Recently, a client was referred to de Jonge Read by his accountant. He operated a sole-trader business in the mining services industry and had a history of noncompliance with the ATO which resulted in a sizeable debt being accrued. This debt position was approximately $700k which included substantial interest and penalties. Our client had a family member who was prepared to assist with a loan of $80k to settle the debt.
The accountant had tried negotiating with the ATO to reach a commercial settlement by offering the $80k (a figure fair superior to what would be achieved in a bankruptcy scenario). The ATO would only accept a payment plan which addressed the principal debt in full and was prepared to entertain a request for remission of interest and penalties once the principal debt had been repaid.
It is important to understand the ATO’s position on accepting a settlement as, in our experience, generally the ATO does not assess an offer on its commercial merits but rather on the basis of the ATO’s policies. It is extremely rare to have the ATO compromise a debt outside of a formal insolvency administration.
Although the client did have some funds available to him, he was never going to be in a position to repay the debt in full. The client was very stressed as his situation seemed impossible.
When the client was referred to us, we considered his options based on his individual circumstances. There are three formal insolvency options available to debtors under the Bankruptcy Act, specifically, Bankruptcy, Part X and Part IX. The insolvency framework is designed to offer individuals with insurmountable debts a fresh start and allow them to move forward with their life. While many people may view this as a punishment, in reality, it gives people who have ended up in difficult circumstances a chance to clear the slate and start over. However, this framework needs to be carefully managed and clients do need good independent advice.
Based on the fact that our client had good job prospects for a high paying position we therefore assessed that a Part X would be better suited to his circumstances. A Part X is where an offer is made to creditors as full and final payment of his debts. A meeting is held and only creditors attending the meeting or those who have provided proxies to the trustee are allowed to vote on the offer. All of the client’s known creditors must be notified of the Part X proposal being put to his/her creditors and advised of the meeting.
To be successful, a special resolution is required to be passed. More than 50% of creditors in number and more than 75% of the dollar value of the voting creditors are required to vote in favour the Part X for a special resolution to be passed. If the Part X is supported by the required majority of creditors and satisfied by way of payment of the accepted amount, the client is in and out of formal insolvency in a very short time frame in contrast to the 3 year period of bankruptcy so certain benefits do exist.
An offer was presented ($80k) as part of the Part X. The Trustee reviewed the proposal and recommended creditors accept the offer. This Trustee determined that the offer would be far superior to the return to creditors from bankruptcy as the payment was from a 3rd party.
In our client’s case, there were 5 provable creditors. Of the 5 creditors, we were aware that 3 were supportive but we were uncertain as to the position of the remaining 2, the ATO and a major bank for a credit card. de Jonge Read held discussions with the bank and explained the commerciality of the offer and obtained their support. Based on the size of the ATO debt, if the ATO voted against the offer, then the client would have had to proceed into bankruptcy. As it transpired, the ATO did not vote on the proposal. The offer was therefore accepted with the support of all of the creditors who voted on it.
The $80k was paid which finalised $700k of tax debt and $150k miscellaneous creditors, $850k in total debt. Interestingly the offer previously presented to the ATO would have given the ATO a higher return, however based on its guidelines and policies it did not accept the offer. We often use the insolvency framework to finalise negotiations where not all creditors agree to accept an offer. A formal arrangement such as this binds all creditors, whether they vote in favour or not.
The client’s words were simply: “I have my life back”. A large part of the service that we offer at de Jonge Read is the emotional support in managing these situations and bringing finality to overwhelming financial situations, thereby allowing people to get on with their lives. We, as advisors, can never underestimate the toll of this emotional stress that insolvency can have on our clients. It is so important for people in financial difficulty to have the right strategy, advice and careful management.