de Jonge Read were recently instrumental in designing and executing a strategy whereby a creditors’ trust was used in bringing early relief to some restrictions which vest with a Part X arrangement. This month’s case study details how this was managed.
Our client, Fred (name changed to protect our client's privacy) , was a director of a liquidated company. de Jonge Read had assisted Fred with a liquidation and Fred was held personally liable for provable “arms-length” debts of approximately $4,000,000 due to the company. He was also liable for significant debts within a family group structure. With a large amount of personal liability and the requirement to be able to continue as a director (Fred was a director of other companies), de Jonge Read needed to design a strategy that allowed Fred to deal with these personal debt issues but did not impact on his continuing directorships.
Within days of placing the company into liquidation, and in accordance with de Jonge Read’s comprehensive strategy, Fred executed an authority pursuant to Part X of the Bankruptcy Act (“the Act”).
Part X of the Act enables a debtor to offer creditors a compromise in the form of a Personal Insolvency Agreement (“PIA”) without the need to enter into formal bankruptcy. A PIA does not subject the debtor to the same restrictions as bankruptcy but the debtor is still disqualified from being a company director until the PIA has been completed (ie until the final dividend has been paid to creditors under the PIA). While a PIA will normally take a minimum of three months to be completed, bankruptcy disqualifies a person from being a company director for the duration of the bankruptcy – generally three years. Fred could not afford to be disqualified from being a company director due to him being a director of several companies.
The process began by Fred executing an authority appointing a Controlling Trustee. Prior to signing this, he had to have a draft PIA outlining the offer to his creditors. de Jonge Read assisted Fred’s lawyers in drafting the PIA and recommended that the offer consist of a lump sum paid into a creditors’ trust.
By using a creditors’ trust, the PIA is completed once the trust is established and, in this case, the agreed amount paid into it. Thus, the PIA and the creditors’ trust could, if accepted by Fred’s creditors, be executed on the same day and Fred’s “disqualification” from being a company director would last for mere seconds.
Australian Financial Security Authority (“AFSA”) is the regulatory authority for all matters to do with the Act and it rightly vigorously scrutinises all PIAs, particularly where related-party creditors have significant power to influence the acceptance of the proposed PIA. Given that this matter had related creditors, coupled with the unique creditors’ trust, it was clear that this would be reviewed very carefully.
Once Fred appointed the Controlling Trustee, de Jonge Read worked closely with Fred, the liquidator of Fred’s company (which was a major creditor of his estate) and his Controlling Trustee. The Controlling Trustee is required to investigate Fred’s financial affairs, prepare a detailed report to creditors with a recommendation as to whether or not they should accept his proposed PIA, and convene a meeting of creditors to vote on same – all this needs to be done within 25 business days of the Controlling Trustee being appointed.
de Jonge Read assisted Fred in providing information to the Controlling Trustee, answering the trustee’s queries and concerns, negotiating with the trustee and the liquidator regarding the ultimate amount to be offered to creditors, and preparing the claims of related-party creditors so that they would be able to vote on the proposed PIA.
As expected, AFSA contacted the Controlling Trustee on the eve of the creditors’ meeting with a series of questions regarding Fred’s proposed PIA but the hard work put in by Fred, the Controlling Trustee and de Jonge Read had provided the answers to all their questions.
The meeting of creditors was attended by the Controlling Trustee’s staff, Fred, de Jonge Read’s strategist (as proxy for all of the related-party creditors), and AFSA representatives – all by phone. The liquidator of Fred’s trading company had submitted a vote by proxy voting in favour of the proposed PIA.
Fred's proposal was accepted unanimously by the creditors represented at the meeting and Fred settled more than $4,000,000 of debts, including his ATO debt, for $120,000 without having to be replaced as a director. The PIA proposal that had been put together by de Jonge Read succeeded - leaving Fred to continue to preside over the corporate and trust structure that has survived the demise of the main company in the group.
However dire the situation may seem, de Jonge Read can tailor a strategy to navigate the insolvency framework.