In this month’s case study we are going to look at that all important priority – protecting the family home! When we ask our clients what is really important to them this is usually at the top of the list. So, how do family homes end up at risk and what do you do about it?
This month we will be looking at Will and Kate. Will is the company director of a removalist business, while Kate is the carer for their two young children. Kate is not involved in the business at all, not as a director, shareholder or employee. Will ran the business successfully for many years but ran into problems with the loss of his two major contracts at the same time. As a result, the business failed and we assisted Will with a business restructure, following which the company was put into liquidation.
When Will and Kate first met with de Jonge Read they were convinced they would lose the family home. The bank had secured a business loan against the property. Will had also provided a number of personal guarantees to creditors for debts the company was now unable to pay. Now, when thinking about company directorships, consider that if Kate was also a director she would have had to personally guarantee these debts to and the situation could be even worse.
At that first meeting Will and Kate’s position looked like this:
Family Home - $600,000
Motor Vehicle - $20,000
Total Assets - $620,000
Home Loan - $300,000
Business Loan - $100,000
Credit Card (Will) - $20,000
Personal Guarantees (Will) - $250,000
Total Liabilities - $670,000
The home loan lender had also provided a business loan (shown above) which had been secured against the family home. Prior to liquidating the company we assisted with the refinancing of the family home sufficient to payout the business debt. So, the position changed to a home worth $600,000 and a home loan of $400,000. The equity in the property is unchanged at $200,000. At face value you may think that Will and Kate had $100,000 in equity each. Given the personal guarantees Will had provided this would place the family home at risk if he was pursued for payment.
When we reviewed this matter we believed the doctrine of exoneration applied. Also sometimes called the equity of exoneration, the principle is that if a debt was incurred solely for the benefit of one party it should be repaid from that party’s share of the equity first.
Applying this principle would lead to the following distribution of equity:
Family Home - $600,000
Less Home Loan - $300,000
Equity - $300,000
Will 50% - $150,000
Less Business Loan - $100,000
Will’s equity - $50,000
Kate 50 % - $150,000
Kate's equity - $150,000
As previously noted, Kate was not involved in the business in any capacity, and therefore the business loan had been solely for Will’s benefit. He has used some of his equity for his business purposes. As a result, the bulk of the equity vests with Kate.
As part of our project management we ensured that the family home was valued by a licensed valuer and evidence of the debt secured against the property was held. Once this was established Will documented an agreement with Kate for the sale of his remaining equity to her. With some help from her parents, Kate was able to pay $50,000 for Will’s share in the family home. These funds were paid into Will’s personal bank account.
Now, while Will still has some issues to deal with, the family home has been protected. Will and Kate can sleep easy as all the equity now vests with Kate and she has not guaranteed anyone. As long as the mortgage can be met the house is safe.
Saving family homes is a crucial part of our work. Knowing the home is safe can be an enormous relief for our clients and makes dealing with those other issues a lot easier with less worry and stress.
Should you have clients or associates that you know are struggling with financial issues or need assistance in reviewing their business affairs in preparation for what’s around the corner, our team of Strategists would be pleased to discuss options that are available on how to best design and implement insolvency strategies.
Contact us now on p. 1300 765 080 | firstname.lastname@example.org