IN THIS ISSUE 01 State of Play: Insolvency Update 03 What Happens to the Family Home in Bankruptcy? 04 Deceased Estates and Bankruptcy Scan to read more articles
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State of Play: Insolvency Update Darren Vardy - Director | NSW South
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s we slide into the end of the calendar year, a year that has seen unprecedented events, I thought it prudent to provide an update on matters from the world of insolvency that may have an impact on your clients or someone you might know. Superannuation Guarantee Amnesty The super guarantee amnesty ended on 7 September 2020. If you didn’t apply for super guarantee amnesty and you have any unpaid or late paid super to disclose, you will need to lodge a Superannuation Guarantee Charge Statement and pay the super guarantee charge (SGC). If you were advised by the ATO that your disclosure was eligible for the amnesty, to remain eligible, you must either: ►► Pay the SGC amount in full ►► Enter into a payment plan to pay the SGC amount and comply with the terms of your payment plan. It is timely to remind Company Directors that unpaid superannuation guarantee charges are covered by the ATO’s Director Penalty Regime, meaning that directors are
personally liable for a penalty (equal to the charge) if the company has not lodged its superannuation guarantee statement and paid the corresponding guarantee charge by the due date. Insolvent Trading Moratorium Comes To An End On 7 September 2020 the Government announced an extension of the temporary amendments to the insolvency laws until 31 December 2020. The temporary COVID-19 safe harbour defence for directors from civil insolvent trading liability (s588GAAA of the Corporations Act 2001 (Cth)(Act), which can make directors personally liable for debts incurred when they should have suspected their company to be insolvent) applies to debts incurred during a period of at least six months from 25 March 2020 to 31 December 2020 in the ‘ordinary course of the company’s business’. It is important to note that the debts must be incurred in the ‘ordinary course’ of the company’s business, that is, necessary to facilitate the continuation of the business during the COVID-19 safe harbour period.
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Darren Vardy Director
Whilst not a moratorium, we have seen a curtailment of debt recovery action through the use of statutory demands and bankruptcy notices whereby the period of compliance has been extended from 21 days to 6 months. Further, we have seen companies struggling due to Coronavirus be placed under less pressure from the ATO who have assisted to ‘tailor solutions for their circumstances, including temporary reduction of payments or deferrals, or withholding enforcement actions including Director Penalty Notices and wind-ups’. With the likely return of pre-COVID debt recovery practises by trade creditors and the ATO, it is important for Directors to assess the financial position and future profitability of their Company to ensure that they are able to meet debts as and when they fall due, not to mention having arrangements in place to deal with historical debt. Failing that, Directors may fall foul of trading whilst insolvent rendering them personally liable. For example, let’s say a company owes $250,000 to creditors as at 31 December 2020 that was incurred during the period 25 March 2020 to 31 December 2020. Whilst a Director may not be personally liable for such debts, to ensure the ongoing operation of the Company, there will need a plan to repay this debt from the ongoing profitability of the business operations. If a Company is unable to pay the debts, it will face debt recovery action initiated by the a creditor. New Restructuring and Insolvency Processes On 24 September 2020 the Australian Federal Government announced
significant insolvency law reforms that will affect small businesses with liabilities of less than $1 million that find themselves in financial difficulties. The changes are expected to commence on 1 January 2021 in response to the economic downturn caused by COVID-19. The reforms introduce a new debt restructuring process and liquidation pathway for small businesses with associated regulations to provide ‘devil in the detail’ as to the ultimate operation of the legislation. Debt Restructuring Process
Government has proposed a temporary transitional regime under which an eligible company could declare its intention to access the debt restructuring process and then obtain a further 3 month period of protection in respect of insolvent trading liability and statutory demands. A company would be able to make such a declaration between 1 January 2021 and 31 March 2021. A New Liquidation Pathway A new streamlined liquidation pathway is intended to reduce time and cost in the liquidation process and which aims to ensure better returns for creditors. Under the new liquidation pathway, a small business may still appoint a liquidator to take control of the company and realise the company’s assets for the benefit of creditors and other stakeholders.
A new “debtor-in-possession” debt restructuring process is intended to be The key modifications include: a simpler, more flexible and efficient voluntary administration which aims to ►► reducing the circumstances in which maximise small businesses’ chances of a liquidator can seek to recover an survival. unfair preference payment from a creditor that is not related to the Under this process, the directors of company; the company will work with a small ►► only requiring the liquidator to report business restructuring practitioner to ASIC on potential misconduct (SBRP) to develop and implement a debt where there is reasonable grounds restructuring plan. that misconduct has occurred; ►► removing requirements to call Whilst the plan is being developed, creditor meetings and the ability to directors will retain control of the form committees of inspection; company, a moratorium will prevent ►► simplifying dividend and proof of creditor enforcement and the company debt processes; will be permitted to trade in the ordinary ►► maximising technology neutrality in course of business. voting and other communications. The plan is circulated by the SBRP for creditors to vote upon and is approved if more than 50% of the company’s creditors by value vote in favour of the plan. (For full details, please view this article on our website). Transitional Relief It would appear that given the number of companies in a current state of flux, the
The rights of secured creditors and the statutory rules as to the payment of priority creditors such as employees are not affected. A liquidator, once appointed, will need to seek approval from creditors to conduct the liquidation in accordance with the new streamlined pathway. This article has been condensed for print. Please visit our website to read the full version.
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What Happens to the Family Home in Bankruptcy?
Jason Cronan Director
Upon an individual’s bankruptcy, a Bankrupt’s interest in ‘divisible’ property/ assets vests in the Bankruptcy Trustee to recover and sell for the benefit of the bankrupt estate and creditors. Divisible property includes a wide range of assets, such as real estate and the family home. There are some exemptions, which allow a Bankrupt to retain certain assets (which we will traverse in a separate newsletter article). Sounds simple! In theory yes, but there are a number of factors to consider when dealing with a Bankrupt’s interest in a property, especially the family home. We often get faced with questions regarding: 1. What happens to a Bankrupt’s interest in a family home, especially when they have a spouse and / or joint ownership? 2. What if a Bankrupt is not a registered owner of the family home? 3. Can a Bankruptcy Trustee recover a property that has been transferred prior to the bankruptcy? The answer to these questions is…it depends on the circumstances. We have covered some common issues below.
1. Property registered in a Bankrupt’s name
if the property is solely owned by the Bankrupt.
a. Property registered solely to a Bankrupt
The unfortunate consequence of this is that if a Bankrupt has a Spouse or Family, they are inadvertently impacted by the bankruptcy and the sale of the family home.
When an individual is declared bankrupt and they are registered as an owner of a property, the Bankrupt’s interest vests in the Bankruptcy Trustee to recover and sell for the benefit of Creditors. In practice, the Bankruptcy Trustee will generally: ►► secure the property by lodging a caveat and/or transferring title in the property to the Trustee; ►► assess whether there is any equity available, that is, consider the value and any security/mortgages; ►► on the basis there is some equity available, sell the property, with any surplus proceeds being applied to the costs of the bankruptcy and payment of a dividend to creditors (if sufficient funds are recovered); and
The Bankrupt’s Spouse may have some options available, including: ►► claiming an interest in the property (if they have contributed to the property in some manner); ►► purchasing the property from the Bankruptcy Trustee (or the equity in the property, if suitable arrangements are made with the Trustee and any mortgagee); or ►► in the event of a separation, commence Family Law proceedings seeking an interest in the property. This article has been condensed for print.
►► pay any surplus, after the payment of all debts and costs of the bankruptcy, to the Bankrupt.
The full version of this article is available at www.svpartners.com.au/news/quarterlynewsletters and covers in depth examples and important factors to consider for a bankrupt and the treatment of assets.
This is relatively simple (putting aside any difficulties with possible claims by the Bankrupt or other stakeholders),
Should you have further questions, please contact Jason Cronan on 07 5414 3000 or email jason.cronan@svp.com.au
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nheritances from deceased estates can result in some of the largest funds received by individuals in their lifetime. Usually the major asset in a deceased estate is the real property owned by the deceased at the time of their passing. In some instances life tenancies are provided by the deceased in their Last Will and Testament (Will) which can cause some deceased estates to last for many years after the date of death. What may not be well known, is that whilst a person is bankrupt, any inheritance they are entitled to receive from a deceased estate will be claimed by a Trustee in bankruptcy. Life Tenancy A Will may provide for a life tenancy in a property owned by the deceased to a person, whether or not that person is a beneficiary of the estate. Some examples that we have seen in the past include life tenancies granted to: ►► the deceased’s child, with the monetary interest in the estate granted to the deceased’s grandchild; and ►► the deceased’s bankrupt child, with the monetary interest in the estate divided equally between the deceased’s children (including the bankrupt child). Vesting of Assets in Bankrupt Estate Other than specific exemptions, under the Bankruptcy Act 1966 (Act) the assets of the bankrupt vest in the Trustee of the bankrupt estate that: ►► exist at the time of the commencement of the bankruptcy (Pre-Bankruptcy Assets); or ►► are acquired (or devolved) upon the bankrupt after the date of bankruptcy and before the date of their discharge (After-Acquired Assets) Revesting of Assets to the Bankrupt An asset (either Pre-Bankruptcy Assets or After-Acquired Assets) that vests in the Trustee does not return to the bankrupt (i.e. revest) upon their discharge from bankruptcy. A Trustee has the following time limits to realise the assets of the estate:
Deceased Estates and Bankruptcy
Travis Olsen - Associate Director | Adelaide
►► 6 years from the date of discharge, where that asset is disclosed in the bankrupt’s Bankruptcy Form/ Statement of Affairs (SoA) and is a Pre-Bankruptcy Asset; ►► 6 years from the date of discharge, where the asset is disclosed to the Trustee prior to the bankrupt’s discharge and is an After-Acquired Asset; and ►► 6 years from the date of notification, where the asset is disclosed to the Trustee after the date of the bankrupt’s discharge and is an AfterAcquired Asset. The Trustee is entitled to extend these revesting times for an unlimited number of extensions as long as each extension is no longer than 3 years or that it is within 3 years of a specified event (e.g. the death of a life tenant). In circumstances other than those outlined above, the revesting time is 20 years from the date that the bankruptcy commenced. Limiting Exposure to Deceased Estate Vesting in Trustee The death of a loved one is often unexpected and, therefore, if a person is bankrupt it is important that they limit the amount of time that they remain bankrupt given the risk of an interest in a deceased estate vesting in their Trustee. This would involve: ►► lodgement of their SoA as soon as possible upon notification of the bankruptcy; and ►► ensuring they comply with their duties under the Act so as to avoid a situation where the Trustee objects to their discharge, thereby extending their bankruptcy by up to 5 years. Life Tenancy Issues for Bankrupts Additionally, the granting of a life tenancy to a bankrupt may have unintended consequences for the bankrupt in terms of income contribution assessments. Even though the bankrupt is not receiving what is traditionally thought of as “income” for income tax purposes, the
Act specifies certain situations where the free use of property may also be deemed as income for the purpose of the income assessment. This may result in the bankrupt being liable to contribute to their estate even though they are not receiving a specific cash benefit. Case Study Post-Bankruptcy Interest in Deceased Estate The circumstances of this matter were as follows: ►► The bankrupt was made bankrupt by a Sequestration Order in 2003; ►► The bankrupt failed to file a SoA; ►► The bankrupt’s mother died in 2018; ►► The bankrupt’s mother’s Will devised the estate to her children equally (including the bankrupt) along with granting a life tenancy in her property to the bankrupt. ►► The bankrupt filed the SoA in 2018. Whilst the death of the bankrupt’s mother occurred some 15 years after the date of bankruptcy, the bankrupt was not yet discharged due to the failure to file a SoA. On this basis, the bankrupt’s interest in the deceased estate vested in the Trustee. As the bankrupt has a life tenancy, the Trustee’s interest in the deceased estate will continue until such time as the bankrupt either terminates the life tenancy or passes away. This matter is ongoing, however it has caused significant issues for the bankrupt and the executors of the deceased estate. This is a prime example of the importance of a bankrupt complying with their obligations to ensure they are discharged at the earliest possible time, and the difficulties that can be encountered where a bankruptcy is extended beyond the minimum 3-year period. This article has been condensed for print. Please visit our website to read the full version.
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