Vic and Richard are two brothers who were directors of what became a rather large (100+ employees) company. Due to changes in the industry, the business model changed, became unprofitable and ultimately the company was put into liquidation.
On the advice from the accountant Vic and his wife met with de Jonge Read and engaged our services for strategic insolvency planning. At this time, they had a home, a holiday home, both with mortgages (and minimal equity), and a young family. Vic had secured a new job with a good salary and was able to meet the mortgage payments. Vic’s wife was never involved or associated with the failed business.
Unfortunately, the brothers had some personal guarantee debts that crystallised upon the liquidation of the company. These were insurmountable. One of these was to Sandy Corp (Sandy’s).
Vic, and his brother, had signed an account application for Sandy’s to supply the company with goods. The account application that they signed included personal guarantees and a charging clause giving Sandy’s the right to lodge caveats on any real estate owned by either brother to secure payment of the outstanding debt.
When the personal guarantees were called upon by Sandy’s (and the caveat lodged), the debt was of such a magnitude that Vic’s properties did not hold enough equity to settle the mortgages as well as the Sandy’s caveat.
Richard and his partner also had a home, with a mortgage, as well as a baby. Like Vic’s wife, Richard’s partner was not involved in the company. Sandy’s also lodged a caveat over Richard’s home.
Strategy
de Jonge Read devised a strategy for Vic and his wife which involved, among other things:
- Negotiating a settlement with Sandy’s;
- Having Vic’s wife exert her rights to their properties pursuant to the equity of exoneration (this concept is discussed in detail in some of our previous case studies);
- Having Vic’s wife purchase Vic’s current and future equity in the properties from him for fair value so that Vic would have no interest that could be claimed by a trustee in bankruptcy;
- Having Vic declare bankruptcy.
Vic and his wife were relieved to find a direction after meeting with de Jonge Read and they urged Richard to come and meet with us also. He chose to get advice from his lawyer, who referred him to a registered trustee in bankruptcy, instead.
Our attempts to negotiate with Sandy’s fell on deaf ears. Sandy’s were just not interested. Whilst we can’t control what others do we can deal with the outcomes, so when Sandy’s issued a Bankruptcy Notice against Vic, de Jonge Read on reviewing the documentation noticed some flaws.
Having a thorough knowledge of the bankruptcy legislation and process, we were confident that these flaws would inadvertently give up Sandy’s right to maintain their caveats on Vic’s properties in the process of having him made bankrupt. Accordingly, after explaining the situation to Vic and his wife we sat back and allowed Sandy’s to proceed to bankrupt Vic.
Once Vic was declared bankrupt our Strategist liaised with the Court appointed trustee in bankruptcy to secure withdrawals of the Sandy’s caveats. The Withdrawal of Caveat forms were supplied with no payment to Sandy’s or the trustee in bankruptcy.
Outcome
The equity position (excluding the caveats) was calculated using the equity of exoneration, and Vic’s wife purchased the nominal equity that Vic held. Once he became bankrupt, Vic’s trustee in bankruptcy reviewed the sale of his equity to his wife and found no reason to challenge the sale.
Whilst Vic was happy with this result, he still yearned to bring finality to the bankruptcy.
de Jonge Read then led Vic through the process of offering his creditors a Composition pursuant to section 73 of the Bankruptcy Act. Negotiations with some of the major creditors in Vic’s bankruptcy gained their support for his offer which ultimately resulted in his bankruptcy being annulled.
Vic, his wife and their children are now living happily without the shadow of bankruptcy hanging over Vic’s head. The family home, and their holiday home, were retained.
So, what happened to Richard? Well, he went bankrupt without any preparation, as per the advice he received from the registered trustee in bankruptcy.
Richard’s family home was sold, and Sandy’s took all the proceeds remaining after the home loan was paid. Although Richard’s partner tried to challenge Sandy’s caveat in the Supreme Court, she was unsuccessful.
Richard is still bankrupt and living with his partner and their baby in a rental property. Richard and his partner were devastated. This case study shows the importance of getting the right advice!
At de Jonge Read our professional staff include insolvency professionals, accountants, senior business bankers and franchise professionals guaranteeing your clients the best advice in times of trouble.
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 | ua.mo1736762935c.arj1736762935d@ofn1736762935i1736762935
Did you know?
Phoenixing is another name of business restructure. Read more about business restructures and when this can be an option for you.
