collected by the liquidator and distributed evenly amongst creditors. While the extra return to the company was not enough to have a dramatic effect on Craig’s bankrupt estate, there was a certain level of satisfaction for Craig in helping to deal the Vendor Finance issue.
The Outcome Finality has been brought to this matter for Craig & Jane. They have retained their family home, and both are now gainfully employed. They are in a position to rebuild financially and move on to the next stage of their life. So, the house was saved and they have a financial future. It is about so much more than that though. This is about their family, their lives and relationships. What saving the family home really means is the kids could stay in the same school with their friends, and the same teachers that they knew and liked. They stayed in the same sporting teams with their friends and teammates. Craig & Jane remained part of their local community, with the same neighbours, same friends and the same favourite coffee shop. This can make an enormous difference in the quality of a person’s life, even without considering the financial outcome.
Good Outcome – But It Could Have Been Even Better Craig’s position at one time was manageable. He had cash available for settlement, and after reviewing the situation, we believe we could have achieved a great result in negotiations. Our approach in a negotiation is to clearly demonstrate to the creditor the return they would achieve if they pursued recovery action and demonstrate that the offer being made represents a superior outcome for them. Importantly, no payments would have been made without consideration of all creditors, including the ATO. Our processes have proven highly effective in the past. Craig was a smart guy, but he was just not expert in business exits and the complexities of navigating issues relating to insolvency. If he had sought help sooner, it is highly likely that bankruptcy could have been avoided.
Should you have clients or associates that you know are struggling with financial issues, our team of Strategists would be pleased to discuss options that are available on how to best design and implement insolvency strategies.
Call us now on 1300 765 080.