In this episode, Chamberlains’ Managing Director, Stipe Vuleta, is joined by Condon Advisory’s Managing Principal Schon Condon , Associate Gavin King, and Chamberlains’ Director Harold O’Brien, to discuss all things personal insolvency.

As with all Chamberlains Lawcast episodes, the information provided cannot be considered as legal advice, if you have any questions in relation to any information presented, please contact our office on 02 6188 3600 or visit our website at www.chamberlains.com.au 

Presented by; Stipe Vuleta ft. Schon Condon, Gavin King & Harold O’Brien
Date; 13/11/2020
at Chamberlains Law Firm, Canberra.

Transcript

Stipe Vuleta: Welcome back everyone! I’ve got Harold from Chamberlains and Gavin and Schon from Condon Advisory in which adding all things, Windsor, motor vehicles and cruising around. Schon, how you going?

Schon Condon: Good. Thank you. Yes good.

Stipe Vuleta: So, I understand you spent a lot of time in Windsor driving the old car out, enjoying the lovely roads.

Schon Condon: Yeah, no, I enjoy, I must admit I’m very much the Car freak. I’ve got an old MG TF 1955, uh, 1500, which I get out and about, when I can, not as often as I would like to, but very pleasant drive. Good, good to have the old it’s very low car and a very small car. So, you really feel the attachment to the road.

Stipe Vuleta: I feel, I feel, uh, driving or owning an old car is like having a boat, you know, it’s, um, it’s quite quite enjoyable, but it is a lot of work in maintenance.

Schon Condon: It requires some mechanical, big, but fortunately I’ve got a mechanical bench, so I’m not afraid to pick up a spanner or a screwdriver, um, and, and do it. But yes, I actually put Boats in a slightly different category. Um, there’s a quote which I’ve got, but I won’t use it on your recording.

Stipe Vuleta: Haha! So a bit of a technical mind, and today we’re talking about personal insolvency it’s I think an area that a lot of accountants and advisors in the personal, or, in the insolvency space probably don’t appreciate for the complexity that it creates.

Schon Condon: It’s, it’s an area which has its own quirks, um, and a little bit of an historical note, which might be of interest to people listening. I remember doing some study and in Roman times, pre-AD, um, they were fighting a battle with the Greeks that resulted in 70,000 Greeks being killed, uh, on the success of battle. But at the same time, the Roman Senate was dealing with the issue of individuals failing to pay their debts. And this process of bankruptcy was actually created at that time. And its three-year period, was, was created at that time. And what effectively it meant was that the bankrupt was put into servitude of his creditors, uh, for a period of three years.

Schon Condon: And quite commonly, one of the creditors would typically pay off something to the other creditors. And then he’d end up with the bankrupt as a personal servant for the period of three years as he served out his time, uh, which I found that juxtaposition between sorting out this thing and preventing debtors from up until that point in time, simply being killed.

Schon Condon: Um, versus the battle was raging across not far away. Um, and 70,000 people being wiped out in one day was really, really interesting. But no, there is some very real quirks to how bankruptcy rule works. Um, it is very much a piece of legislation, which is dealt, meant to deal with the situation from being in the middle. There’s a creditor and there’s obviously the need to get money back to the creditor and all that. But there’s also a respect for the individual rights of the debtor. And in the majority of cases, it’s a poor, unfortunate person, that’s found themselves in a situation where they can’t pay their debts.

Schon Condon: They didn’t steer their life into that situation. There is a handful of people who, ah shall we say, the crooks in the society who will quite deliberately go out and scheme and do whatever they need to, to get money and then milk it away, and then go bankrupt and that. But I can assure you from 40 years in the game, that’s by far and above the, the minority of the people involved.

Schon Condon: And so, there’s a lot of people that don’t fully understand it. And the regulator does a pretty magnificent job actually in making sure that that balance is maintained. And I’ve got a lot of respect for how they approach things. Um, so with that sort of thought, unless you properly know, I understand bankruptcy and I’ve actually seen some decisions in lower courts when they’re not exactly dealing with a bankruptcy issue, but it’ll involve something bankruptcy.

Schon Condon: And they’ve actually missed some of the quirks of the bankruptcy legislation in the decision that they’ve made, which would have been better guided. And that’s probably had, one of the two lawyers or even potentially the magistrate or whoever had some understanding of the bankruptcy law in the decision might have been a slightly different one.

Stipe Vuleta: It’s funny you raise that because an area that I’m passionate about, I do a bit of work with Harold in and around is this tripartite intersection of, you know, real property of trust law, family law, and bankruptcy. Because you find, you know, people get themselves into these situations where, you know, they’re stressed, they’re under pressure because their financial circumstances, they may be haven’t yet had the opportunity to speak to a bankruptcy trustee or another insolvency professional. It has all these other negative impacts on their lives. So sometimes I guess you guys are not just stuck dealing with, you know, a legislative process for absolving people from some of their financial sins, if I’m off, put it in a crude way, but, um, otherwise, you know, helping people go through very challenging issues.

Schon Condon: No, that’s, that’s very true. It’s funny. I’ve had one marriage which is still in existence, um, but I’ve been the third party to more divorce proceedings then I can point a stick at! Um, and, and they have all of their quirks, and the balance between. Uh, then the age of the family versus, um, the rights of creditors and all sorts of things can often end up in very complex situations. Particularly when there are other, we’ve got one interesting matter at the moment, uh, where other members of the family have suddenly, um, formed a desire to suggest that the property, properties held in the names of the bankrupt, or the bankrupt, and her husband are in fact, technically in trust for someone else.

Schon Condon: Now I can’t go into too much detail. Because it’s a living, breathing case at the moment, but, um, you, when you throw those sorts of things into it, it’s amazing to see how quickly costs and confusion can escalate.

Stipe Vuleta: It’s an interesting point you raise because it gets me thinking about some of the classic personal insolvency cases, even the ‘Cummins’ case about the gifting of property and transactions to defeat creditors, and, and you really start thinking about the importance of getting good legal advice when you’re entering into transactions. And, you know, determining the strategy upon which you want to protect your assets. Harry, do you, uh, have any tips for people in the context of, uh, you know, the type of advice they should seek before they’re buying property?

Harold O’Brien: Well, I, I, yes. I, I think, uh, depending on the type of business they have and whether they’re at risk, whether they should consider, um, who actually acquires the asset, the property. Whether that persons involved in the business or not. Um, in particular, the family home is one that can be acquired by a family member. Um, uh, and if it’s your domicile, um, in the future, you can in new South Wales, get some exemptions where it’s your family home to go back on title. Um, so definitely it’s something worth looking at and considering at that time, um, I mean, there’ve been plenty of instances where I have seen, uh, businesses that are set up where the husband and wife are both directors and one of the parties aren’t involved in the business at all. There’s no reason for them to be. Um, and I’m not sure why they would do that, but, um, clearly, they haven’t, um, obtained advice, um, before they’d entered into that transaction.

Stipe Vuleta: Yeah, well, I guess it, it, it flows back into something, we see a lot in personal insolvency and bankruptcy, which is that element of the greater pool of debtors that go bankrupt. And I guess directing this at Gavin, um, business risk and bankruptcy, I mean, it’s, it’s a fraud area. What are your recent experiences with it?

Gavin King: I guess the two go hand in hand more than most people realize, but people see corporate failure. In most circumstances, the creditor’s probably think it doesn’t lead to a personal failure. Um, but in most cases it does, um, the directors out there generally have signed personal guarantees, they’ve signed a mortgage, they’re probably their own real property. Um, they’ve signed all this other stuff up that results in them having to consider their own personal options. Um, and it’s one that they probably need to take a bit more advice on, um, before they get into these sort of structuring issues, or going into a business, um, and then you’re tying up their partner in it, um, who might not have any role.

Gavin King: Um, an interesting one of that, we’ve dealt with recently was, um, we did one, the husbands divorce proceedings, husband, divorced wife, they had the property was in both names. Husband had mortgaged it and signed it up. Then there was some fraud in there as well. So, it’s a slightly different circumstance, but you know, I think the case remains, in that he really went bankrupt four years ago. She got lumped with the balance of the loan. They were still chasing her, not withstanding the fact that know she was a schoolteacher earning minimal money. Um, you know, got lumped with this leftover debt, um, that we just couldn’t negotiate and told them she had to go bankrupt, but you know, people need to consider all their options and what they’re actually signing when they’re getting informed.

Stipe Vuleta: Yeah. Well, I guess, um, you know, if you fail to plan, you plan to fail and, and, uh, a good, a good reason to. Maybe not just speak to a lawyer, um, but to speak to a, uh, risk and, and insolvency professional before you get yourself into a real hot mess.

Schon Condon: That’s a really interesting point. Um, regrettably, most of the people that we see who want to talk about restructuring their affairs, are doing so with a visible issue on the horizon, shall we say. It might be, I haven’t, I haven’t yet received the, uh, demand from the lawyer, but because of something that’s gone wrong or whatever, I know I’m going to get one in due course back. What can we do about things right now? And going back to the point that you were making with earlier, um, there is proper planning that people going into business should do, and it should be done early. Not, not when the problem’s there. But when you’re sitting up preferably, so that you can, um, make sure that these sorts of dramas are prepared for rather than confronting when they become a problem. And from that perspective, the idea of gifting, as you mentioned, whether it’s the ‘Cummins Principle’ thing, or even just, I want to give something away to my family.

Schon Condon: Um, There’s nothing wrong with that. And then the bankruptcy act doesn’t prevent it and it doesn’t include it in the fact that you’re in business, it doesn’t preclude that. But the critical thing is you need two components to it, structurally it needs to be done properly. So therefore, there is a legal element component to it so that the transaction is affected in a proper sense.

Schon Condon: But at that point, the lawyers should be seeking advice from a relevant professional. Um, the, it shouldn’t be the necessarily their accountant. It should be somebody independent. Um, so that the, the Lawyer can rely on the fact that there’s an independent view, but they should be getting a view to, to confirm the fact that the people are in fact, solvent, with no visible sign of insolvency, uh, into the future because giving away something that you own, is no issue with, there’s no one else seeking to claim it. Um, but mystically and we see it a lot, um, we end up with bankruptcies where the title deed was transferred five months ago, and Lawyers still do it! Now, put on, on the title, they transferred for $1.

Schon Condon: And you know, if you want to work out whether property transactions undervalued then using a dollar is the transfer, is probably a good way to do it. Um, if you put it a more responsible number on there, then issue becomes wasn’t ever paid, actually paid, but that becomes a separate issue.

Stipe Vuleta: Yeah. Well, it’s really interesting because it’s this, um, this weird matrix of a number of risk points for individuals that are getting into or conducting business, because you’re talking about, well, what am I personal and philanthropic goals and what is the context of my life at the time that I want to start, investing in those long-term goals, versus, what are the potential risks that I might face in the future. And like you said, the only real certainties, the time, distance between those two things. We see, we see it a lot in the context of property structuring for individuals, just the, the need to properly document arrangements about not owning things equally in a marriage and why those things might be important.

Stipe Vuleta: And people always think, well, you know, I’ve got a prenup or I’ve got a postnup uncovered, or I don’t want to get one. But this isn’t even about the family law. This is just about how we want to own our home and how we want to structure ourselves in the future. And what is the reason about that? So, you’re absolutely right, Schon, uh, getting good advice, not just from your accountant, but from the lawyer and an independent insolvency practitioner is so key in mitigating your stress ultimately. Whether you’re a hundred percent protected. At least mitigating your stress as you approach potential financial crisis.

Schon Condon: Absolutely. I mean, I know from a, from a trustee’s perspective, um, if I’m confronted with a situation where they gave away a piece of real estate to a family trust… 15 years ago as a gift, and I’ve got proper documentation from a lawyer clearly existent from that point in time. Well dated and stamped or whatever. And then they turn around and say, well, here is the report from XYZ, who is probably someone that the court’s going to significantly respect. And, and that report is similarly dated and visible to be from that period. And the persons remained solvent up until the last two years maybe, when there were business dramas that happened or whatever it was that caused the bankruptcy, maybe it was a failed development. I’m not sure. Um, but if you’ve got that, then the chances of drumming it into a court, um, and trying to force a disposal and undervalue, uh, would be fraught with danger. In fact, I’d be suspecting that the judge would throw the trustee out with costs and rightly so, because it was done right. And the information’s’ been provided.

Stipe Vuleta: Yeah. And I guess that’s a really interesting point to end on, which is, there’s a lot of, um, I guess, distrust in and around the insolvency industry, because often, you know, you guys in particular and us as lawyers who might represent trustees, are caught mopping up the messes of poor planning for the interests of creditors, but ultimately you’re impartial observers and investigators. So, if people have planned correctly and done things, right, um, they should have confidence in the process.

Schon Condon: Uh, that’s exactly right. And I’ve got to say to you, poor planning is one component to it, regrettably. Um, and, and this can sit across lawyers, accountants, and various other professionals. There’s been a number of examples of where the intent existed some time ago to do something. And it was sort of possibly the client that said, you come back to me and we’ll get this all sorted. And in time, slip by, the practitioners become very busy with other clients and things. And because it wasn’t kept forefront and because the client thought, well, that’s obviously not a real issue, and in of course, when someone’s confronting bankruptcy, what potentially could have been and should have been done 10 years ago, um, they’re trying to rush through now. And unfortunately, when you have that visible sign of an impending climb, it is too late. There are things that you can still do to control the damage, but substandard damage has been done at that point in time.

Stipe Vuleta: Right. Well, I mean, I think that’s, uh, an appropriate, but slightly more the drop-off point for today’s discussion. So, get advice, but get good advice. Be decisive and act and act early.

Schon Condon: Yeah, absolutely. And it’s not a, to me, it’s not a morbid point. It’s, it’s the constructive point. It really is. Much of the problem that we see can be completely avoided if people have done things properly in the first place.

Harold O’Brien: Yeah. I actually recently had a transaction where you can actually rectify a structure, that’s not been set up properly in the first instance. So, I had a client that was selling their property, and looking at buying a new property. Uh, they were looking at renting some new premises. So basically, with the spouse. Uh, the spouse was removed as a director of the company. Um, and in entering into the new transaction, the landlord had requested originally a guarantee from both the husband and the wife. Um, one of the spouses was removed, um, and we were only required to provide a guarantee from one of the parties. So, going forward the. Uh, acquisition of the new property will be in the name of the person that is not involved in the company.

Harold O’Brien: So when you were looking at buying and selling and people are always upgrading their homes and houses and so on, it’s a great opportunity to look at your structure again, and you might be able to rectify it without the cost of stamp duty and trying to transfer something.

Stipe Vuleta: That is, that is a really interesting point. So what you’re saying is, Um, it’s not always too late, unless you’re in an impending risky financial scenario. There are ways to fix the sins of the past, and put yourself into a better position moving forward.

Stipe Vuleta: Great. Well, thanks gentlemen. Um, it’s been lovely chatting and look forward to doing it again.

Schon Condon: We truly appreciated the chat. 

Stipe Vuleta: That’s alright, thanks guys.